Inflation leads to hawkish central bankers

Outlook:

Today the market-mover is supposed to be CPI, although it's conceivable that a new tone in Washington will have some weight. Fed officials have referred to the downward move in inflation as due to transitory factors like cell phone charges, which may be true but is un-convincing. Headline inflation has been rising at a tepid pace of about 0.1% and Bloomberg has a fore-cast of 0.3% for August, which seems unlikely. Bloomberg also has a forecast of 1.6% for core CPI. After the weird dollar rise on bad PPI data yesterday, it's hard to say what the response will be to CPI today. The vast majority of expectations is for an additional dip or a tiny gain at best, and not some-thing that should be dollar-positive.

We also get the usual Thursday jobless claims this morning and after the two hurricanes, it's likely to be a gigantic number, possibly 300,000 (Bloomberg) after 298,000 last week. And tomorrow we get retail sales, undermined by weak wage growth.

Traders make decisions on the immediate data and not possible data that will emerge in months to come. And yet it would be silly to ignore that job creation, inflation and retail sales will be getting a big bump from the natural disasters. Maybe they will be one-time, transitory bumps or maybe they will become the engine of growth and Fed rate decisions, but whatever they are, we must expect the bumps and the positive effect they will have on the dollar. Who, if anyone, is putting down cold hard cash on this outlook?

We could just as well ask the same question of the traders who went long sterling ahead of the BoE today, in anticipation of a "hawkish tone." Sure enough, "a majority of its nine policy makers judged that ‘some withdrawal of monetary stimulus was likely to be appropriate over the coming months in order to return inflation sustainably to target' if the economy develops as they anticipate." Bloomberg has a chart labelled "November Live, February Fully Priced."

BOE

We don't want to take the analogy too far, but quite often the UK leads the US. It did Brexit, we did Trump. Quite often economic developments follow the same pattern. The pound devalued, inflation rose. Inflation rising leads to a hawkish central bank. We see something similar developing in the US, with the caveat that May is a lot less erratic than Trump and Trump changing his mind and stance twice a day and trying to be a deal-maker complicates the political judgment.

We are always leery of charts that indicate we should be long dollars. They end in tears all too often. Be wary.

Currency Spot Current Position Signal Date Signal Strength Signal Rate Gain/Loss
USD/JPY 110.60 LONG USD 09/13/17 WEAK 110.05 0.50%
GBP/USD 1.3309 LONG GBP 09/07/17 STRONG 1.3075 1.79%
EUR/USD 1.1886 LONG EURO 06/28/17 WEAK 1.1218 5.95%
EUR/JPY 131.45 LONG EURO 09/13/17 STRONG 131.76 -0.24%
EUR/GBP 0.8929 SHORT EURO 09/13/17 WEAK 0.9033 1.15%
USD/CHF 0.9671 SHORT USD 08/10/17 STRONG 0.9655 -0.17%
USD/CAD 1.2185 SHORT USD 08/24/17 STRONG 1.2533 2.78%
NZD/USD 0.7225 LONG NZD 09/13/17 WEAK 0.7282 -0.78%
AUD/USD 0.7997 LONG AUD 08/17/17 WEAK 0.7931 0.83%
AUD/JPY 88.42 LONG AUD 09/05/17 WEAK 87.30 1.28%
USD/MXN 17.7524 LONG USD 09/05/17 WEAK 17.8312 -0.44%
USD/BRL 3.1349 SHORT USD 09/05/17 WEAK 3.1409 0.19%

This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.