Dollar Stumbles on Data
After a very quiet start to the month last week’s blizzard of data finally created some action in the currency market. Unfortunately for greenback bulls, the majority of data was dollar negative and buck buckled as the result. For the week the EURUSD gained 104 basis points as US economic condition clearly deteriorated. Specifically US Trade deficit widened to -$61B while the TICS inflows shrank to a miniscule $15B. No matter how you sliced it the balance sheet news was horrid. Some analysts noted that “If the US investor falls in love with foreign equities, the way the US consumer has fallen in love with foreign cars,” the structural problems for the dollar may only be beginning. The rest of the data was hardly inspiring as well with Retail Sales printing weaker than expected and weekly jobless claims jumping a very hefty 43k more than forecast. In short the news suggests that US economy is slowing rapidly and if that trend persists dollars woes may only be beginning.

Next week the action once again slows to a crawl with only the CPI and Fed minutes to occupy the markets. We may again begin to trade in a narrow range but for now the bias in the greenback is to the downside and the onus is on the dollar longs to prove the market wrong.

Euro Benefits from Dollar Weakness
The calendar in the Euro-zone was relatively subdued and euro’s strength came from dollar’s weakness rather than its own data. Both the Trade Balance and the ZEW missed estimates, but not by much. More importantly the EZ GDP was revised to 3.3% from 3.0% original estimate. As we noted “Although GDP is generally considered to be a backward looking indicator, the surprising strength of the release suggests that economic growth in the EZ remains quite vibrant and its momentum may carry over into this year.” Furthermore higher-than-expected US trade balance deficit and the bigger than forecast draw in US inventories last Friday suggest that the initial 3.5% estimate of US 4Q GDP will likely be revised downward. It fact its quite plausible that after final adjustments are made. EZ GDP will exceed US GDP for the third consecutive quarter. Little wonder then than German business confidence rose to its highest level since 1991 and EURUSD broke through the 1.3100 level.

Next week the Euro-Zone calendar is also barren with one exception. The German IFO survey is due to be released on Friday night and is likely to be the marquee event of the week, The market is looking for a small drop to 107.5 from 107.9 which if accurate, should not dent the unit much, IFO has hovered near record reading for most of the past year and has been one of the primary foundation for euro’s strength. If it does not change much the unit is likely to remain well supported. However, if the survey registers a massive drop due to the concerns over VAT, the EURUSD could tumble hard given the pair relatively overbought status.

Yen – It’s all on the BOJ
Japanese Q4 GDP printed at 1.2% versus 0.9% projected as Japanese economy grew at the fastest pace in 3 years. Fueled by the longest corporate expansion in 30 years the Japan’s GDP expanded at a 4.8% annual rate – far better than consensus estimates of 3.8% growth. Furthermore nominal prices climbed 5% - faster than even the headline GDP number. All of this of course stocked speculation that BOJ will now finally move on rates and the yen registered the second best performance against the greenback jumping 199 basis points for the week. However, no sooner did the good news hit the screen, than Japanese politicians, most notably the powerful LDP Policy Chief Shoichi Nakagawa quickly chimed in with yen dovish rhetoric stating that the recovery remains fragile and that the GDP data does not suggest any pronounced change for the better over the past month.

All of which of course leaves this Tuesday night’s BOJ announcement as the key event for USDJPY this week. The decision will not be easy as Japanese data is hardly unabashedly bullish. For example, the Tertiary index, a measure if the country’s service sector, continued to disappoint printing at -0.4% vs. -0.1% expected. This was the second consecutive month of negative readings lead by a massive 13% drop in demand for postal services which include savings and insurance as Japanese retail investors favored deposits in high yield currencies such as the Australian and New Zealand dollars. In short as Governor Fukui described it, the economic news was “mixed”, making next Tuesday’s announcement a 50/50 proposition. Some analysts even suggested that the bank may opt for a Solomonic solution of raising rates by only 12bp thus reaffirming their commitment to price stability without affecting consumer demand too harshly. This may indeed be the case but whether the market will consider such a move good enough to spur further yen buying remains to be seen.

