Despite the much weaker than expected TICs report yesterday which printed at $56.6 billion versus expectations of $76.2 billion, the dollar held its own against the majors in Asian and European trading today as yesterday's testimony from Chairman Bernanke practically telegraphed that the Fed is moving to 5% money in the near future boosting the dollar's interest rate differential against its counterparts. Speaking of rates, USD/JPY - the preeminent carry trade in the FX market today - continued to hover at 118.00 level near two day highs as BOJ board member Nishimura noted in a speech today that even if the Japanese central bank decides to move away from the quantitative easing monetary policy the Zero Interest Rate Policy will stay in place for the time being. This is a crucial nuance that many yen bulls have been missing. The primary reason for carry trade liquidation  and yen strength over the past few weeks has been the assumption by many market players that Japan would abandon its ZIRP posture as the Japanese economy demonstrates continued growth in consumer spending. However, the BOJ appears to be choosing a far more gradualist approach - tightening the QEP first and only considering the change in ZIRP no earlier than next year. Should that be the case, the USD/JPY will continue to attract carry capital especially if the Fed does raise rates to 5% and the pair moves to a burgeoning 500 basis point differential.  The one fly in the ointment of that scenario will be the state of the US Balance Sheet position. If the December's TICS shortfall to cover the Trade deficit is the start of a troubling trend, then Current account concerns regarding US's ability to finance its expenditures may overwhelm any carry trade benefits and the greenback will falter. For now however, its support is holding.

Looking at the TICs data in more detail, the key statistic that jumps off the page is the fact that indirect buyers (Central Banks) have been relatively consistent in their purchase patterns over the past few months. Rather, it is the hedge funds that have been the swing buyers of US capital assets. It was the plunge in demand from that sector that caused such an unexpected compression of the surplus. This dynamic only reaffirms the notion  that the Fed may have to raise rates higher than the market expects regardless of political consequences in order to continue attracting capital to US. 

We will be on the road for rest of the week. The next Market Brief will be published Tuesday morning.

Boris Schlossberg is a Senior Currency Strategist at FXCM.