• Dollar Rebounds Thanks to Blockbuster TIC data
• Softer Eurozone Data Weighs on Euro
• Carry Traders Continue to Run for the Exits in USD-JPY

US Dollar
The US set two new records this past week - a record trade deficit of -$68.9 billion as well as a record amount of foreign purchases of US securities.  With the second month of back to back triple digit inflows, the strong TIC data helped to offset some of the dollar bearishness that was brought on by the growing deficits.  Over the past 5 months, it seems that whenever we receive a bad deficit number, the market is shocked at the economy's structural imbalances and sends the dollar lower, but once we learn about how much capital has flowed into the US and the extent by which the amount covers the same month's trade deficit, they soon shrug off their initial concern.  Today's price action was pretty indicative of this same sentiment, as the strong TIC data induced the dollar to recuperate a good portion of Wednesday's losses.  In fact, the market perceived the TIC data as so important that they were able to completely brush off the biggest drop in consumer prices in 56 years.  Even though the TIC data was very important, it tends to be treated more like a lagging indicator than a leading indicator, given that the report was for the month of October.  Consumer prices on the other hand is a pseudo leading indicator in that it helps the Fed determine what to do next with interest rates.  The latest report is yet another piece of evidence confirming that we may very well be near the end of the Fed's rate hike campaign. If so, there is only so much more room for the dollar to rally, and most traders will be looking for opportunities to buy on dips than to sell on rallies.  The other reports released today were mostly mixed with the stronger Empire Manufacturing offset by a weaker Philly Fed.  Industrial production accelerated by 0.7 percent as companies continued to increase activity as needed for the recovery efforts in the Gulf Coast.  This is a slower pace of growth than the 1.3 percent rate registered in the month of November.  Capacity utilization also ticked higher to 80.2 percent from 79.8 percent, highlighting the tight constraints that the economy still faces. 

Euro
The EUR/USD faced a double blow today.  Softer economic data and comments from ECB President Trichet weighed on the Euro while stronger US data gave dollar bulls a good reason to recover some of yesterday's losses.  French non-farm payrolls were revised to unchanged in the third quarter from up 0.1 percent while Eurozone labor costs fell from 2.5 percent to 2.2 percent.  The softer labor costs suggest that even though European corporations may be doing better, these benefits have yet to filter back to their workers.  This explains why consumer spending has remained so restrained in Europe, as it illustrates how workers are seeing their wage growth shrink rather than expand amidst the region's gradual recovery.  ECB President Trichet reiterated his earlier comments that even though the central bank raised rates recently, it does not mean that they will necessarily follow up with a series of rate hikes.  Judging from comments from ECB officials as a group, it seems that so far, we are in route for no changes next month. 

British Pound
The British pound sold off today against the dollar despite a stronger retail sales report.  Spending for the month of November leaped 0.7 percent compared to the market's forecast for 0.3 percent growth.  For the previous month, spending was also revised higher by 0.4 percent from 0.2 percent.  However a deeper look at the report shows that the retail sales deflator fell 1.1 percent for the second consecutive month, suggesting that the increase in sales is primarily due to retailer discounting.  Also, the report contrasts with the CBI retail sales survey released earlier this month, which actually suggested that November was the worst month for retailers in 22 years.  In the context of mostly weaker economic data that we have seen this past week, we remain doubtful of today's stronger report.  Judging from today's price action, it seems that the market may agree as well. 

Japanese Yen
The dollar rallied against all of the major currency pairs today EXCEPT for the Japanese yen.  For the second day in a row, USDJPY tumbled over 175 pips, the biggest two day decline since March 2002.  It is clear that carry traders were just waiting for the Fed to give them any reason to start running for the exit.  In the past seven trading sessions, USDJPY has fallen 4.5 percent.  Comments from the MoF's Vice Finance Minister Hosokawa confirm how the government is completely unconcerned about yen weakness, but any whiff of yen strength and they start ringing the warning bells.  Last night, Hosokawa said that the yen's move was “relatively big,” “excessive” and “undesirable.”  He also added that even though the yen is in line with fundamentals, they will be watching the price action “with great attention.”  Although they are far from considering intervention to support USDJPY, it is a clear illustration of where their alliance stands.

Kathy Lien is the Chief Currency Strategist at FXCM.