Euro Traders Look for New 16 Year High in German IFO Report (page 2 of 2)

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 RBA's 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.