Yen Collapses as Traders Learn the Pain of Short Yen Trades (page 1 of 2)

US Dollar

The market is very much in limbo at the moment as traders try to figure out whether the majors have the momentum to extend last week's sharp moves. There are a lot of uncertainties this week with five central bank meetings along with the US trade balance and non-farm payrolls due for release.

The trade balance should not have much of an effect on the market unless it deviates from the consensus forecast significantly. A wide trade deficit is something the market has grown accustomed to and we'll need a few more months of funding deficiencies before the concern for the trade deficit resurfaces.

Non-farm payrolls on the other hand are the real wild card. Given the low level of jobless claims over the past few weeks, expectations are high for a good report. Even though the consensus is currently for 210k jobs to have been created last month, the whisper number is as high as 300k. Some argue that if jobs are strong, the Fed may be tempted to overshoot rate hikes, pushing the lending to rate to 5.25% or even 5.50%.

Although we think this is highly unlikely, the market is bearish dollars at the moment, betting on an end to the Fed's tightening cycle and any reason that casts doubt on their positions could result in some extensive position squaring. In the meantime, the focus is first on the Bank of Canada and Reserve Bank of Australia's interest rate decisions tomorrow.

The Bank of Canada is fully expected to raise interest rates by a quarter of point to 3.75%. Comments by Governor Dodge could seal the fate for the CAD for the next few weeks - hawkish comments could send the CAD back up to its 14 year highs while dovish comments could cement a near term bottom in the Loonie. The RBA's decision is far simpler. Having left interest rates unchanged for almost a year now, the central bank is expected to remain neutral once again.

Euro

The Euro gave back some of its gains against the dollar today, but losses were limited thanks to the ECB's clearly hawkish bias. ECB President Trichet was on the wires today reiterating many of the same comments that he made last Thursday.

With retail sales coming in firmer than expected on an annualized basis, the Eurozone recovery is still chugging along. Retail sales rose 0.8% on a monthly basis and 0.9% annualized. The retail Purchasing Managers index weakened slightly from 49.7 to 49.6, which was disappointing at first glance, but it is still encouraging to see improved activity in France.

The market continues to price in a growing likelihood for more rate hikes with another quarter point of tightening already discounted. Yet it is interesting that there is still a near 50-50 chance that we will see rates at 3.00% by year end. Given Trichet's comments that interest rates "remain accommodative," the market should really be pricing in a higher chance of 2 more rate hikes.

However, traders could be treading carefully given the central bank's historically conservative nature. A good argument against further rate hikes is given by one of our favorite economists, Nouriel Roubini on RGE Monitor. He argues that the ECB may be threatening their own recovery by raising interest rates.

He says that even though data shows improving growth, the recovery is coming from a very low point (1.2% in Q4) and core inflation is actually falling. He encourages the ECB to "sit back" until they see "stronger signals of a strong and resilient Eurozone-wide growth recovery before (they) tighten too much." Roubini makes a good point, but the ECB is a central bank that adheres closely to its inflation mandate and their recent comments confirm that.