US Dollar Strengthens as Market Anticipates Hawkish FOMC Statement (page 2 of 2)

According to the British Bankers' Association, mortgage approvals dropped sharply in the month of December. This follows softer than expected price growth reported by RICS and Halifax earlier this month. Next week we will have a better gage of how the housing market is doing thanks to more reports related to the sector. We are expecting Nationwide House prices, BoE Mortgage Lending / Approvals, in addition to the CBI distributive trades survey, the Gfk Consumer confidence report, and PMI.

Japanese Yen - A softer than expected consumer price report has put a stop to most of the carry trade liquidation. Even though consumer price growth was flat in the month of December, core prices fell 0.1 percent when compared to the prior month. This was hardly surprising given the Bank of Japan's decision to keep interest rates on hold earlier this month. If inflation had picked up pace, they may have had more reason to tighten rates. There are two major event risks over the next few weeks that the market will be focusing on, which are the G7 meeting and the February central bank meeting. The decision to stand pat this month shifted the market's expectations for a rate hike to February. The overnight swap rates are putting the odds at 50/50. Originally the fear was that the G7 would criticize the recent weakness of the Yen at their meeting, but to do so would require criticizing the weakness of the Chinese Yuan, which the US may not support at this point. Treasury Secretary Paulson's buddy versus bully approach seems to be paying off slowly but surely and he may not be willing to risk it. Next week the Japanese economic calendar is quite busy as well. We are expecting spending, labor market, manufacturing and trade data. Unfortunately, none of the numbers are projected to be stellar.

Commodity Currencies (CAD, AUD, NZD) - It has been a brutal week for the Australian dollar after the surprise drop in consumer prices. The currency is trading at a year to date low against the US dollar and this weakness has infected the New Zealand dollar as well. The market has completely shrugged off the hawkish comments from the Reserve Bank of New Zealand after their monetary meeting. The central bank has been confusing the market quite a bit lately. Even though they the RBNZ comments were hawkish, Governor Bollard warned of the possibility for a financial crisis because of the nation's low savings rate. It seems that every time there is a Kiwi supportive development, that development is tempered. In the week ahead, Australia and New Zealand will be releasing trade data while Canada publishes its report on manufacturing conditions along with the GDP. As usual the trend of commodity prices will also play a role in how these commodity bloc pairs behave.