US Dollar Shrugs Off Stronger Inflation and Housing Data (page 2 of 2)

The currency has extended its gains against both the US dollar and the Euro for yet another trading day. Employment data released this morning for the month of December was stronger than expected thanks to a larger drop in jobless claims. Wage growth slowed for the month of November however but that failed to undermine the overall strength of the UK economy. The Bank of England still has reason to raise rates again in the first quarter, which leaves them as the most aggressive central bank in the G7. Retail sales are due out tomorrow along with money supply and housing data. It would be surprising if retail sales were not strong because it is unlikely that the central bank would raise interest rates otherwise. Money supply data, which is another measure of inflation, should also be firm after the rise we saw earlier this week in consumer and producer prices.

Japanese Yen

The Japanese Yen is the star of the market tonight as traders gears up for what could potentially be the second rate hike in six years. With as many no rate hike calls as rate hike calls reported by the media, the decision is simply a coin toss at the moment. The markets went from pricing in an 80 percent chance of a rate hike yesterday to 30 percent today. Data overnight was yen bearish with the trade balance shrinking and consumer prices dropping. We continue to believe that if there was a time for the BoJ to lift rates, it would be now. The Japanese Yen is trading at very low levels against the Euro, US dollar and British pound which is already providing stimulus for the economy. Therefore a rate hike at this time will probably not deal a significant blow to the economy. The recent comments from Japanese government officials suggest that they are no longer as staunchly against a rate hike as they use to be. As a result, we continue to believe that the most likely outcome tomorrow is a 25bp rate hike followed by an attempt to temper the market's reaction to that move by signaling that another rate hike may be a long way off. At this point, with the yen continuing to slide and rate hike expectations dropping so significantly, a move by the BoJ may actually still a cause a meaningful rally for the yen.

Commodity Currencies (CAD, AUD, NZD)

The Australian and Canadian dollars are stronger today thanks to the rebound in commodity prices. The New Zealand dollar however was not as lucky as a larger than expected drop in consumer prices dragged the currency lower. For the first time in six years, consumers prices fell 0.2 percent q/q due to an 8.5 percent rally in the NZD/USD in the fourth quarter along with a 15 percent drop in oil prices during the same period. This should keep the Reserve Bank of New Zealand on hold at next week's monetary policy meeting. Retail sales are due out tonight. Given the recent trend of New Zealand data as well as the overall health of the economy, consumer spending is expected to be weak.