[B]Trading the News: Japanese National Consumer Price Index[/B]
[B][U]What is Expected[/U][/B]
Time of release: [B]10/25/2007 23:30 GMT, 19:30 EST[/B]
Primary Pair Impact : [B]USDJPY[/B]
Expected: [B] -0.1%
[/B]Previous: -0.2%
[B]How To Trade This Event Risk[/B]
The economic calendar must be unusually slow if the Japanese inflation data is the top market mover for the day. In months past, the price action immediately following the indicator has been consistently muted. It is not surprising that the market has a hard time responding to this indicator during one of the most illiquid periods of the day. Inflation pressures in Japan have long hovered around near negative territory for years. For a brief period, through the summer of 2006, annual National consumer inflation numbers breached the deflation trend and pushed to a multi-year high 0.9 percent clip. It was this acceleration in fact that encouraged the Bank of Japan to pursue abandon its zero interest rate policy (ZIRP) and deliver rate hikes, normalizing otherwise anomalous conditions that have led to investment bubbles in the past. Price action immediately following the previous few CPI releases have been quiet, but a follow through move in the direction of the fundamentals has developed despite an empty calendar. We suggest playing this event risk conservatively and taking a trade only in the event of a considerable surprise from the inflation data. A sharp move towards positive price growth could give the central bank more leeway to pursue further interest rate normalization, but with economic projections aiming in the same direction as inflation, such forecasts are flimsy. At the same time, a marked jump in deflation trends would certainly weigh on any probability of a 25 basis point hike through the first half of 2008.
A strong inflation report would have the advantage of providing fundamental fuel in the same direction of short-term USDJPY price action. However, its overall economic impact and promise of changing interest rate policy would be questionable in all instances except for a considerable rebound in positive territory. What’s more, the component data would likely be required to prove the upswing has staying power to truly encourage speculation of a rate hike. On much strong than expected CPI data, we will look to short USDJPY on two lots at market after a five minute red candle is closed. The initial stop on both lots will be above the nearby swing high (or a fixed distance if volatility is too low or high). The profit objective on the first on the second half of the trade will be based on discretion while the target on the first half will be immediately set equal to risk. When the first lot takes profit, move the stop on the second to break even.
A sharp drop in inflation trends could play on sentiment that USDJPY is oversold and help the dollar regain footing as speculation that the diminishing yield advantage of the pair will not be made worse by the Bank of Japan. The same entry rules above apply for a long position.
