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How to Trade On Japanese Inflation

Monday, 25 Jun 2012 | 9:32 AM ET
Woman on Escalator at Midtown Tokyo
B. Tanaka | Photographer's Choice | Getty Images
Woman on Escalator at Midtown Tokyo

Japan will release its latest CPI report on Thursday, and this strategist has a trading plan.

It's been a while, to say the least, since Japan had a real inflation problem. On Thursday, investors will get an up to date look at core Japanese CPI, and Amelia Bourdeau, director of foreign exchange at Westpac Institutional Bank, has a trading plan.

If core CPI comes in stronger than expected, Bourdeau thinks the Bank of Japan will leave policy unchanged, and she would sell the dollar against the yen, she told CNBC's Scott Wapner. But if it's lower than expected, she wants to do the reverse, since that would increase the chances of more easing by the Bank of Japan - which would weaken the yen.

"Of the scenarios, I'm choosing number two, the weak core CPI," Bourdeau says, partly because the Bank of Japan just added two board members who are in favor of easier monetary policy to boost the economy.

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She wants to buy the dollar against the yen on an upside breakout at 80.50, setting a stop at 79.70 and looking for a move to 83.00.

Todd Gordon, co-head of research and trading at Aspen Trading Group, likes the direction of the trade, but suggests using limits and entering the trade on a little pullback to about 80.30, rather than trying to time an entry on a breakout. "I'm just not a believer that you have to stay up all night to trade the FX market," he says.

Bourdeau agrees that buying breakouts can be tricky. But she says, "if you can time this, I think it's worth it because that 80.50-80.60 area is the top of a trend line, and I think if we break, it will break big."

You can watch the discussion on the video clip.

Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm and repeats on Saturdays at 7pm.

Learn more: The essential vocabulary for currency trading is on Key Terms Dictionary. Top currency strategies are broken down for you in Currency Class.

Talk back: Tell us what you want to hear about - email us at moneyinmotion@cnbc.com.

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