US Dollar (USD) Becomes Exhausted Despite Strong Retail Sales (page 2 of 2)

Although everyone was expecting a rate hike from the central bank eventually, the timing of the hike was a complete surprise. With the producer price report due this Monday and the consumer price report due on Tuesday, the main question is whether the Bank of England knew something that we didn't. By now, it is quite certain that either the PPI or CPI or both releases will come in much stronger than expected next week with the annualized CPI rate probably accelerating even further beyond the BoE's 2.0 percent comfort level. Annualized CPI growth in November already reached 2.7 percent, which was an 11 year high. Overall the economy is doing very well and we expect that strength to be reflected in next week's unemployment, retail sales and money supply data. If growth continues at its current pace, the BoE may have to follow up with another rate hike. For the time being though, the latest hike is more likely an acceleration of the March hike rather than the need to deliver two back to back rate hikes.

Japanese Yen

The Japanese Yen will be a big focus next week as the market gears up for a possible interest hike from the Bank of Japan. Traders are very insecure at the moment as the futures market prices in a 65 percent chance of a rate hike which is basically 50-50. The decision is scheduled for January 18th and thus far, we have seen little clarity from the Bank of Japan or the Japanese government. The problem with Japan has long been the battle between the monetary officials who want to tighten policy and the politicians who want to keep the economy stimulative. The recent weakness in Yen may actually be perfect timing in this case since the currency's movements may already be stimulative enough for the economy that the Japanese government feels comfortable allowing the BoJ to deliver a rate hike. However even if they raise rates, this may not be completely positive for the Yen. Judging from the BoJ's track record, in all likelihood, they will raise rates, then pause for a good number of months which would leave carry trades in play.

Commodity Currencies (CAD, AUD, NZD)

It has been a pretty good day for the commodity currencies despite the lack of any meaningful data. New Zealand was the only country with an economic release and that was building permits, which came out weaker than expected. Overall, the recovery in gold and oil prices was the main theme, which has helped to send the Australian and Canadian dollars higher. In the week ahead, the calendar is far busier. Both Australia and New Zealand have inflation reports due for release. New Zealand also has a retail sales report while Canada's central bank will be meeting to decide on interest rates. No changes are expected which will leave their monetary policy report as the main focus in Canada next week.