I think CAD CPI is more likely to be strong and UK CPI is more likely to be weaker than economists’ expectations.
Was this puzzle driving you crazy? Was your brain stuck in neutral, or did it come through in the clutch?
The answer is R. As in, reverse. Like a gear shift.
September 19, 2023
First up: Please let us know your view on the FOMC Dot Plot. Results in tomorrow’s am/FX. Click here: https://www.esurveyspro.com/s/513719/sep23dotplot
Second, we get Canada CPI today. Yesterday we saw two releases from Canada, Industrial Product Price (PPI) and the Raw Materials Price Index. Both are correlated to CPI and both came in stronger than expected. PPI was two standard deviations strong and Raw Materials beat by 0.75 standard deviations. When both figures come in more than 0.5 SD above expectations in the same month, that month’s headline MoM CPI in Canada has come in strong 68.4% of the time (13 beats, 6 misses).
The first chart shows all the outcomes. The bars are actual minus expected for Canada headline CPI, MoM. It’s hard to do much with the core numbers because they are all over the place, so any trade done here is based on headline with the assumption that trimmed and other CPI figures will follow. That assumption is not always true, but there’s a pretty good edge here on headline and that’s worth trading, I think.
Thanks CC, aka Subscriber One© for the idea here
The cleanest trade is in front end rates as the October Bank of Canada meeting is still in play (currently 29% chance of a hike). By the end of today, that figure could be closer to 50/50 and once a meeting is 50/50, I believe it’s easier for it to subsequently go to 80% priced in as the meeting is clearly viewed as in play (i.e., anything can happen once it’s 50/50). When pricing is closer to zero, it’s sticky and needs strong data to unstick.
I think CAD will benefit today because there has been a nascent interest in the currency of late on the back of a big range top failure above 1.36, persistently high oil prices, overblown bearish China sentiment, strong Canadian jobs data, and a clean break of the 200-day MA in EURCAD. If you’re playing CPI through FX, long CADJPY and short EURCAD both make sense and you’re looking for a 40-50 pip move or maybe a bit more. It’s a good day trade, imo.
Tomorrow, we get UK CPI and the setup is the exact opposite to the one in Canada. Forward-looking data is showing lower prices on the horizon while the central bank’s reaction function is turning less hawkish.
The CBI selling prices figure, which is a survey from the Confederation of British Industry asking companies where they see selling prices, continues to mean revert after exploding higher post-COVID. The series is one of the few soft data points that has been an excellent forward-looking indicator. The lag between the survey and official CPI is about five months. Here is the chart:
With anchoring bias likely to keep estimates firm, especially after a few false starts during this reversal of high inflation in the UK, I think the economists’ estimates are probably too high this month. There are a few extenuating factors, such as changes to the alcohol duty, but these more technical adjustments are usually well factored into economist estimates.
The GBP setup is interesting as there are very few people that expect a hawkish bias from the Bank of England meeting on Thursday and many ready for dovish. As such I think GBP trades heavy into the meeting, and accelerates lower on a weak CPI release. But, I would not be short GBP through the BoE meeting as it’s setting up as a situation where fast money likes the trade and is short GBP already and will add if CPI is weak.
By the time the BoE comes around on Thursday morning, the market is likely to be a bit over its skis. That could be with GBPUSD at 1.2280, though, so I think holding short GBPUSD or GBPCAD (or long EURGBP) until just before the Bank of England announcement will work well. Then, as BoE comes out, the risk is a painful squeeze.
With FOMC in the middle of all that, it’s too complicated to predict GBPUSD’s path, but my best guess on EURGBP over the next 48 hours is that it goes something like that black, red, and purple diagram up there.
I’m focused on tactical stuff these days as there is no broad macro theme in FX (that I can see, anyway!) and when FX vol is low, event trading tends to pay the bills until the bon temps roulent encore. Hypertactical stuff like this doesn’t tend to make it to the sidebar but I do believe strongly in everything I’ve written today.
Alex was kind enough to email me yesterday and tell me that Bloomberg has a series for the effective mortgage rate actually paid by US homeowners. Here is how it compares to market rates.
It’s a stunning visual representation of how locking in at low rates shields the economy from Fed hikes. For a while, at least! I would bet a similar chart for US corporations would look similar.
Have a rapidly accelerating day.
The Spectra FX Positioning and Momentum Report
Hi. Welcome to this week’s report. Participation in FX has been modest, but not terrible, as the market has given up on outright USD views and is focused more on carry, crosses, events, and idiosyncratic stories. With the FOMC, BOE, SNB and BOJ this week (plus other central banks), excitement levels are ticking higher again.
1. CHF positioning has increased, which is interesting as the franc is near its highs against the euro. It’s not common to see positioning go against price. This change in positioning is presumably related to USDCHF momentum as that pair has moved methodically higher (many CTAs simply trade the USD against each currency as a separate asset) and because the SNB meeting is coming soon and there is some chance they take their foot off the neck of EURCHF. The Swiss National Bank has been selling currencies and buying CHF for a while and with inflation well below their 2% cap, there is some speculation that the wording of their statement might change at this week’s meeting.
Almost all the price action in USDCHF since 2013 has been between 0.8700 and 1.0300 and that brief July foray down to 0.8560 is looking more and more like an aberrant one-off that was cleanly rejected. With spot at 0.8970, the 1-year forward outright is at 0.8670 and that makes for some interesting medium-term carry trades for USD bulls / CHF bears.
2. CFTC GBP positioning remains extended, but it’s lost momentum. The multi-month bearish signal from the extreme push up in CFTC GBP longs has worked (see Spectra Positioning Report, June 26, 2023). Meanwhile, fast money is loading up on GBP downside ahead of this week’s BoE meeting, but there is a CPI report on 20SEP to contend with first.
Often the runup trade into big events like this CPI/BoE combo create an excessive short-term positioning setup and that’s my base case this week. That is, fast money GBP shorts are likely to press their bets if UK CPI is weak and this could set up for a big rebound in GBP as expectations for the Bank of England will be excessive by BoE game time. If this is the scenario, GBP will go into BoE on the lows but trade super bid regardless of what Team Bailey ends up doing or saying.
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That’s this week’s report. Thank you for reading.
The answer is R.
(captain)
A sort of almost unbelievably large move in Brazil. Plus: Short CADJPY.
