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The mother of all data points!!!!!!!

Trading the US CPI data

Once again we have a data point being built up into the biggest thing ever since the last biggest thing ever. Is it important? Of course but is it a game changer? I doubt it.

What we’re trading regarding the Fed right now is when and how many cuts there will be. The market is pretty much at 2 cuts, some Fed heads are at 2 cuts and many are saying there’s no rush to cut, so we’re leaning to the less dovish side. That means a hotter, or on the money inflation print today will see the timeline pushed out for cuts, and maybe a reduction (in bps terms) for total cuts this year.

FFR futures are pointing to 60bps of cuts this year, so 10bps over 2 cuts. A hotter number might see that coming down to 50bbps. A more hawkish move would be sub 50bps. I think the risk from this point (on a hotter number) is that we again start to get some of the market talking about hikes again. IIRC there were some small bets being made a couple of months ago so we may see a pick up in that. We know the market likes to go from one extreme to the other. The question will be whether it does that today or not. If it does, then we should expect USD to maybe shift to small dip buying until the next big Fed speaker like Williams (tomorrow), or Uncle Powell, next sits down to tell us what’s what.

I don’t think much changes if the number misses exps but stays above 3%. For me, 3% is the pivot line for the Fed. Another 3% or + print today will make it 10 months of not going below 3%, and that’s a problem IMO. So, while the initial reaction to a softer print might be to sell USD, I don’t think that will last if it keeps a 3 handle. Oh, and don’t get sucked into the “PCE is more important” line of thinking. They watch this just as closely.

Overall, I don’t think we’re going to be seeing USD breaking any new ground today in most pairs. Yes, we might stretch some legs in pairs like AUDUSD but perhaps only to wider range edges like 0.6800 on a softer number, though maybe not in a straight line. Going into today, we know USD has been on the weaker side of things so note that’s the way we’re leaning, and know what it might take to change or keep that pattern.

One pair that’s still in its own world is USDJPY, so as we’re playing the 152 game still, I wouldn’t trust trading that one on the data. There’s plenty of other USD pairs that don’t have such high risk around it.

I’d suggest not getting sucked into the all the ‘showbiz’ around this release. Don’t think we’re going to get an instant 200-300 pip move when we haven’t managed that over all the other inflation prints, PCE prints, NFP prints, FOMCs etc etc. Keep your expectations realistic. Trade your levels, not your hopes and do your homework going into the data on where you would be happy to trade. If you catch the right move, think about taking partials just in case moves fade and reverse (See USDCAD recently as an example). That way you can put money in the bank if you’re right, while managing the rest, and protecting the profit made if it turns against you.

Trade safe everyone.

Analyzing the Potential Impact of CPI Data on SPX500 and DXY

CPI y/y reflects the percentage change in consumer prices compared to the same month of the previous year.

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What Next, Chairman Powell?

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Trading JPY, BOJ Ueda, forex

Big (risk) in Japan

We have two huge events for JPY on Friday in Japan

On Friday in Japan we have CPI numbers and then BOJ nominee Ueda attending his first hearing in the Lower House. These can both be big movers for JPY.

Japanese inflation

Core inflation is expected to rise to 4.2% vs 4.0% pr y/y.

If this number is hotter than expected, yen could gain significantly at least on a kneejerk reaction. The opposite is likely if the number is softer than expected and/or lower than last month. Whatever the move, the market will still be thinking about Ueda next so any significant move may revert to a more neutral stance quickly after.

BOJ’s Ueda

This is a tough trade. On one hand we have the risk that he’s being brought in as a changing of the (monetary policy) guard. Someone who’s not of the old ‘team easing’. That in itself is hawkish if true. But, on the other, even if he is being implemented to lead Japan out of the ultra loose policy, he won’t be doing so in a rush and keeping markets from getting too expectant will be his ultimate task.

So, finding the balance in any comments is going to be important. The last thing he is likely to do is rock the boat with any big hard hitting comments in his first real public event. For example, he could say an exit will be looked at but then counter by saying something like it might take 10 years to get there. There really is a ton of permutations we can find for this, both hawkish and dovish, and that means potentially big volatility for markets.

How to trade it

Purely from a risk perspective, I think the lowest risk trade might be to buy a dip in USDJPY on a strong CPI number to hold into/over Ueda.  If he plays it ultra safe on exit talk, JPY pairs are likely to rally. If the market quickly fades a drop in USDJPY on the CPI, that could give longs some trading margin to play with into Ueda.

On the otherside of the pair, USD is still bullish while expectations for the Fed remain more hawkish, so dips are currently very shallow while US yields hold up on their highs. Therefore, long USDJPY is the path of least resistance. But, the risk is if the CPI is strong, and Ueda is hawkish, and then we’re likely to see a much bigger downside move. On that scenario there’s going to be a battle between a newly hawkish BOJ and a currently hawkish Fed.  If I had to pick a side, I would pick the JPY side as the BOJ turning hawkish would be a far bigger and longer-term event than whether the Fed is possibly going to take their rate ceiling up a mere 50bps from 5.5% to 6%.

In trading we often try to cover all the bases when trying to pick a trade but for me, I always look for the one that has, in my opinion, the least risk. Therefore, there may be many other trades to take, on many other possible outcomes but when I take a step back and look at all the parts (US & Japan) from a wider perspective, this is the one I like the most. Does it mean it will succeed? No. Does it mean I will definitely get a trade? No. In the first instance, I won’t be interested if there not a significant move over the CPI. Plus, I am still running some core shorts down to 131 so I may even use a strong CPI number to reduce or get out of that trade, with the consideration of Ueda sending USDJPY much higher.

On the tech front, we have a big closing confluence area high 136’s, low 137’s, then 138’s

USDJPY Daily

To the downside, 133.00/132.80 is the first big level. then 131.50-131.00/25.

Maybe the best advice I can give to traders is that as this is a big risk event, it does no harm to stay out and wait until the dust settles so that we have a clear idea of what may follow.  No one is going to miss a big trend move in one moment. Yes, we may miss the start, or a big initial move but something like the BOJ changing stance won’t be “priced” in one day. The saying “If in doubt, stay out” has served me well lover the years.

Whatever you do, however you trade, please trade safe and good luck.

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