The markets were reasonably busy overnight in preparation for this evening US CPI, and with some G-10 traders arguing this is the most significant economic release in the past three years, and at a minimum, the consensus is that that the US CPI release on will provide the next directional signal for markets. The announcement should generate an outsized volume of noise.

There is little to fret about the forecasted number in itself, but traders will be keying the divergence, direction and delta of the miss. Most certainly a higher CPI will be initially interpreted through USD strength, higher yields and lower equities bolstering the market views post-AHE narrative that inflation scare could push Treasury yields much higher and send equities spiralling lower.

It certainly feels like the proverbial calm before the storm and rightly so as there plenty of reasons to be cautious, but whether it warrants the present sense of foreboding in the markets or not, equity investors seem undeterred by the possibility of higher yields. US equities finished in the green for the 3rd consecutive day ahead of the critical inflation print despite the fresh memories of last weeks market carnage in the wake of an inflationary uptick in wage growth.

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While there remains the concern that investors are shifting from growth to inflation narrative.A spike in CPI will reinforce that moving storyline and will draw much attention to the bond markets. However, the more significant risk for Bond Traders may be a tepid CPI reading given the staggering bearish short positions in 10 year US bonds that woYen strength spilling from the US session into Wednesday Asia combined with broadening USD weakness sent USDJPY to 107, on the brink of breaching the 1 1/2 year trendline support. Japan’s Q4 GDP slowed to 0.5% y/y from 2.2%, disappointing expectations of a 1.0% reading. The rout in risk trade followed by the latest rebound hardly put a dent in the trend of US dollar weakness, especially against the yen. The Premium short USDJPY trade hit its final 107 target for a 250-pip gain. The Premium video for the upcoming trades is found below.

Yen Mystery?

Based on interest rates and the carry trade, this pair shouldn’t be struggling. Japanese 30s pay just 0.8% and the BOJ hasn’t given the slightest hint about raising rates. So what’s the driver?

A big one is investment. Japan has been a no-go zone for a generation due to languishing growth but also due to better potential elsewhere. Now investors are giving Japan a fresh look as the economy shows small, budding signs of growth. Along with that, equity valuations in Japan are cheap.

Ashraf reminded us 3 weeks ago on the reasons to JPY strength and why it would persist.

So long as the weak-dollar paradigm extends and global growth shows signs of life, a steady trickle in the yen could continue. Note also that specs are heavily short the yen and could be forced to start covering if USD/JPY embarks on another leg lower.

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Ashraf Laidi is an independent strategist and trader, founder of Intermarket Strategy Ltd and author of "Currency Trading & Intermarket Analysis". He is the former chief global strategist at City Index / FX Solutions, where he focused on foreign exchange and global macro developments pertaining to central bank policies, sovereign debt and intermarket dynamics. Ashraf had also served as Chief Strategist at CMC Markets, where he headed a global team of analysts and led seminars and trainings in four continents. His insights on currencies and commodities won him several #1 rankings with FXWeek and Reuters. Prior to CMC Markets, Laidi monitored the performance of a multi-FX portfolio at the United Nations, assessed sovereign and project investment risk with Hagler Bailly and the World Bank, and analyzed emerging market bonds at Reuters. Laidi also created the first 24-hour currency web site for traders and researchers alike on the eve of the creation of the euro. Laidi's analysis of currency markets stand out based on his distinct style in bridging the fundamental and technical aspects of the markets. Laidi regularly appears on CNBC TV (US, Europe, Arabia and Asia/Pacific), Bloomberg TV (US, Asia/Pacific, France and Spain), BNN, PBSs Nightly Business Report, and BBC. His insights also appear in the Financial Times, the Wall Street Journal and Barrons. He has given numerous interviews and lectures in Arabic, French, and to audiences spanning from Canada, Central America and Asia/Pacific.

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