US CPI + Housing Starts and Building Permits - momentum take some time to build

On Wednesday Nov.17th at 1:30pm GMT (8:30am EST) the Consumer Price Index for the USA was released. At the same time 2 housing data figures were also released. Although these housing numbers are important and frequently they are released on their own and we watch and trade these releases in the live forex & futures trading room when they do. This month however they just happened to be scheduled for the same date and time as the much more important CPI.

CPI is the main measure of inflation and US Federal Reserve has been myopically focused on the deflation that has been seen in the USA and this is 1 of their 2 main mandates - some have even mentioned making inflation the sole mandate of the Fed, currently the other mandate is for the Fed to support job growth. The deflation is the main reason that the Fed has introduced another round of Quantitative Easing, aptly named QE2. They have also maintained very low interest rates, all this is an attempt to make money more available, there is more of it. They use this created money to buy bonds.

Anyhow a higher than expected CPI is generally supportive the US Dollar, as if inflation comes back it may signal that QE2 is working and it is time to scale it back and think about raising rates. So far Australia, New Zealand, Norway, and even Canada have raised their rates after the financial crisis saw all Central Banks cut them drastically. When will the ECB and BOE follow, could the USA be the last to hike, or is it possible that a scenario like is seen in Japan where deflation has continued for over a decade and rates have remained next to zero for all this time. CPI has 4 numbers, 2 yearly and 2 monthly, 1 is a core number which excludes food and energy which are considered more volatile, and a headline number which includes food and energy. Anyhow here is the data:

(US) OCT CONSUMER PRICE INDEX M/M: 0.2% V 0.3%E; CPI EX FOOD&ENERGY M/M: 0.0% V 0.1%E; CPI NSA: 218.7 V 218.8E
- CPI Y/Y: 1.2% v 1.3%e
- CPI Ex-food & Energy Y/Y: 0.6% v 0.7%e (Core Y/Y CPI at 0.6% is lowest reading on record)
- CPI core index SA: 221.8 v 221.8 prior
- No revisisons

*(US) OCT HOUSING STARTS: 519K V 598KE (lowest since April 2009); BUILDING PERMITS: 550K V 568KE
- Prior Housing Starts revised lower from 610K to 588K
- The decline in overall starts was almost entirely due to a 44% plunge in multi-family starts. Single-family permits rose by 1.0% to 406K

- Note: Housing starts -11.7% m/m is approximately double the lowest street estimate.

So all the CPI figures were lower by -0.1, this was not enough of a difference lower for it to trigger the lighting fast entry generated by the Secret News Weapon from Fast Economic News Service, however the housing data was also lower. So looking at all the data as a whole after it was released, it all did seem rather negative for the US Greenback. Although the deviations for CPI were small but all 4 of the figures were all negative, which was a definate plus because some times they will conflict, where for example the Core month-on-month number is a positive deviation and the Headline year-on-year figure is negative. Then to add fuel to the fire the Housing Starts figure was the lowest reading since April 2009. As mentioned in previous posts, whenever we see a news headline where a number is the highest of lowest in a certain period of time, the market will pay attention to this. So this housing crisis, which started the how financial meltdown a few years ago, does not seem to be getting that much better, at least in the USA. The Building Permits Data was also lower, not by a large amount and it is not as important as the Housing Starts number, but as it also came out in the same negative direction all the other data, it did not matter and only supported the other data.

Ultimately in these situations price action is true indicator as to whether the data is good or bad. Normally in the trading room we focus on USDJPY when trading Spot Forex for US Data, as well as either the 10 year Notes or the EMini S&P 500 when looking at futures, but we have also started watching the USDCHF as it has had some really good moves on economic figures from the USA. Focusing on the moves in Spot Forex, initially the USDJPY and USDCHF only moved down 15-20 pips minute after the release. There was then a pullback as we have seen on many releases, to the 61% on USDJPY, but on USDCHF the 38% got frontrun. The USDJPY then moved about 10 pips from the number, while the USDCHF produced a 20 pip move, so definately outperforming the Dollar Yen on this news.

Also included are some charts of the next few hours after the release, as with US data sometimes we have to wait for the US Stock market to open, also sometimes there is more US Data at 3pm GMT (10am EST), and many market participants want to see all the data before making their trading decisions. There was no data except the DOE Crude Inventories at 3:30pm EST (10:30am EST), however with all the bad data there was really no reason not to stay short. If price action had turned back up then of course the decision to exit would have had to be take. The Swiss just went into a period of sidewise consolidation for the next half hour, before momentum gently turned lower and then accelerated. From the cart we can see several trading entry opportunities, drawing a new fib over the entire news reaction and watching the candlestick close for entry. Even after the initial move down price on the USDCHF came back up to test the news reaction low at 0.9925, producing another opportunity to enter if the trader had not yet got in or to add more to the position after banking some profit on the initial move down. The USDJPY made a key reversal also about half an hour after the news was also at the 61% fib of the news reaction swing which then price extended down even past the 161% extension of the same move.