AUD inflation data cool drives carry trade liquidation
EUR ITL Consumer sentiment softens
GBP BOE surprisingly split, GDP strong
USD docket barren
The BoE minutes revealed that the Monetary Policy Committee was surprisingly split on the issue of last months rate hike with the final vote tally a much closer than expected 5-4 (traders were looking for 7-2 and some cable bulls were even calling for unanimous vote). The dissenters noted that there was insufficient cause to warrant a tightening of monetary policy in January, citing that inflation is likely to fall back later in 2007. Taken together with last night speech by BoE Governor King that the January strike was pre-emptive in nature, tonights news suggests that for the time being the BoE is far more likely to wait than hike rates further in February or March.
Traders who were betting on an additional rate hike in the near future and looked to the BoE minutes for unambiguous guidance were clearly disappointed and sold the pound in the immediate aftermath of the release. As a result the EURGBP cross which only a day earlier plumbed a three year low bounced back strongly but was capped at 6595. However, not all the data was negative for sterling longs. UK 4Q GDP expanded at healthy 3.0% rate a bit better than 2.9% expected and that news raised speculation that the underlying tone of the UK economy which continues to produce some of the best growth in G-7 universe may yet prompt the BoE to hike rates again sometime in the first half of this year.
Earlier in the session, the yen and its crosses saw tremendous volatility as Australian inflation data printed markedly worse than expected quashing any speculation about a possible RBA rate hike in February. The release caused a flurry of carry trade liquidation first in AUDJPY and then in other yen crosses which saw tumbles of 100 points in EURJPY and more than 200 points in GBPJPY in less than a hour. However, the correction was very brief as it was triggered by negative news on the high yielder (in this case the Aussie) rather than any positive news on the low yielder (the yen). In fact Japanese eco data continued to register very lackluster results as the All Industry Index printed at -0.2% versus 0.0% expected. Until the currency market begins to see some serious signs of tightening out of Tokyo , the yen remains victim to the carry, but tonights events foreshadow the possible fury of carry trade liquidation. When the move eventually comes it will likely be vicious and volatile as everyone will try to simultaneously exit what up to now has been the strongest one way trade in FX.
