Dollar's Jump To Boost EU And Japan's Next Inflation Reports

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About: Invesco CurrencyShares Euro Trust ETF (FXE), EUO, ERO, DRR, ULE, EUFX, URR, UUP, UDN, USDU
by: Elazar Advisors, LLC
Summary

The dollar jumped 4% versus the Euro in November and 9% versus the yen. Both inflation numbers are going to report soon.

These moves elevate import prices to the EU and Japan driving inflation higher.

Inflation is 6-12 months away from hitting central banks' 2% target. At that time, they will need to reverse course from this record-easing period.

We're not there yet but when we arrive there, markets have material risk.

The dollar's (NYSEARCA:UUP) move is going to fan inflation higher abroad. The dollar alone should add about .2% to inflation in the upcoming inflation reports. That takes us a jump-step closer to 2% inflation targets. 2% inflation is the catalyst for central bankers to sell their quantitative easing assets. At some point in advance, markets (NYSEARCA:SPY) will preempt such a move with selling of their own.

How Fast Will Inflation Jump In One Month Due To The Dollar?

EU

The dollar was up about 4% in November versus the euro (NYSEARCA:FXE).

14% of EU's imports are from the US. 40% of EU's GDP is made up of imports.

Now let's do the math.

EU: 4% dollar move X 40% imports X 14% of those imports from the US = .2% move.

In one month, the dollar alone drives EU inflation .2% sequentially. That would be an acceleration from the previous month from the dollar alone.

Here is the month-to-month trend in the EU.

Source: Trading Economics

The .2% from the dollar alone will accelerate this month-to-month inflation trend.

Here's the year-over-year trend.

Source: Trading Economics

The dollar is going to help this trend to continue higher.

Japan

10% of Japan's imports are from the US. 20% of Japan's GDP is made up of imports. The dollar was up about 9% versus the yen (NYSEARCA:FXY) in November.

Let's do the math how much inflation should be up on the dollar effect alone.

10% of Japan's imports are from the US X imports are 20% of GDP X 9% dollar move = .2%

Inflation should be up .2% month to month in Japan based on the dollar move alone.

Source: Trading Economics

The last reading for inflation in Japan jumped by .6% sequentially. The dollar's move is going to help this move higher.

Implications

We've had a jump in oil which can filter into other commodities. That will, of course, drive prices higher.

Now with the jump in the dollar, the EU and Japan are quickly marching closer to their inflation targets of 2%.

If the dollar and oil trends continue, inflation could meet central banks' goals in 6-12 months. At that point, the central banks need to strongly consider halting their easing program and bond buying and raise rates. If inflation continues its trajectory, they may need to sell the bonds they purchased.

Those bonds that they purchased cornered the markets sapping liquidity. Central banks have been huge purchasers. When they sell, it will crash markets.

As we approach 2% inflation, these giant buyers globally will have to stop and reverse. That reversal will cause selling from central banks of trillions of dollars of bonds. The hint of that will cause markets to preempt such a move.

That's why these inflation drivers are so critical to watch. The dollar's move is an important driver in this chain of events.

Calendar

Japan's November inflation reports December 26th.

The EU's November inflation reports January 4th.

Conclusion

The dollar's move is important to the inflation story in the EU and Japan. The dollar in isolation should drive a .2% sequential jump in inflation for November in these two key regions. These two key regions have about $8T in central bank purchases. When inflation officially hits 2%, which is 6-12 months away now, they will need to stop buying and start selling. That will be a material market risk.

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