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The US CPI and the rest of the World

Written by A Forex View From Afar on Wednesday, May 14, 2008

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The global CPI/Inflation situation looks like this now:

• The Bank of England inflation runs at 3.0%, requiring the Bank’s Governor to send explanation letters to Parliament. This is telling traders that inflation will not be coming down too soon, and there are not too many chances of a rate cut.

• The Bank of Japan just announced the biggest inflation increase in the last decade, they are also jawboning about the possibility of a rate increase. A rate increase, for Japan? That is something pretty new, after the “quantitative easing” strategy.

• The Bank of Canada announced that inflation will reach the upper limit of it’s target, and that when GDP growth hits 1.5% they will look to raise rates.

• The Reserve Bank of Australia already has a high interest rate, 7.25%, whilst the CPI is running at 4.2%, year-over-year, two big numbers.

• The ECB seems a little obsessed with inflation, and now some political leaders are starting to follow that mantra. Clarity in the fact that growth comes second at the ECB with their single mandate- price stability.

Now, bear in mind that all commodity prices are way up, including food and energy. Agreed? OK, now you can read the next one;

• The US CPI shows no signs of inflation. (That is not a typo, the US CPI really does not show any signs of inflation)

If you know where to look, and it is not easy to find, you can find the scoundrel Inflation hiding in the print, but in order in order to see it you really have to monitor the components that make up the US read;

• Food had recorded a monthly gain of 0.9%, the biggest gain in 18 years

• Energy stayed flat. (Hmmmmmm, come on Pinocchio, your nose will get bigger). A look at the nearest Gas station proves that wrong, not to say a look at any Oil Chart. It was only last week that Equities were trembling because Oil was breaking new highs at $125.

• A big drop in the recreation, and lodging area, 0.1% and 1.9% respectively. It appears that not too many Americans will be making any trips too soon

• Seasonally adjusted, Transportation fell too, by 0.7%, while Gasoline is down 2% (no typo here either, Gasoline is lower).

Where do they get these numbers, and why does nobody question them? Do you know where the real inflation numbers will be felt? In the value of the Dollar in your pocket as Inflation breeds and infects all aspects of the economy, thriving in the low interest environment.

The Fed has a tough job here, raging Inflation that can't be seen, and an economy that needs to quickly find its feet, but shows little signs of sustainable growth until at least Q1 (1st quarter) 2009. Until then the Usd valuations are probably not going to allow too much appreciation, and at best may send most major pairs into a sideways channel through the summer. We may have to get used to trading the 200-300 pip ranges for a while.

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There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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