By DailyFX - US Dollar.The US trade deficit hit a record high in the month of January and as we predicted, the dollar barely budged....

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In yesterday's daily fundamentals, we said that traders
were so transfixed with the possibility of a very strong non-farm payrolls report
that a good number would have a much more significant reaction than a bad number.
Both imports and exports were strong and this time around, the strength in imports
was not only due to energy prices but many other sectors as well. Unfortunately the
trade balance will not be something that the market really turns it focus to until
next week when the Treasury International Capital flow report is due for release.
The widening is of course a concern that the market has been facing for years, but
the degree of the concern rises and falls based upon how much foreign investment is
coming into the country. For the time being however, non-farm payrolls is our
number one focus. Yesterday, the Hudson employment index surged by 5 points, while
today, the more closely watched Monster.com online employment index saw a similar
rise. Payrolls is a very peculiar release. Over the past few years, analysts have
struggled to correctly forecast the payrolls number. According to our friends at
IFR Markets, "From 1992 to 1999, the market underestimated actual payroll growth
100% of the time, by an average 136k. So far in this decade, the consensus has been
on the right side of the actual as many times as it has been on the left while the
surprise has been trimmed to a miss of 77k." Although the forecast is right now
210k, the whisper number is 300k. Therefore anything sub 230k will probably be seen
as a disappointment. Aside from the low level of jobless claims, warm weather,
increases in the employment component of the ISM survey and a decline in layoffs
supports the possibility of a strong report. However the counter argument is that
just because companies are not firing, doesn't mean they are necessarily hiring. We
will have to wait for tomorrow to see which side of the argument is stronger. What
we do now though is that the market has really bid up dollars in anticipation, so a
sub 190k number could cause a sharp and deep slide in the dollar.

Euro

Weaker German industrial production gave Euro traders another reason to exit long
positions ahead of Friday's US non-farm payrolls release. However the surprise
decline does not shift the outlook for overall recovery all that much because the
details of the report indicate that the decline in construction activity may just be
weather related. Furthermore, there was a very sharp upward revision to industrial
production for the previous month from negative 0.5 percent to positive 0.7 percent.
There was nothing new in the ECB monthly bulletin released this morning. The
report confirmed that the central bank as a whole viewed monetary policy as still
accommodative and along with that, further rate hikes are necessary. The only
interesting comment that they made was that the rapid accumulation of foreign
reserves by Asian central banks could push up global inflation.

British Pound

As expected, the Bank of England left interest rates unchanged today at 4.50
percent. We had mentioned yesterday that when they make no changes to monetary
policy, they also do not make any comments. The more important monetary policy
related event will be the release of the minutes for the meeting, where we actually
get to see if the balance of votes shifted. Given the recent mixed to better
economic data, there is a growing possibility that the one dissenting member may
have shifted back to neutral. However, we will have to wait until March 22 to be
sure. Meanwhile both the trade balance and industrial production reports came in
stronger than expected which is in line with our earlier argument that even though
economic data overall has been mixed, more releases have shown strength rather than
weakness.

Japanese Yen

After much anticipation, the Bank of Japan delivered little for yen bulls. Although
they made a major move to end their 5 year long quantitative easing policy, they
played down the move by saying that despite the policy shift, they will still be
maintaining short term rates near zero. In terms of the mechanics, they are going
to shift away from targeting reserves which they have been doing since March 2001 to
targeting interest rates specifically. This means that going forward, any monetary
policy changes that the central bank makes will be changes to the overnight lending
rate. They also implemented a target band of 0-2 percent for inflation. Yet before
getting too excited, the BoJ said that aside from last night's announcement, "there
will be no abrupt change as a result of today's policy decision." They argued that
it will first take several months to reduce excess liquidity which is the primary
reason why the Japanese Yen sold off after the announcement. The market was really
hoping for an interest rate hike in April but the latest comments suggest that they
are in no rush to raise rates anytime soon.


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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