Update: U.K. CPI and U.S. PPI

There was limited reaction to the U.K. CPI which declined 0.7 percent to 4.5 percent annually, the sharpest in at least eleven years. It might be overshadowed somewhat by frequent news from the troubled auto industry in the U.S.

The U.S. PPI declined 2.8 percent just in October, more than analysts' estimates, but the Core PPI which excludes the volatile food and energy prices rose again showing that the recent sharp drop in commodities prices still needs time to be passed through the production channels.

Stocks, Treasuries, and Yen; Toward Understanding the Big-Picture

Rising inflation is not always negative for stock markets especially when the prospect is improving and other asset classes look more risky.

Last week showed that the CPI increased in Europe and North America but the possibility of a dipper slowdown in global economy noticeably eased concerns about the future of inflation. It may explain why equity indexes climbed, yields on Treasuries fell, gold and oil prices dropped and even carry-trading somewhat resumed.

When Inflation doesn't Work!

The cost of living in Euro-zone and UK rose in June but the market reaction looks completely different to what you may remember from July. At that time, rising inflation headlines in addition to revived concerns on the health of the U.S. financial institutions, Freddie Mac and Fannie Mea specifically, helped both Euro and pound reaching their records highs against the dollar. However inflation my look not so frightening when everything pointing to the possibility of a sharp slowdown in global economic activity:

• IMF's World Economic Outlook Update in July pointed to an increasingly slowing economy in the UK, EU, and Japan.
• Gross Domestic Product shrunk in Euro-area in the second quarter, for the first time since introducing the Euro, after economy contracted in Germany and France, the two largest euro economies.
• Japan GDP also showed that the world second largest economy contracted at an annualized 2.4 percent in the second quarter when Japanese officials earlier warned about it.
• The data also showed negative numbers for Industrial Production in Japan, France, and Euro-area.
• Moreover, the war in Georgia just increased concerns about the security issues in European economies.

There were certainly reactions to this situation. Commodity prices lead by oil extended their declines. One month ago it was really difficult to imagine gold at 772 $/ounce but it happened on Aug 15.

The only winner was certainly the dollar which appreciated against all major currencies. The depreciation of sterling was the most in almost 37 years. Nevertheless, I think the appreciation of the greenback against the Yen was somewhat limited which may come from a widely reduction in carry-trading.

Finally, almost all economic data for the week were overshadowed, positively or negatively, by the big-picture which was the fear of a global economic slowdown. There was almost no significant reaction to the GDP or CPI in Euro-zone at the time of the releases showing that most of decisions had been already made.

The bet finally resulted in 8 percent loss

I closed my positions last night (after U.S market close). Every supports was broken and there was no supportive technical data. In addition, an only pre-order for buying GBPUSD automatically triggered at its daily support which resulted in 49 pip loss very soon.
Looking at sharp drop in commodities prices show that the market may be in an adjusting process. UK CPI and US Trade Balance are ahead but I have no specific plan for the rest of the week.
Although holding positions beyond a day was in contrast by my style but a relatively small size and making a difficult decision (closing all in loss) help to control the loss.
I forget it from now, looking toward the next week. (plan of the trade)

Moving Forward with Profit

German wholesale price index rose more that estimates, French industrial production unexpectedly slowed in June when Italian CPI rose nearly in line with expectation. In the UK, Trade deficit widened more than analysts estimates while Producer Price Index Output rose 10.2 percent from a year earlier suggesting inflationary pressures has still way to be moderated.

There is no significant economic data from the U.S. today, but Housing Starts in Canada could affect dollar. I decided to hold my positions, both EURUSD and GBPUSD which are in profit right now. Heading toward Tuesday's UK CPI, I would be prepared to increase the size in appropriate technical conditions. (plan of the trade)

Unusual positions and very usual losses

All recent positions resulted in heavy losses. There are clear reasons:

I was completely wrong when underestimating the possible negative effects from the US housing and credit problems especially the case of Freddie Mac and Fannie Mea. Yesterday, President G. W. Bush made a press conference explaining the government plan for supporting the two firms and the deposits of American people. At the same time, Bernanke was at the senate when repeating concerns on credit conditions and also the prospect of inflation.

I was also wrong in creating the positions. In the case of selling EURUSD there were significant errors and mismanagement:

• Although it was generally inappropriate to sell the euro at that time but considering economic data then the possible option could be EURGBP, not EURUSD.


• Also too much risk had been taken when I hold the position in a very weak technical conditions until making almost 100 pip loss.

In the case of selling GBPUSD I made the worst choice. I sold a currency when it was facing CPI data that has been its only support in recent months. Even a very armature trader doesn't make such crude decision.

The market certainly doesn't make mistake and I paid the full price of my decisions.

Taking an unusual position ahead of UK CPI

In less than 4 hours to UK CPI, GBPUSD has reached near its daily resistance. I think most of the data has been priced and it may be an opportunity to prepare for the possible reactions after the report. I decided to sell sterling against dollar and it may looks unusual but there are reasons to me:

• Inflation could support a currency from interest rate perspective, but it is usually unsuitable in a long term especially when the economy increasingly shows signs of slowdown. It may be also a chance to be in a better place before tomorrow's UK Employment report.


• After the report, the market must face economic data from US, Advanced Retail Sales and PPI which is likely to work in favor of dollar, at least in a short term.

Reaction to increase in UK CPI; Story of Trade vs. Gamble

3.3 headline inflation, even more than estimates, was unable to keep British pound from falling. Probably it makes investors more concerned about the prospect of the economy, which is already facing falling home prices and deteriorated consumer confidence.

I was true in taking profit well before the release this morning. It is another case showing why I see it worthless to bet on the data itself, simply because the actual data and the reaction are both subject to high level of uncertainty.

76 pip profit in 5 hours, when recovery matters

Both positions, selling USDJPY and buying GBPUSD, closed in profit automatically, well before the release of UK and US data; making 36 and 40 pip profit respectively.

Buying GBPUSD

I opened a long position on GBPUSD at 1.9633, betting that tomorrow CPI is not fully priced so far!

Housing slump plus Inflation; Going short on US dollar

Housing data is not expected to be encouraging tomorrow, Industrial Production probably stalled after contracting in April, and inflationary pressure in the production side will increase concerns on purchasing power of American consumers.

I think these forces could reduce the possibility of an interest rate rise by the Fed in the short term, which I expect to be negatively reflected in US dollar.

I see two candidates for buying against dollar: British pound and Japanese Yen. I decided to go short on USDJPY at 108.11; regarding relatively good technical conditions. UK CPI is ahead and I would buy GBPUSD (or GBPJPY) if technical conditions improve in coming hours.