Trading the Core PCE on 9/29

The next report i'm looking at is the Core PCE on Friday. As i'm sure you know, this is one of the Fed's most important indicators of inflation. The consensus is for an increase from a .1% rate to a .2% rate ($+).

What's interesting here, is that the $ is presently at a level (2700 or so) that indicates this info is probably close to already having been bought into, if the report comes out about on consensus. I think the best scenario for this report is if the $ goes down between today and the Friday morning London open. If the EUR does go to the high 2700's or better, you may see a large EUR drop after the Friday morning London open, as traders buy (or in this case re-buy) into the consensus $+ numbers for this report.

To put it another way, if the numbers do come out consensus or a bit higher and the EUR is sitting at 2650-2700 at the time of the report, there probably won't be too much room for the $ to strengthen further. Just the opposite is true if the EUR is sitting in the high 2700's (or even the low 2800's) and the report comes out this way; then there will be room for the $ to strengthen. The thing to also be aware of, is where the EUR is sitting when London opens Friday morning. If it is in the high 2700's, you may see traders buying into the report ($ strengthening) during that London session.

Of course, the number might come out dollar negative. If we see the number at like 0 or even more negative, he opposite scenario is then in effect; if the dollar is sitting where it is now or better, obviously there would be a large up spike in the EUR as the EUR would be "undersold" for a $- report. And, if the EUR is in the upper 2700's-low 2800's with a $- reading, there will be less room for the EUR to strengthen further.

Traders may also want to keep an eye on tomorrows PCE data (part of the Q2 GDP revisions - final).

As Newstrader says, the PCE is a favoured inflation measure of the Fed. Merrill Lynch say the following:

'The Fed’s favorite inflation gauge is released this week. We expect the core PCE price index will rise 0.2% in August, boosting the year-on-year rate to 2.5% from 2.4%, the highest since mid-1995. However, we are very likely near the peak and expect the rate to slow as we head into 2007.'

While CPI has surprised on the downside, the PCE is close to the Fed's comfort threshold (estimated to be 2.5%). If we get anything north of 2.5% y/y, the market could get spooked.

I believe the comfort level is between 1-2 % y/y. Correct me if i'm wrong. I do believe the market could get "spooked" with a higher reading, but the higher the EUR, the greater is the potential for a big "spook".

Oops, you are definitely right amigo. The Fed comfort range is thought to be 1-2%, though my understanding is that most feel it is closer to the 2% mark.

Mm, that sounds logical, given my own understanding.

So we know what to expect... now what is our strategy meant to be? Is it going to be a crazy spike like the less major news today? A fade candidate or a wave to ride?

Sorry if my questions are newbie-like Just that today I made my first news trade and it was small (15 pips total) but it was quite fun to bet on a confident strat.

Question on news trading: have spikes ever gone OPPOSITE of the supposed direction?

bernanke wants to stay between 1 and 2% for sure. read his book "Inflation Targeting", he says a whole lot on this subject.

It is so "unconvenient" to have major CAD and USD news released on the same time.

I wish they were all single announcements with clear deviation with a slight delay to get a good fill

Or better, each one complimenting each other going in opposite direction!

ie, Good US with Bad Can Number (Long USDCAD)
or Bad US with Good Can Number (Short USDCAD)

Thanks for the info regarding Berenenke's book Merlin...BTW...any opinions regarding the friday #?

How is the PCE computed?

Is this number to be released for a single month? and the Annual PCE would be the sum of these monthly PCEs?

PCE is highlighted under: Durable good, nondurable goods, and services. PCE is the is the largest component in the GDP (page 53).

That is the understanding i got from Baumohl's book: "The Secrets of Economic Indicators."

I dont have enough past info on PCE... anyone care to fill us in on how currency pairs react to PCE?

based on 2 charts, I can only say that:
1. if the first minute move is strong, expect a reversal
2. if the first minute is weak, expect a long trend

PCE Core History : Here

CAD GDP m/m History : Here

Looking at the levels of the EUR and GBP this morning, it's obvious that both have sold off in anticipation of the $+ consensus in the core PCE. If this number comes out at .3 or higher, there should be some further $ strengthening, as the Fed's preferred indicator will be far above their target. A drop to 0 or even negative territory could see a frenzy of buying in the EUR and GBP.

I wouldn't straddle this trade. If the report is on or near consensus, there'll be some wild whipsawing that you will want to stay far away from. Get the number and watch the market reaction. I have a feeling that due to the lowering oil prices a drop in the number may be seen. They'll be plenty of time to get in on the market if this occurs.

Correct me if i'm wrong, but the number indicates the yearly figure on a m/m basis. Fore example, if the number is .2%, it indicates that the yearly rate is 12 x .2 = 2.4%

Merlin?

IF PCE plays a big part in GDP, and since GDP (yesterday) was lower than expected, perhaps, PCE is lower also...

Expectation is 0.2% Core PCE; if the result comes out 0.1% and up, i expect it to be USD bull. I personally think that only a 0.0 (or lower) will cause heavy selling of USD.

in 30 minutes, we shall see the number and the reaction...

do the Canadians do this on purpose?

Reuters forecasts for all 3 components:

Personal income is expected to have risen 0.3 percent last month after a 0.5 percent increase in July as personal income growth eased on the slower growth in employment and hourly wages, according to the median estimate of 85 economists polled by Reuters.
Personal spending is seen having risen 0.2 percent after a 0.8 percent increase in July, as auto sales slowed and higher gas prices dampened spending, according to a median estimate offered by a Reuters poll of 87 economists.

The core PCE price index, meanwhile, is expected to have risen 0.2 percent in August, after a 0.1 percent gain in July, according to the median estimate in a Reuters poll of 60 economists.

It came out 0.2 as expected and USD rallied once again.

shorted at 1.8670 to 1.8640.

Too much dollar sentiment. Easy money.