Concerns of higher inflation dampened
A-ha! Maybe the Fed is on to something. Our economy is working off of interest rates that are around the 4.00%, as the lag in interest rate increases still works its way in to the markets. And wouldn’t you know it, signs that the interest rate increases are having an affect. The m//m change for the headline increased a whopping 0.1% while the core rate declined -0.3%. Yes, declined.
Yesterday, we read our share of news articles suggesting that the dollar’s rally was due to concerns over this week’s inflation releases. I wrote something last month regarding the PPI softening a bit and the charts starting to point lower. The y/y change was edging down. So, when I was reading these news releases last night, I began to think about the possibility that the market may not need to be as concerned. I figured our m/m increase would be higher for today’s release. But, it was the y/y increase that I figured might edge lower. I didn’t expect the m/y change to come in lower.
My FX Trading Plan:
I’ve been dollar neutral for a few months now vs. certain currencies. I know, sideways is rarely a market direction that gets a lot of front cover stories. But, it’s still sexy to someone who trades options primarily. However, today’s news doesn’t keep the dollar contained in the sideways range that I’ve been playing.
All the data we’ve been getting is dollar positive when it’s inflationary and dollar negative when its growth oriented. For my current trades, however, this will still work out. Japan is still going to take their time in raising rates, and Canada is still done. As well, Australia is probably about as high as they are going to go. So the dollar’s course of direction comes down to the actual differential vs. these countries, not the potential widening of the differential. The markets are reacting to today’s release. But, I see the dollar contained as we await tomorrow’s more important release. And, no, before you ask, there’s not a huge strong correlation between the CPI and PPI. There is a correlation. But, just because PPI
comes in soft does not guarantee tomorrow’s will come in soft. Eventually, yes.
Tomorrow, not necessarily.
My S&P 500 Trade: As I mentioned in my economic thesis, I am
playing along with the Fed’s notion that inflation will be contained. I see
growth moderating in this quarter but increasing as early as Q1 2007. There may
even be signs that this year’s Q4 is perky. With today’s release I see the
equity markets moving higher. This is something the equities have been waiting
for… confirmation that the Fed is on the right track.
The Forex Project