US August CPI: Impact on USD/JPY and Trading Strategies

Tomorrow’s US August CPI is the pick of the week’s data releases and, after two years of heightened volatility in this data, we can say with some confidence that an upside surprisewould be USD-positive and vice versa. But how much is a surprise “worth” andis thereaction instantaneous? As the cleanest play on US rates prospects, we focus ontheUSD/JPY reaction here.

The two charts above show the difference between the core CPI outcome andtheBloomberg consensus forecast (horizontal axis) and the change in USD/JPY (vertical axis) after five minutes and after one hour. Data are from January 2021 up to last month’s July2023 data. As expected, almost all of the data points for non-zero surprises are inthebottom left and top right quadrants. Several observations are worth making

Firstly, the beta reported on the first chart implies that on average a 0.1%pt surprise, either upside or downside, is associated with a 25pt move in USD/JPY after five minutes. We would stress that there is a wide range of outcomes around the average, but this gives an idea of what a “normal” market response would be to a given surprise in the data.

If we exclude the two upside outliers (0.5pt and 0.6%pt surprises), the initial reactionrises to 40pts for a 0.1%pt surprise, which may be a fairer estimate as both of theseobservations were very early in the current inflation cycle and were clearly treatedwithsome scepticism by markets.

Secondly, because the beta in the second chart (the move after one hour) is larger thanthe beta in the first chart, the initial USD/JPY move tends to extend an hour later, rather than reverse. Again this is on average and will not always hold. But with that caveat inmind, the rightstrategy is generally to trade with the initial market reaction, rather thanto fade it.