Cable Steady on Mixed Messages from the BOE
A week of choppy trading after a slew of important economic releases left GBPUSD modestly higher by the end of the week. Overwhelming evidence that inflation pressures have eased in the UK economy kept Cable grounded, with PPI showing that input prices plunged 2.0 percent on petroleum product costs, while output prices jumped 0.3 percent as producers worked to boost profit margins. Meanwhile, CPI fell materially lower at a rate of -0.8 percent, dragging the annual rate down to 2.7 percent - well below the critical threshold of 3.1 percent that would have prompted a warning action to UK parliament from BOE chief Mervyn King. The next day, the release of the central bank’s Quarterly Inflation Report initially backed the tepid inflation data, as the BOE dovishly forecasted downside price risks in the short-term. However, comments by Mr. King put the bid back into Cable when he noted that the inflation forecast remained highly uncertain, suggesting that the bank will remain proactive in controlling future price risk. An unexpected nosedive in UK retail sales drove the final blow to GBPUSD, as the 1.8 percent drop – the sharpest decline in 4 years – signaled that consumption growth was weakening. By Friday, the combination of tepid retail data along with the contraction in CPI quelled much of the speculation of additional rate hikes from the BOE for this quarter, and perhaps as far out as mid-year.

With interest rates in the UK and US at parity at 5.25 percent, Cable trade may remain tumultuous as economic data from both countries gives neither bank the impetus to adjust monetary policy in the near-term. The minutes of the February BOE MPC meeting will likely garner most of the attention for the week, as the market will look to the voting record for the committee’s bias on policy. Mild wage growth is likely to keep hawkish impulses in check, which could subsequently bring Cable bears out to take the pair sub-1.9500 this week.

Carry Trade Unwinding Lends Swissie Strength
The mild unwinding of carry trades gave the Swiss franc a boost this week against the greenback, as USDCHF eased nearly 200 points to 1.2345 by Friday’s New York close. The market opted to ignore the decline in the Swiss ZEW survey, which saw the expectations component drop to -17.3 from -10.9 as investors start to feel uneasy amidst steadily rising interest rates. However, adjusted real retail sales surprisingly surged to an annual rate of 9.2 percent on holiday shopping for electronic items and leisure goods. While the figure is notoriously volatile, the data still bodes well for the sector as consumption growth remains alive and well. This sentiment is underpinned by the KOF leading indicator, which has continued to hold at buoyant levels and has helped the Swiss National Bank maintain a hawkish edge, keeping the central bank on track to hike rates in March to 2.25 percent.

Economic data out of Switzerland is not likely to yield many surprises this week as price growth at the factory gate is estimated to remain tepid, signaling that declining oil costs are eliminating price pressures in the pipeline. With inflation figures slipping month to month, there is a danger of annual CPI showing an outright contraction, which could be the one event to keep the SNB on hold this year. As a result, traders will turn to SNB President Roth, who speaks on Thursday at 9:00GMT, to gauge whether or not the central bank is concerned about this scenario. Given the rhetoric we’ve heard over the past few weeks, Mr. Roth will likely indicate that he foresees the potential for upside inflation risk later in the year, which should keep USDCHF below resistance at the 1.2575 level this week.

A True Turn for Loonie?
Green signaled go for Loonie bulls this week as better-than-expected economic releases for the month of December sent the top-heavy USDCAD pair lower to 1.1627 by Friday. The international merchandise trade surplus unexpectedly widened to C$5.0 billion – the largest since February 2006 – on the back of stronger exports of cars and energy products. Vehicle exports also gave manufacturing shipments a surprise boost, as the figure surged to 1.7 percent against estimates of a 0.7 percent rise. The combination of the two releases bode especially well not only for Q4 2006 GDP, but Q1 2007 expansion as well, thus keeping the Bank of Canada on hold at 4.25 percent as growth and inflation risks remain broadly balanced.

