US Dollar
After yesterday’s wild moves, the global financial markets spent the day licking its wounds. Although government officials from around the world tried to pacify the markets by suggesting that things may not be as bad as they seemed the degree of today’s recoveries indicate that traders may not be buying it. They will be reluctant to get back into the markets in force after having bailed out as quickly as they did. Starting with the Chinese government, officials at the Ministry of Finance reassured international investors that they are not planning to take some heat off of the economy by enacting a capital gains tax. The initial trigger for yesterday’s liquidation was concerns about Chinese growth and tighter restriction on foreign investment. In the US, members of the NYSE attributed the collapse in the Dow to a computer glitch and not necessarily mass bearish sentiment. Federal Reserve Chairman Ben Bernanke confirmed his positive outlook on economic growth and indicated that the latest move in the stock prices will not alter the Fed’s plans for monetary policy. Yet, the real concerns about the US economy still remain. Manufacturing conditions in the Chicago region continued to contract while new home sales saw the largest percentage drop in 13 years. Sales of new homes are a more leading indicator for the housing market than sales of existing homes. Supply of new homes also increased significantly which suggests that the worst may be yet to come. Problems in the subprime lending sector continue to keep the markets jittery. The US’ third largest subprime lender announced that they will have to delay their fourth quarter results, triggering a 20 percent drop in its stock price. Fourth quarter GDP was also revised lower form 3.5 percent to 2.2 percent. The price index was revised higher from 1.5 percent to 1.7 percent, but core PCE was revised down from 2.1 to 1.9 percent. At this point, the revisions are no surprise given the slower inventory accumulation and weaker residential investment. In fact, the market is already expecting slow growth in the first quarter. Looking ahead, personal income, manufacturing sector ISM and construction spending are on the docket. Both manufacturing activity in the Chicago and Philadelphia region was very weak. This suggests that any improvements in the national index should be minimal. Both personal income and construction spending are not expected to be very dollar friendly either.

Euro
Despite stronger Eurozone economic data, the Euro has been hit by the rebound in the US dollar. The labor market is improving with the unemployment rate in the Eurozone dropping from 7.5 to 7.4 percent in the month of January. The ILO unemployment rate in Germany also dropped from 7.6 to 7.4 percent. Consumer confidence has improved in the Eurozone region despite the prospects for another interest rate hike and the increase to Germany’s Value Added Tax. Headline consumer prices dropped 0.5 percent in January, which was right in line with expectations while core prices increased by a less than expected 1.7 percent. The stronger data continues to support higher rates in March, which is further confirmed by this morning’s comments from central bank officials. According to ECB member Weber, “more significant normalization of monetary policy is needed.” Stark said that “there is some evidence that prices could rise more strongly again.” The ECB remains one of the few central banks that are still raising interest rates. Meanwhile Switzerland reported the first improvement in its leading indicator index in 7 months, after already having released a stronger UBS consumption index yesterday.

British Pound
The British pound is stronger across the board thanks to solid housing market data. The UK’s Nationwide Building Society reported 0.7 percent rise in house prices in the month of February. The market was only looking for a 0.5 percent rise. Unfortunately consumer confidence did not improve along with it as the GfK report dropped from -7 to -8. Bank of England Deputy Governor Lomax warned today that inflation could fall sharply in the months ahead and take the rate below the central bank’s target by the end of the year. Looking ahead, there is a busy UK calendar tomorrow with manufacturing sector PMI, consumer credit, mortgage lending, and the CBI Distributive Trades survey due for release. On balance, the data should be mixed with the manufacturing sector expected to improve, but the distributive trades survey expected to deteriorate.

Japanese Yen
After yesterday’s sharp rally, the Japanese Yen gave back some of its monstrous gains. Although the Yen’s rebound could continue, it is very unlikely that the yen linked crosses will be able to capture back all of yesterday’s losses. The breakdown triggered a new downtrend which was supported by last night’s comments of BoJ officials. Central bank Governor Fukui said last night that they need to keep raising interest rates while Mizuno noted that short term rates are “pretty accommodative” and as such, the central bank needs to push rates towards normalization. However economic data indicates that the country is struggling to recover. Even though industrial production fell less than expected, the annualized pace of retail sales growth failed to increase while manufacturing sector PMI dropped from 53.4 to 53 in January. Looking ahead, the fiscal year end could continue to tip the scales in favor of the Japanese Yen.

Commodity Currencies (CAD, AUD, NZD)
The Australian and New Zealand dollars both rebounded today thanks to firmer economic data. Australia reported stronger private sector credit growth while New Zealand reported an increase in building permits during the month of January and weaker visitor arrivals. Like many of the other central bankers around the world, Australian Treasurer Costello attempted to pacify his markets by saying that Australia’s strong economy and corporate earnings will allow them to better weather market volatility. Australia has manufacturing PMI due for release tonight and private new capital expenditure. The Canadian dollar slipped against the US dollar with little catalyst. Their current account and industrial product price reports are tomorrow. The sell-off in the Canadian dollar in the fourth quarter should help to boost trade activity.

Kathy Lien is the Chief Currency Strategist at FXCM.