Jump in CPI Could Rally Yen (page 2 of 2)

However even though the GBP/USD tried, it could not sustain earlier gains and actually ended up being the most underperforming currency pair today.

Earlier this week we had said that the relatively light UK economic calendar means that the British pound's valuation against the Euro and Dollar would be left to developments in the US and Eurozone and that is exactly what we have been seeing so far.

Yesterday the broad dollar weakness sent the British pound soaring and today, the dollar recovery dragged the pair lower. Once again, economic data released from the UK was mixed with the manufacturing sector index falling slightly from 51.8 to 51.7 while mortgage lending increased a more than expected GBP9.2 billion last month, which is yet another indication of stabilization in the housing market.

Japanese Yen

Asia was again the market's main focus, but this time it was China that stole the limelight and not Japan. The country's State Administration of Foreign Exchange announced last night that they plan on making the Yuan "convertibility on the capital account in the near term."

Translating this to plain English, it means that they plan on easing some of their controls on money leaving China. For some time, China has had restrictions or allowances on the amount of money that can be sent overseas and now they are taking more steps towards making inflows and outflows more balanced.

The Japanese Yen has sold off as this encourages outflows and relieves some of the upside pressure on the Yuan, but over the long-term, it should be Yen positive as it is yet another step that China is taking towards making the Yuan fully convertible.

In the meantime in Japan, the market continues to talk about the Bank of Japan's plans to drop quantitative easing ahead of their monetary policy meeting next week. In most of comments made by BoJ officials, it seems that any move they take will be small to ensure that their overnight lending rate does not jump substantially.

We could see a bit more volatility in the Yen tonight from the CPI numbers. A big rise could stir another Yen rally as it builds a stronger case for the BoJ to end their zero interest rate policy.