RESEARCH NOTE: Fed's Beige Book Looks to Confirm or Deny Recent USD Strength

The Fed's Beige Book, which offers a wealth of anecdotal evidence as to the health of the US economy, is due up tomorrow (June 11th) at 14:00ET. This could be a significant turning point for the US dollar that will either confirm and extend its recent gains, or lead to a significant pullback for the Greenback. We believe the four main categories to focus on in the report are the labor market, consumer spending, inflation and lending standards. Given the sharp move up in the unemployment rate and the fact that the US has failed to register even one positive nonfarm payrolls number this year, the Beige Book's labor market assessment will be key. In the April Beige Book, labor markets were described as mostly weakening. We expect something to this effect is priced in for tomorrow's release as well given the moribund employment data of late. The upside to USD could come from an assessment that the labor market is stabilizing, albeit at a low level of activity. The market will also be eager to gauge the impact to consumer spending from the government stimulus checks which began to hit mailboxes in late April/early May. In the last Beige Book, consumer spending activity was noted as slowing across most of the United States. While the latest chainstore sales numbers suggest some pickup in recent retail activity, if it is noted that the stimulus has had little broad impact on spending we will likely see US economic prospects weaken and a lower US dollar. On the inflation front, the market is looking for confirmation that inflation pressures continue to rear their ugly head. Given the steadfast increase in commodity prices and surging inflation expectations, we expect the assessment to be quite hawkish. This will help keep US yields elevated and add further support to the USD, with USD/JPY especially sensitive to higher interest rates of late. The fourth area of focus is likely to be on the lending side. The credit turmoil has been noted as ongoing by Fed officials and the market likely expects a similar assessment to what we witnessed in the last Beige Book when lending standards were said to have tightened (making it harder for the average person to get a loan approved). An indication that lending standards have eased will likely fuel speculation that the credit crisis is approaching it nadir and help boost the USD. In sum, if the good news on these key economic indicators outweighs the bad we can expect EUR/USD to retest 1.5400 and USD/JPY to come near the 108.00 level. In such a case, the report will validate recent comments from Fed Chairman Bernanke that the economic situation has improved somewhat while rising inflation remains a big risk. However, if the labor situation and consumer spending are downgraded significantly, this will outweigh higher inflation or an improvement in lending activity and likely take the Greenback lower towards EUR/USD 1.5600 and USD/JPY near 106.50. Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.