US PPI remains at highest levels since November 2010; What about CPI? USD/JPY
Joe Perry November 9, 2021 11:23 AM
If 10-year yields can hold support and move higher, USD/JPY may be able to do the same
According to the BLS, the Producer Price Index (PPI) measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and services. Theoretically, PPI filters down to the CPI, which is the average change over time in the prices paid by urban customers for a market basket of consumer goods and services. Companies pass higher prices they paid down to consumers. Therefore, PPI is often viewed as a leading indicator for CPI.
October’s PPI YoY print was 8.6% vs 8.6% in September, however slightly missed expectation of 8.7%. This is the highest level since November 2010. The Core PPI for October YoY was 6.8%, again matching September’s print. Expectations were in-line. This remains the highest level ever for the core reading.
Tomorrow October’s CPI will be released. The headline YoY expectation is 5.8% vs 5.4% in September. The core inflation rate is expected to be 4.3% vs 4.0% in September.
Does the leveling off in PPI mean that in a few months’ CPI will begin leveling off as well? And could it even be a peak in inflation?
As we often discuss, US 10-year yields and USD/JPY often move together. On the 10-year yield chart below, the orange line on the chart is the price action for USD/JPY. It’s easy to see how the 2 assets move with one another. Yields reached a recent high of 1.704% on October 21st and pulled back to the neckline of a head and shoulders pattern as the November 3rd FOMC meeting approached, near 1.55%. On November 4th, 10-years broke the neckline of a head and shoulders pattern and are on their way towards target near 1.33%. Note that today yields broke through both the 50- and 200-Day Moving Averages at 1.479% and 1.468%. A close below these levels would be bearish for US yields, and therefore, USD/JPY. Support is at 1.378% and an upward sloping trendline at 1.29%.
Source: Tradingview, Stone X
So that leads to the question “Where USD/JPY may be headed?”. USD/JPY has been moving higher off channel support at 109.12 since the September FOMC meeting and reached a high of 114.70 on October 20th, which was resistance dating back to 2017. On its move higher, the pair broke through horizontal resistance and the top trendline of the channel near 112.22. This level now acts as support. However, ahead of that is the top trendline of the channel and the 38.2% Fibonacci retracement level from the September 22nd lows to the October 20th highs, near 112.57. Below 112.22 is an additional confluence of support at the 50% retracement and the 50-Day Moving Average near 111.90. Short-term resistance is at today's highs (and the October 28th lows) at 113.29. Above there price can move up to the October 20th highs at 114.74.
Source: Tradingview, Stone X
If 10-year yields can hold support and move higher, USD/JPY may be able to do the same. If traders want to buy USD/JPY, it may be a question of timing regarding when rates will turn higher. With PPI at its strongest levels since November 2010 (although plateauing), and CPI expectations higher, traders may get their answer tomorrow.
Learn more about forex trading opportunities.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.