Canadian Dollar: Time Magazine’s Newsmaker of the Year
Many people may realize that this week, Time Magazine announced their pick for Person of the Year. Yet few probably realize that the Canadian edition of the magazine also announced their Newsmaker of the Year. In the past, this honor has been bestowed on the Canadian Prime Minister, Judges and other influential Canadians who have had the most impact on the news, either positively or negatively. This year, that honor has been bestowed on the Canadian dollar. Even though being named the Canadian edition’s Newsmaker of the Year is not as high profile as the Person of the Year, it is still a testament to how popular currencies have become. At certain points this year, the high flying Canadian dollar became as volatile as the British Pound. When the Canadian dollar hit an all time high on November 7, Canadians were finally able say that their economy “was smoking its U.S. counterpart.” Even though it bottomed on that very same day, the latest rally resurrects thoughts on whether we will see 90 cents again. Wholesale sales for the month of October were strong which indicates that retail sales for the same month could also surprise to the upside. Australian will be releasing their leading indicators report. There is no data from New Zealand after their Q3 GDP numbers this afternoon. Quarterly growth slowed to 0.5 percent but that was offset by an upward revision to the prior month’s report. Annualized GDP growth increased slightly from 3.2 to 3.3 percent.

British Pound Takes Another Beating
Since Monday, the British pound has fallen over 400 pips against the US dollar, making the GBP/USD one of the foreign exchange market’s most active currency pairs. Weaker CPI numbers were followed by dovish BoE minutes and now mixed economic reports have given pound traders more reason to sell the sterling. Annualized GDP for the third quarter was revised from 3.2 to 3.3 percent and mortgage approvals rebounded, but that was offset by the news that the current account deficit hit a record high while money supply growth slowed. Even though Prime Minister Gordon Brown insisted yesterday that the UK economy is fundamentally strong, price action in the markets indicate that traders do not believe him. The interest rate cut from the Bank of England earlier this month was not only the central bank’s first but it also marked the beginning of a new monetary cycle. Many traders believed that the last rate cut would be the one and only move from the central bank for a very long time but incoming data is beginning to suggest otherwise. Tomorrow we have UK retail sales. If that fails to inject new life in the British pound, we could be headed for 1.96.

Weaker Economic Data Fails to Halt the Dollar’s Rise
Trading in the foreign exchange market continues to be very quiet. We had relatively weak US economic data released this morning, but that failed to have a meaningful impact on the US dollar. Third quarter GDP was unchanged at 4.9 percent even though the price indices were revised higher. The big surprise came in the Philly Fed index which dropped to -5.7, the weakest level in 4 years. Given the deterioration in both the Philly Fed and Empire State manufacturing indices, we can see that the weak dollar has not come to US economy’s rescue. The manufacturing sector is not benefitting from increased demand and instead tougher lending practices and the prospect of slower growth next year has caused many manufacturers to believe that more difficult times are ahead. Leading indicators also fell 0.4 percent last month, keeping the risk of a recession in play. We continue to believe that the current trends in the market will continue into the end of the year because no one is willing to take on any new risk after an extremely tough trading year. Personal income, personal spending and the PCE deflator are due for release tomorrow along with the final University of Michigan Consumer Confidence numbers. None of these reports are expected to be particularly market moving.

Bank of Japan Leaves Rates Unchanged, China Raises Rates
The Bank of Japan left interest rates unchanged today, which was in line with expectations. Even though the BoJ believes that the economy is expanding moderately, they added that the pace of growth is slowing due to a drop in housing investments. Fukui also more warned of downside risks, which should have been bearish for the Japanese yen, but wasn’t. Instead, the yen rallied because the Chinese government increased interest rates for the sixth time this year. Rising inflation expectations, continual growth, a solid housing and stock market are all reasons that have forced the central bank to take interest rates to a nine year high. At a time when growth in many other countries is slowing, China’s predicament is a source of envy, especially since they grew at an annualized pace of 11.5 percent in the third quarter. In a Thomson Financial report released today, we learned that for the first time ever, China has become a net foreign investor. As of December 19, in 2007, China received $25.1 billion inbound investments and made $30 billion worth of outbound investments. Although the number of outbound deals was only a third of the inbound deals, the size of each of China’s investments was significantly larger.

Euro Extends Losses, Swiss Franc Reports Stronger Numbers
Despite stronger economic numbers, the Euro fell to a fresh monthly low against the US dollar. German consumer confidence accelerated in the month of January along with Italian retail sales and consumer confidence. This continues to matter little to traders who are focused on making sure that they will not take any excess risk that could threaten their annual bonuses. Swiss economic data was also stronger than expected with the trade surplus rising to CHF 1.89bn and producer prices growing by a more than expected 0.3 percent.

Kathy Lien is the Chief Currency Strategist at FXCM.