Weak Data Is Only Beginning to Hurt the US Dollar (page 2 of 2)

Despite the lack of economic data this week, next week is expecting the Swiss trade balance, PPI and employment.

British Pound - The British pound came back strongly today after having sold off for most of the past week. The market had turned very bearish on the pound after a round of disappointing inflation data followed by a more dovish BoE Inflation report. The surprise jump in retail sales yesterday reminded traders that the economy is still performing well even though inflationary pressures are subsiding.

This falls right in line with the message in the central bank's Inflation report, which called for stronger growth, but weaker inflation. The BoE is not one to rush monetary policy and they are not prone to overdoing it, which means the market can be pretty confident that they will not be lifting rates until mid next year. Next week's housing market and GDP release should continue to confirm that. With inflation releases out of the way, we would not be surprised to see a continued rebound in the GBP/USD as traders reverse their prior short positions.

Japanese Yen - Talk of carry trade liquidation is helping to send the Japanese Yen higher today. This is something that everyone needs to start getting use to as carry trades face greater risks. Today's move was sparked by rumors that a large hedge fund needed to bail out of their carry trades to fund bad energy bets. That was later denied by the hedge fund in question, but nonetheless reinforces a worry in the FX market. The G-20 meeting is being held in Melbourne Australia this weekend along with the BIS meeting.

The last time we heard from central bankers at one of these meetings, their comments were mostly targeted at the Japanese Yen. We would not be surprised to hear the same this time around. With EUR/JPY above 150 and USD/JPY not far from its recent highs, we expect government officials to continue to be critical of the weakness of the yen, which would be positive for the currency and exacerbate its strength. Futures traders have already begun to pile out of their short yen positions as indicated by the latest IMM report. The Icelandic Krona, which is another popular carry currency, is already beginning to see an unwinding, which may be a sign of what may be to come for the Yen.

Commodity Currencies (CAD, AUD, NZD) - Of the commodity bloc, the Australian dollar is the only currency that ends the week stronger against the US dollar thanks to firmer wage data. There is no Australian data due for release next week. New Zealand on the other hand is expecting trade data, which is expected to worsen.

The kiwi struggled to rebound towards the end of the week, but even firm retail sales data could not offset the recent bearishness in the currency. The Canadian dollar suffered the most as the combination of weak economic data and low oil prices was too much for the loonie to handle. With crude at 17 month lows, the Canadian dollar fell to a six month low. There is a lot of CAD data due out next week, none of which is expected to give the currency much relief.