USD bulls take advantage of the Surprising September CPI
- Flat US CPI for September (at1.7%) beats bearish expectation
- USD spiked against other currencies
- Food and shelter increased more than projected
- Energy prices declines subdued
- Strength in the real economy
- What the CPI means for the QE
The US BLS report on consumer price index showed that the all items price index for September 2014 experienced a 1.7% increase. This increase matches the previous months reading at the same figure. Due to the soft retail sales previously reported and the fall in oil prices the market had anticipated and priced in a lower reading of 1.6%. As soon as the release was out, the USD experienced a spike across the board as traders moved to cover their overexposure and speculators sort to jump in with the USD bulls thus driving up the Greenback.
Gold immediately fell 500 points as together with the EURUSD which had a 350 Point drop in an hour. The New Zealand dollar and the Japanese Yen also experienced a 350 points decline against the dollar. This is captured in the appreciation of the USD index from 85.4540 to 85.7120 in an hour.
Putting it in Perspective
The higher than expected CPI for September marks an important point for the market sentiment. The market had fallen into some risk aversion symptoms as fears regarding the European crisis and the slowdown in the Chinese had begun dampening the risk appetite in the markets. There are still concerns that the problems in Europe will echo across the globe taking onto account the prime position the Euro Zone economy occupies in the international trade arena.
The primary concern was that with the cooling down in china, the reduced prospects in Europe and the declining commodity prices, the US cannot sustain a healthy economic growth trajectory. The BLS report however paints a different picture; despite the fall in energy prices, the increase from food and shelter was able to cover their decline.
In the last 12 months, prices for food and shelter increased by 0.3% and 3.0% respectively. This is higher than the 0.7% decline registered on Energy prices. Airline transportation and auto vehicles also registered moderate declines. The flattening of the inflation rate despite the fall in commodities shows just how well growth is entrenched in the overall US economy. Let’s also keep in mind that part of the cause in the fall in energy prices is the new oil mining activities taking place in Texas and North Dakota this is good news for the US trade balance and the US GDP. In the medium term, the USD bullish sentiment is stronger. The proposal to terminate the QE program in Q4 much more tenable and a Q2 US rate hike seems more credible.
In this circumstance, the flattening inflation rate is a bullish signal for the USD. In part it has cooled down the fears that we were slipping into risk aversion. Today the market woke to positive news from Europe where both the German manufacturing PMI and the Euro Zone Manufacturing PMI showed a reversal in trend to 54.3 from 54.2 and 50.7 from 50.3 respectively. Despite the flattening of the respective services PMI the Euro zone composite PMI had an appreciation to 52.2 from 52.0.
Taken all this into consideration we think that the market will be showing an increase in risk appetite up to Friday. A great trading approach under these conditions is to go short the safe haven currencies that have been benefiting from the risk aversion. An aggressive approach would be to go long the EURJPY. A less risky approach is to go long the USDJPY.
UK Nationwide Housing Prices highlighting the value of the houses prices in UK and indicate current movements in the housing market posted an increase of 1% in April, compared to the preceding month.
US dollar continued to weaken against a few currencies and managed to recover some ground against currencies like the Euro and the British Pound
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