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Much Ado About Nothing Sends Yen Tumbling

Currency markets are settling into new trading ranges after the Bank of Japan defied pressure to change its policy settings, and ahead of data that could shed light on the strength of underlying consumer demand in the world’s largest economy. The greenback is slightly weaker on the day, and is down more than 10 percent from its late-September highs.

The yen dropped almost 2 percent last night after the Bank of Japan said it would leave its yield curve control policy unchanged, surprising a small contingent of market participants who were betting on another increase in the target band. Policymakers also kept the benchmark lending rate at -0.1 percent, and published updated economic forecasts showing that they expect inflation to average 1.8 percent in the fiscal year beginning in March, up from the 1.6 percent previously estimated. The currency’s losses could prove short-lived however – most observers think bond markets will soon go back to attacking the yield cap, putting renewed lift under the exchange rate.

The pound jumped against both the dollar and euro as the latest inflation report boosted expectations for another 50 basis point hike at the Bank of England’s February meeting. Consumer prices rose 10.5 percent in December from a year earlier, down from 10.7 percent in the prior month. But core inflation remained sticky at 6.3 percent year-over-year, adding to wage data from earlier in the week to suggest that underlying price pressures remain too hot for comfort.

Yesterday’s Canadian inflation print left markets unimpressed, doing very little to shift odds on a rate hike at next week’s Bank of Canada meeting – or raise the likelihood of moves farther out. Headline consumer prices climbed 6.3 percent in December from a year prior, and an average of the Bank’s preferred core measures fell to 5.15 percent, suggesting that pressures are gradually ebbing. With two-year US Treasuries yielding almost 65 basis points more than their Canadian equivalents, it is clear that markets expect the Federal Reserve to hike rates farther, and to then cut them by less than the Bank of Canada over the next two years.

Economists think US retail sales fell -0.9 percent in December, accelerating from November’s -0.3 percent month-over-month decline as gasoline prices fell. So-called “control group” receipts—which exclude auto dealers, gas stations, building materials, and office supplies—are seen slipping more modestly, down -0.3 percent.

Markets are looking for a -0.1-percent fall in producer prices and industrial production for December, with data set for release at 8:30 and 9:15, respectively. Business inventories – out at 10 am – are expected to rise 0.4 percent in November.

Federal Reserve speakers include Atlanta’s Bostic, Philadelphia’s Harker, Kansas City’s George, and Dallas’ Logan.

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