Bank of Japan Rate Decision is the Marquee Event Next Week for the FX Market (page 2 of 2)

There was no UK data released today but the EU Commission raised their GDP forecast for the UK from 2.6 percent to 2.7 percent this year. At this point, there is only a slim chance for a rate hike in March. However, with the UK, things change frequently and next week's busy economic calendar could easily shift the market's outlook. The Bank of England will be releasing the minutes from their monetary policy meeting earlier this month. The most important takeaway from the report will be how the members voted. If the decision to leave rates unchanged was unanimous, then the odds for a rate hike in March will be very low. If at least 2 members voted in favor of a rate hike, then market expectations will quickly adjust to reflect the possibility of 5.50 percent rates in March.

Japanese Yen - The best performing currency pair of the week was the Japanese Yen. The combination of a strong GDP report and liquidation of yen shorts have sent the Yen soaring against all of the majors on the prospect that the Bank of Japan could raise interest rates next week. Aside from the GDP report, most other data has not surprised to the upside. The latest was the December tertiary activity index, which dropped by 0.4 percent. As a result, we still think that there is only a 50-50 chance of a rate hike next week and overnight index swaps and a recent Reuters poll reflects that. The Bank of Japan would raise rates for only one reason and that would be if there was a behind the scenes agreement between the Europeans and the Japanese at last weekend's G7 meeting that effectively allowed Japan to engineer strength in their own currency rather than be outwardly pressured to do. Growth is improving, but there are still no signs of inflation. Either way expect the Japanese Yen to be a big market mover next week.

Commodity Currencies (CAD, AUD, NZD) - The Australian, New Zealand and Canadian dollars extended their strength today as commodity prices continued to climb. Oil prices are back above $59 a barrel and that is keeping the Canadian dollar at a seven week high against the US dollar. We are finally seeing the benefits of the prior weakness in the Canadian dollar. In the week ahead, we are expecting wholesale trade and inventories, Canadian CPI which is expected to be softer, just like the inflation reports from the other parts of the world, retail sales, which is expected to be stronger and leading indicators. Bank of Canada Governor Kennedy is also scheduled to speak on economic change. Australia and New Zealand have a fairly light calendar. RBA Governor Stevens will be speaking before the House Economic Committee. His comments will be extremely important given the rather cautious comments on the outlook for the economy that we heard from the Treasury's Costello earlier this week. The only piece of data due for release is the wage cost index. From New Zealand, the only releases are tax receipts and credit card spending.