Dollar Yields Outshine Japanese Hike With CPI Pickup

As volatility cooled in the wake of the two biggest pieces of scheduled event risk for the US currency this week, the dollar set its course for a difficult ascent. However, the knee jerk reactions following both releases may not reveal their true potential until nearby technicals are out of the picture.

For EURUSD, the dollar made a painfully slow 50 points advance from overnight highs until the proximity of 1.31 led traders to stand back and wait for others to trigger the next leg. In similar fashion, USDCHF made a jumpy, 75-point advance to climb back into the pair’s previous 1.2375-1.2575 range. The pound put up a struggle against dollar bids, but data from its own coffers helped rebuff the 1.96 level for lower highs on a drop to 1.9490. Finally, USDJPY saw a smooth 150-point greenback rally after carry traders piled back into the pair following Bank of Japan’s rate hike overnight.
While the US calendar held its own dangers for those dollar traders looking to avoid volatility, the entire market has a singular focus in the overnight – the Bank of Japan’s rate decision. As the market had expected (and contradicting economists projections), the policy authority decided to lift the overnight lending rate by a quarter point to 0.50 percent. Leading up to the verdict, international financial markets were showing signs of concern. Specifically in the Foreign Exchange market, higher yielding currencies were being sold off in favor of the Japanese currency. Much of this was due to profit taking and position squaring ahead of the central bank conclusion, which stoked fears that a steep deep correction could follow if more traders saw the lucrative carry trade in jeopardy. However, according to price action, this was not the case. After the extra 25 basis points were officially tacked onto the overnight cash rate, BoJ Governor Toshihiko Fukui followed up by saying that the carry trade was not a considerable factor in the current meeting and that further firming would come be gradual. Though market participants will make slightly less on the carry, the draw of a consistent 4.75 percent annual return on USDJPY put capital right back on track.
Back in the US, the busiest calendar day of the week (in terms of economic releases), kept the market on its toes. The main event for American-centric trades was January consumer inflation numbers. According to the Labor Department, the headline numbers were rather unimpressive. Though prices didn’t slow as much as expected over the month as analysts had predicted, the 0.2 percent pace was hardly the rate needed to alarm the Fed. On the other hand, the acceleration in the core measurements may provoke a reaction from policy officials in both professional and unprofessional channels. When the 3.0 percent drop in gasoline prices for the month was excluded, inflation jumped 0.3 percent, matching the fastest pace of growth since September of 2004. Now the market will move on to the FOMC minutes due later in the afternoon to see whether the Fed softened its official stance on price pressures prematurely.
Stocks were hit hard in the opening hours of trade after the pick up in inflation left many wondering whether the central bank will defer a rate cut deeper into future. By 15:45 GMT, the Dow was leading the pack with a 0.56 percent to 12,715.02. Making substantial moves of their own, the S&P 500 slipped 0.47 percent to 1,452.86 while the NASDAQ Composite edged 0.3 percent to 2,505.51. After the open, the Dow saw 24 of its 30 component stocks in the red. One of the biggest moves came on the part of Hewlitt-Packard, whose shares dropped 4.0 percent or $1.73 to $41.40 after a weak outlook soured a strong quarterly earnings report. Elsewhere, media-friendly Jetblue Airways Corp. witnessed a modest rebound in its shares as its flight schedule was put back on track. The airliners shares were 4.8 percent higher at $13.52.
Treasuries were slowly starting to incorporate the effects of a strong core inflation figure, though big moves in the government asset were put off until the FOMC minutes hit the wires. The ten-year note was trading 7/32nds lower at 99-09 by 15:45 GMT as its yield added 3 basis points to 4.715. Bonds slipped 11/32nds to 99-07 while yields climbed 2 basis points to 4.798.