By DailyFX - US Dollar - To our disappointment, there was not as much excitement in the market today as we had hoped. ...

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Softer inflation numbers and a near in line Treasury International
Capital flow report along with an unsurprising Federal Reserve Beige book report
kept the dollar tightly wound up against the Euro. With limited data releases on
Thursday and Friday, fundamentally it seems that there is little hope for a breakout
move this week. However, technically, prices and trading ranges are getting much
more consolidated which makes some sort of breakout move is imminent. The inflation
numbers released this morning indicated that headline consumer price inflation fell
0.1 percent in the month of December while core consumer prices increased an as
expected 0.2 percent. After seeing last week's higher producer prices, it is clear
that companies are still having difficulties passing over higher fuel costs. The
combination of tamer consumer price inflation and the possibility that the
bottom-line of companies may be hit by the higher costs and lower revenues is one
reason why some believe that the Federal Reserve may be at the end of its tightening
cycle. The Beige Book report indicated that many Fed districts saw continued growth
at year-end with tight labor markets and moderate wage increases. Although there
are signs of "some cooling" in the housing market, sectors such as manufacturing saw
improvements. The NAHB Housing Index confirmed the lack of growth with the index
remaining stagnant at 34 month lows. The market is interpreting no news as good
news, especially with net foreign inflows, as measured by the Treasury International
Capital report coming at $89.1 billion, which is slightly better than the market's
$85.0 billion forecast. Even though this is less than the previous month's $104.2
billion rise, it is still a strong report. The details indicate that the UK was a
big buyer, but the rumor in the market is that an OPEC nation may have used a UK
bank to buy Treasuries. China and Japan were small buyers of dollar denominated
assets, which suggests that reserve diversification may not have occurred in
November. However as we have postulated yesterday, what a strong number will do is
push trade deficit concerns back to the sidelines.

Euro
The Euro ended the US session virtually unchanged against the dollar. Economic data
released overnight was mixed once again. The French current account deficit
ballooned from - EUR 3.8 billion to * EUR 4.1 billion. The market was actually
calling for the deficit to narrow. Meanwhile industrial production for the entire
Eurozone accelerated by 1.3 percent in November after falling 0.7 percent the
previous month. This caught the market by surprise, as some traders may have been
banking on an even weaker than consensus release after seeing Italy's dismal
numbers. However, German growth led the pack as the region benefited from the
stimulative effects of a weaker Euro. There was also a bit of confusion in the
markets today as MF-Dow incorrectly quoted ECB Member Bini as saying that he favors
more rate increases. Bini quickly came onto the wires denying such a comment. Yet,
with subsequent comments by ECB Issing, the central bank's overall hawkish bias
cannot be denied. Issing said that the ECB does not need to wait for Staff
forecasts before making their decision and as far as he can tell, recent data
indicates that there is "nothing to show a break in economic recovery" and that
"asset prices are overvalued in some areas." More speculation of central banks on
the bid in the EUR/USD has also helped the Euro hold onto its gains.

British Pound
The British pound however was not able to maintain its strength against the dollar.
Slightly weaker economic data continues to give some sterling traders a stronger
reason to bet on further losses in the GBP. The three month average earnings
including bonuses grew at a slower pace of 3.4 percent in the month of November,
which compares to the market's 3.6 percent forecast. The ILO unemployment rate also
ticked higher from 4.9 percent to 5.0 percent. The number of unemployed increased
for the 11th consecutive month, but on a positive note, the increase was slightly
less than expected. The British pound's relative underperformance against the
dollar compared to the Euro is primarily due to different biases of the respective
central banks, helping to lift EUR/GBP.

Japanese Yen
The Japanese Yen strengthened across the board against the majors despite a 464
point drop in the Nikkei. Talk of margin calls forcing investors to buy Yen in
order to cover their losses has caught the market by surprise. A corporate scandal
involving Livedoor, a Japanese high tech company caused such a big drop in the stock
market that trading had to halt on the Tokyo Stock Exchange. With such a sharp dive
in the stock market, there is an even smaller hope that the Japanese government
would allow the central bank to raise interest rates any time soon. Just today, MoF
Watanabe said that they would need more than one or two consumer price increases to
warrant a rate hike. Japanese economic data was also softer than expected with the
leading economic index falling to 54.5 percent from 60.0 percent. Given that the
strong rise in the Yen was attributed to forced repatriation related to equity
market losses, the question is then whether the move is real. Judging from the
recent turn in data and the ramification that the stock market's slide has on
interest rates and the economy, the sustainability of the Yen's rise appears
unlikely, at least for the time being.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com
By DailyFX


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