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USD/JPY Rallies Despite Subdued CPI, Weak Housing Data

USD/JPY Rallies Despite Subdued CPI, Weak Housing Data

Christopher Vecchio, CFA, Senior Strategist

THE TAKEAWAY: USD Consumer Price Index (MAY) > +1.4% as expected, from +1.1% (y/y) > USD Consumer Price Index ex Food & Energy (MAY) > +1.7% as expected unch (y/y) > Housing Starts (MAY) > 914K (+6.8%) versus 950K (+11.4%) expected, from 856K (-14.8%) (m/m) > Building Permits (MAY) > 974K (-3.1%) versus 975K (-3.0%) expected, from 1005K (+12.9%) > USDJPY BULLISH

The batch of mostly secondary tiered data this morning has produced a quizzical rally in the US Dollar, because in aggregate, the data has negative overtones that doesn’t offer reassurance that the US economy is ready for life after extensive stimulus from the Federal Reserve. To wit: all three reports this morning, the Consumer Price Index (MAY), Housing Starts (MAY), and Building Permits (MAY) missed expectations.

On CPI: price pressures picked back up to +1.4% y/y on the headline, but the core figure remained below the Fed’s medium-term +2% yearly target, at +1.7%. Accordingly, these figures are well-below the Fed’s circuit breaker level as defined by “The Evan’s Rule,” at +2.5% y/y. Although monthly headline inflation picked back up to +0.1% from -0.4%, it was weaker than the +0.2% m/m forecast, keepin intact the idea that deflation remains a prime concern for policymakers.

On housing: Housing Starts missed considerably (+6.8% versus +11.4% expected (m/m)) but only a small decline in Building Permits (-3.1% versus -3.0% expected (m/m)) keeps the overall bullish tone for the US housing market intact. These data were probably the most disappointing figures released at 08:30 EDT/12:30 GMT today – the housing market has been a prime source for renewed optimism about the US economy, and the softer data might provoke economists to curb back 2Q’13 growth forecasts slightly.

Overall, the data fits neatly in within the broader picture that’s been painted the past several weeks about the US economy: its health is good, not great. As noted below, the US Dollar rally is an afront to conventional wisdom regarding the impact of the discussed data and the potential influence on Fed policymakers: below target inflation and weaker housing data tends to spur stimulus hope, which has proven to be USD-negative in the post-GFC, QE era of central banking.

Read more:All Eyes on Fed Meeting on Wednesday; No Taper but Hawkish Guidance

USDJPY 1-minute Chart: June 14, 2013

USDJPY_Rallies_Despite_Subdued_CPI_Weak_Housing_Data_body_x0000_i1027.png, USD/JPY Rallies Despite Subdued CPI, Weak Housing Data

Charts Created using Marketscopeprepared by Christopher Vecchio

Following the releases, the USDJPY jolted from ¥95.47 to as low as 95.27, before rebounding sharply to fresh session highs at 95.68, where price was holding at the time this report was written. Elsewhere, the most exaggerated reaction was in the EURUSD, where price rallied from $1.3377 to as high as 1.3397, a fresh session high, before quickly diving to 1.3344.

--- Written by Christopher Vecchio, Currency Analyst

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