The Canadian dollar faces a triple threat this week, with inflation data, retail sales, and BOCspeak all on the calendar. The Bank of Canada’s core CPI measure is anticipated to rise to 2.1 percent in January, which may start to tip the risk scales to the upside for monetary authorities. Meanwhile, retail sales in the country are estimated to gain 1.0 percent in December as tightening labor market likely fueled consumer spending, especially during the holiday season. Wrapping up the week will be commentary from BOC Deputy Governor Kennedy, who will be giving a speech on economic change. Should Mr. Kennedy signal any sort of tightening bias during the event, traders will pay heed and trade accordingly. Overall, the week looks to be a win for Loonie bulls, as the fundamentals will could warrant further gains for the currency.

Aussie Calendar May Supply More Volatility
The Australian dollar posted its strongest weekly gains since December on the back of broad US dollar weakness. However, its path upward was far from a straight line, as fundamental news at the start of the week threatened to end two weeks of modest improvements. Sunday night’s Reserve Bank of Australia Monetary Policy Report sent the Aussie reeling, as the central bank lowered its forecasts on domestic inflation and reduced the chances of further interest rate hikes through 2007. Monetary policy officials expect inflation to stay within the upper band of their target range and feel that risks are relatively balanced on the future of price pressures. Though they were careful to reassert their slight tightening bias, it remains relatively clear that rates will likely stay unchanged through the medium term. A softened outlook on rates may leave Aussie risks to the downside, with further RBA commentary due through the coming week of trade.

A speech from RBA Governor Glen Stevens presents the biggest event risk for the coming week, with likewise significant Wage figures to shed further light on the future of domestic prices. The head central banker is expected to reiterate a largely neutral monetary policy bias through the medium term as he speaks to the Australian Parliamentary Committee. As we saw in the past week of US dollar price action, this may actually threaten to push the Aussie off of its recent highs. Ostensibly dovish commentary from US Fed Chairman Ben Bernanke to Congress was the catalyst for the week’s sharp Greenback tumble. The reverse may occur when Stevens tells the Australian legislature that the bank is likely to leave borrowing costs unchanged through the foreseeable future. The outcome of such a speech will guide reaction to later fundamental data, with important Wage Price Index figures due that same night. Overall, risks seem weighed to the downside for Australian dollar trade. From a technical standpoint, a key falling trendline likewise suggests that the next move may be lower for the Asia Pacific currency.

Kiwi Rallies on Data, But Faces Carry Pressure
The kiwi recorded the biggest gain against the dollar this week, nearly erasing all of the previous week losses. This past week, inflation, consumer spending and the business sector survey all hit the tape with producer prices showing a very sharp slowdown to -0.3% from 0.2% expected. The news hurt the NZD at the start of the week as traders began to question the legitimacy of Governor Bollards hawkish bias. However, the unit turned around and moved higher propelled by the momentum of December retail sales. Spending grew 0.7 percent for the month and a hefty 1.8 percent for the fourth quarter indicating that NZ consumer spending remained buoyant thus justifying Mr. Bollard’s concerns about rising price pressures.

Compared to last week’s evenly spread, rather market-moving docket, the days ahead hold very little in the way of scheduled event risk. One indicator that may only excite pure economists is the year-over-year change in credit card spending. Though it does not have a respectable track record for moving the New Zealand dollar, the increased interest in consumer-driven inflation in recent months may bring the skeptics around. Since other sales reports are lagging, this January print may illuminate the path for Governor Bollard who stuck to his guns when he said at the last policy meeting that the average New Zealander is a threat to national inflation. However, besides this blip on the radar, kiwi traders will likely devote their undivided attention to the international debate over the sustainability of the carry trade. Last week, the yen marked substantial rallies against nearly every pair. Though triggered by a strong GDP reading, the extent of the move has led many to wonder whether it is accelerating as traders unwind their carry trades. On the short list of developed countries with top debt ratings, the kiwi and yen form the most attractive pairing. Therefore a broad profit taking on the carry could hammer NZD.

Boris Schlossberg is a Senior Currency Strategist at FXCM.