US Dollar/Japanese Yen Jumps As US CPI Eases More Than Expected

The release of US inflation data led forex carry trades like USD/JPY and EUR/JPY to jump this morning as the news suggests the Federal Reserve will indeed cut rates further at their next meeting on October 29. Looking at the data on hand, the annual rate of CPI growth eased more than expected to 4.9 percent in September from 5.4 percent, as falling commodity prices led energy and transportion costs lower. While this is well above the Federal Reserve's comfort zone, the fact of the matter is that asset prices - such as property values - in the US are plummeting while waning domestic and foreign demand suggests that businesses will have little leeway to pass costs onto consumers going forward. As a result, upside inflation risks in the long run have fallen significantly, and if anything, the Fed is likely more conerned about the potential for CPI to fall uncomfortably low.

US CPI (YoY, Monthly Chart)

Source: Bloomberg

In fact, looking at the core measure of CPI - which excludes volatile food and energy prices - price growth in the US remains fairly stable and didn't even manage to accelerate faster than the 2006 highs of nearly 3 percent.

US Core CPI (YoY, Monthly Chart)

Source: Bloomberg

Looking at fed fund futures probabilities, the markets are still betting that the Federal Reserve will indeed cut rates by at least 25bps when they meet again on October 29. With investors desperately hoping for a solution to the credit crisis, the news has sent DJIA and S&P 500 futures surging, signaling a slight improvement in confidence. Likewise, this has led the Japanese yen crosses such as USD/JPY and EUR/JPY higher, while the US dollar has actually weakened a bit versus the euro and British pound. This is primarily due to the fact that the US dollar tends to be treated more as a safe-haven asset like gold and Treasuries, so when traders become more "risk seeking", the currency falls.

Source: Bloomberg