By DailyFX - US Dollar - The US dollar is higher today against most of the other major currencies, but this was not due to...

... any dollar positive news. Instead, the lack of any US data actually helped the dollar benefit from weakness elsewhere.

The Australian dollar, British
pound and Japanese Yen were the big movers of the day. Exceptionally weak
Australian consumer prices and less hawkish minutes from the latest Bank of England
monetary policy meeting triggered a wave of carry trade liquidation that put an end
to the Japanese Yens close to two week slide. The one currency that the dollar
did not rally against was the Japanese Yen as it too fell victim to carry trade
liquidation. Meanwhile the President delivered nothing more than comparably humble
comments at his State of the Union Address last night, which led to zero reaction in
the currency market. The US dollar however is benefiting from the strength in the
stock market, which hit a new record high on an intraday basis. The economic
calendar is light tomorrow with existing home sales and jobless claims due for
release. Sales of previously owned homes increased for 2 months in a row,
suggesting a potential bottom in the housing market. Analysts are projecting a
decrease but given the trend of mortgage applications in the month of December,
sales could have held steady. Jobless claims are also projected to rise but that is
primarily due to the surprise improvements that we have seen over the past week.
Therefore these projections are mostly based upon adjustments rather than expected
deterioration in the US economy. Should these reports come out strongly, the dollar
could extend its move in what is already a dollar positive environment.

Euro
The Euro has been hit by broad dollar strength despite the lack of any economic data
today. However tomorrow will be different as we expect the German IFO report of
business confidence. The EUR/USD has been trapped within a 200 pip trading range
for the past 2.5 weeks and the German IFO is the currency pairs only clear chance
to break out. With European Central bank officials still backing another rate hike
this quarter, a fresh 16 year high in business confidence could help drive the
EUR/USD above its 1.3050 resistance zone. A weak print on the other hand would send
the pair for a test of the year to date low at 1.2866. The market is currently
looking for an improvement and such strength is not out of the question since the
Euro has tumbled, oil prices have fallen while the stock market climbed to a six
year high. In addition to the IFO, French business confidence and the Eurozone
current account reports are also due for release. Deterioration is expected in
both, but a strong IFO could easily erase any bearish sentiment. More ECB members
are also due to speak and we are expecting similarly hawkish comments from both
Stark and Gonzalez-Paramo.

British Pound
The British pound came under deep selling pressure today after the minutes from the
latest Bank of England meeting revealed that the surprise rate hike was supported by
only 5 out of the 9 members. The slim margin indicates a minimal chance for a
February hike and a less than 50 percent chance for a March rate hike. The less
hawkish statements support yesterdays comments from Bank of England Governor King
who indicated that the surprise rate hike represented more of a preemptive measure
rather than the need for more aggressive tightening by the central bank. The
dissenters were Chief Economist Bean, traditional hawks Tucker and Lomax as well as
the usually dovish Blanchflower. The British pound has run up very strongly and
very quickly on the back of future rate hike expectations. This raises the risk of
a further correction as the market readjusts its expectations.

Japanese Yen
For the first time in close to 2 weeks, the Japanese Yen actually managed to stage
some impressive gains as carry traders unwind their positions. The original run up
in the high yielding currencies like AUD/JPY and GBP/JPY were driven by the
prospects of higher interest rates in Australia and the UK followed by stable rates
in Japan. Last week, Japan delivered the stable rate policy but today we learned
that the Australian and UK central banks may not be as hawkish as initially
expected. This caused a massive reversal and exodus out of long AUD/JPY and GBP/JPY
trades. The downward surprise in the all-industry index and the possibility of G7
criticism about the weak yen at their meeting next month is adding to the pressure.
The problem is that when carry trades unwind, it is usually not just a one day
affair.

Commodity Currencies (CAD, AUD, NZD)
The Australian dollar completely collapsed today after consumer prices dropped by
0.1 percent in the fourth quarter. The market originally expected consumer prices
to rise, which would keep the Reserve Bank on track to raise interest rates at least
once this year. However the soft number now eliminates this possibility.
Australian officials are thinking the same as well. In response to the release,
Prime Minister Howard said that they are looking for more moderate inflation in the
quarters to come. Finance Minster Michin noted that inflation is now within the
RBAs target band which should reduce the need for any rate hikes. The New
Zealand dollar on the other hand staged a very strong intraday rebound after the
central bank released their interest rate decision. The RBNZ left interest rates
unchanged but maintained a hawkish tone by saying “it is likely that further
policy tightening will be required. Stronger retail sales, consumer and business
confidence as well as a stable housing market have kept the economy supported. This
divergence in monetary policy outlook sent AUD/NZD to a 1 year low. The lack of
economic data and stability in oil prices has kept the Canadian dollar basically
unchanged against the US dollar.


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

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