Inflation in Focus, Yen Shorts Grow

The narrative in markets is that the ECB is fighting deflation and the Fed is seeing a pickup but the data due Monday will underscore the fine line between US and German CPI. The dollar was the top performer last week while the New Zealand dollar lagged. CFTC data showed falling AUD longs. Premium clients who have taken Thursday's AUDUSD trade are currently seeing +70 pips in the green.

Asia-Pacific trading is relatively light to start the week so the focus will be on German and US inflation data later. German CPI numbers are released regionally and traders have largely priced in the results by the time national numbers are out at 1200 GMT. US numbers are due out 30 minutes later.

The consensus is for German prices to rise 0.8% y/y in Sept and US prices up 1.4% on the core and PCE deflator. Given the Fed has a dual mandate that also focuses on employment, the difference isn't huge.

On Thursday, the Fed's Lockhart warned that prices are 'softening' and if the US dollar continues to strengthen the Fed could conceivably push out rate hikes. Keep a close eye on Monday's data.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +. EUR -142K vs -137K prior JPY -105K vs -83K prior GBP -1K vs -6K prior AUD +8K vs +22K prior CAD +3K vs +8K prior CHF -14K vs -11K prior NZD +2K vs +1K prior

Yen shorts grew substantially and the final Australian dollar longs were probably squeezed out in the continued declines on Thursday and Friday. The flattening of AUD positions probably signifies that long-term carry trades have mostly exited and that could mean more nuanced trading than the 7-cent one-way fall we've had in the past three weeks.

The yen position grew put it's still not at the point where it's overcrowded. There was also good dip buying last week in a further sign of strength. The downside risks lie in a more protracted period of risk aversion.