Equities Accelerate, Carry Trades Take Off
Another volatile day has hit the equity markets which have led to sharp moves in currencies. News that Ambac and MBIA are off credit watch by Standard and Poor’s is the primary catalyst behind the move. The US dollar has strengthened alongside the other Japanese yen crosses but the biggest mover was the Canadian dollar against the Japanese yen, which has rallied close to 300 pips. The move in stocks is impressive, especially considering that the Dow jumped over 100 points in less than 10 minutes and ended the day up close to 200 points. Risk appetite has returned to the markets and we have seen strong upside breakouts in many of the yen crosses. There could actually be universal continuation in the Yen crosses which is something that we have not seen in a very long time. Over the past few weeks, there have been many days where pairs like the AUD/JPY and EUR/JPY would climb higher but USD/JPY or GBP/JPY would sell off. Japanese small business confidence is due for release tomorrow. Confidence among this group has been weak for sometime and we do not expect this to change. Meanwhile the London Times reported that China’s Sovereign Wealth Fund is looking to invest $10 billion into Tokyo listed stocks. If this goes through, it could give a temporary boost to the Japanese yen.

Good Data Has Limited Impact on the US Dollar
Existing home sales fell less than expected in the month of January, which has helped the stock market rally and the US dollar rise against the Japanese yen. However the dollar’s recovery was limited to only the yen and Swiss franc because of the market’s focus on risk appetite and problems within the existing home sales report. Not only have sales been negative for the sixth consecutive month, but inventory is building and the median price of homes continues to fall. The Case Shiller index of home prices, which are due for release tomorrow should confirm that house prices are declining. Tomorrow we are expecting producer prices and the consumer confidence report. It will be interesting to see if the dollar also fails to respond to a rise in inflation. With food and import prices on a tear, producer prices should also reflect growing inflationary pressures. Will this matter to the Federal Reserve? That is the question that Bernanke will answer in his testimony to the Senate and House on Wednesday and Thursday. We expect the dollar to rally on the back of stronger inflation numbers but weaker consumer confidence could cap the currency’s rise. Also, stronger inflation will not prevent the Federal Reserve from cutting interest rates again next month, but it could reduce the probability of a 50bp rate cut and increase the chance that the Fed will cut by 25bp instead.

New Zealand Dollar Breaks 22-Year High, Carrying Australian and Canadian Dollars Higher
Extending its impressive rise for the eighth consecutive trading day, the high flying New Zealand dollar has hit a 22-year high above 81 cents. This is the first time that we have seen the currency trade at these levels since it was freely floated in 1985 and the most bizarre part of the move is the fact that it was not driven by any economic data or news, Instead, yield, risk appetite, commodity prices and Uridashi issuance have been the primary catalysts for the latest move. With 8.25 percent interest rates, it was just a matter of time before the New Zealand dollar manages to catch up with the Australian dollar. As for the Australian and Canadian dollars, they have been carried higher by the Kiwi even though today’s news should have exerted more pressure on those currencies. The US Treasury announced today that it supports limited gold sales by the IMF, but the fact that these are not likely to be permanent means that the impact on the Australian dollar should be minimal. The IMF also lowered their growth projections for Canada to 1.8 percent, which is pretty much in line with the pace of growth that is expected in the Eurozone and US.

Euro: Hanging onto Gains, Watch the German IFO Report
The Euro was left out of the action in the currency market today, but don’t expect the calm to continue tomorrow with the German GDP and IFO report due for release. Business confidence is expected to decline due to the slowdown in the global economy but we believe that confidence could improve with manufacturing PMI stronger than expected in January and the preliminary Eurozone PMI numbers surprising to the upside. The GDP numbers are final figures, so no revisions are expected, but comments from Bundesbank vice president Franz-Christoph Zeitler suggest that any revisions could be to the upside. In his speech he painted an optimistic picture of the German economy despite mixed economic data.

British Pound: Rally Getting Tired?
It has been a quiet day for the British pound with only one significant economic indicator released, BBA loans for house purchase which increased to 44288 from previous results of 42088. Hometrack house prices also increased 1.4 percent, but this was the lowest yearly rise since April 2006. Tomorrow the UK economic calendar is light with only the CBI distributive trades survey due for release. This indicator is generally a good barometer for retail sales which means that it could cause some action in the British pound. However the rally in the currency is looking tired and it will be interesting to see if the move will continue. This week we have a lot of potentially market moving UK economic data so stay on top of the data calendar.

Kathy Lien is the Chief Currency Strategist at FXCM.