US Dollar (USD) - Lack of Buyers Characterize Tough Trading Week (page 2 of 2)

Retail sales increased 1.1 percent in the month of December, which was close to double market expectations. Money supply growth was only slightly stronger than expected, rising 0.9 percent versus 0.8 percent expected. After the surprise interest rate hike earlier this week, these upside surprises have been essentially priced into the market. There was a very slim chance that the Bank of England would have raised rates if consumer spending was not strong. Instead, traders paid more attention to the softer mortgage data which points to potential weakness in the housing sector. After the drop in prices reported by the RICS and Halifax housing market surveys, the market has already become concerned about the stability of the UK housing sector. The mortgage data only exacerbates this worry and having been the sector that has led the recovery, it's potential weakness has now become very worrisome.

Japanese Yen

The Bank of Japan's decision to leave interest rates unchanged is still resonating in the markets as the Yen extends its slide against the majors. USD/JPY has hit a four year high while EUR/JPY came with 20 pips of its all-time high on an intraday basis. The markets are continuing to look to February for a potential rate hike. Overnight index swap futures which can be extremely volatile pared back expectations from 70 to 56 percent. Next week's data will play a major role in clarifying the potential timing of the next rate hike with consumer prices due for release. Any signs of inflationary pressures will send rate hike expectations and the Yen skyrocketing. If inflationary pressures continue to subside however, those same expectations could sink towards zero. The BoJ will also be releasing their minutes from the December meeting while many BoJ officials are set to speak in the week ahead.

Commodity Currencies (CAD, AUD, NZD)

The commodity currencies are finally responding to the rebound in commodity prices. They are stronger across the board even though economic data from all three countries disappointed. New Zealand reported a larger than expected drop in retail sales, which was also the first drop in 7 months. Australia reported a much weaker rise in export prices and a larger drop in import prices, signaling that inflationary pressures are subsiding. Canada also reported a smaller than expected rise in wholesale sales due to a drop in demand for agricultural and farming products. The Reserve Bank of New Zealand will be conducting a monetary policy meeting next week. Given the drop in retail sales and the drop in consumer prices we saw earlier in the week, there is little chance that the central bank will change interest rates from their present level of 7.25 percent. Meanwhile, Australia and Canada have inflation reports due for release; Canada will also be releasing their retail sales report.