am/FX: Playing for Softness

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There is room for a downside miss on CPI today, and AUDUSD has been particularly heavy going in.

by Brent Donnelly

October 13, 2022

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Long AUD @ 0.6293

Stop loss 0.6214

Long a 3-month USDBRL 4.90 digital put at 20%

Spot ref. 5.1850 on 10OCT22

Expires 11JAN23

October 13, 2022

Playing for softness

I am going to keep things super short today so I can send this before CPI.

It is a well-known fact that commodity prices take a while to flow through to core CPI. Here is a chart of the 2-month difference between headline and core (orange) vs. the miss in CPI that month (actual vs. median economist exp.) You can see that as headline inflation runs ahead or behind core, economists are a bit slow to catch up. Given the massive drop in headline vs. core over the past two months, there is room for a downside miss today (and in next month’s CPI).

Prior two-month average of (headline minus core MoM) vs.

core CPI miss (actual vs. expected) MoM for that month

For example, this month’s orange bar is average of headline minus core for July and August.

No blue bar because we are waiting for the release

Meanwhile, as discussed yesterday, the runup into CPI has been massively buying USD. AUDUSD has been particularly heavy.

AUDUSD %return: 3 days before CPI, and the day of CPI

I like long AUDUSD as a trade for CPI with a stop loss at 0.6214. Take profit TBD. I also wrote a longer, more explanatory piece about this for less experienced traders in my educational Substack yesterday.

You can read it here: https://50in50.substack.com/p/week-31-trading-events