USD
The Lunar New Year holidays in Asia and the President's Day in the US meant the market was quiet in thin trade throughout Monday. But while carry trade remain popular, the lingering threat of weakening data out of the US may mean more position adjustments in the coming weeks. Our economists' warnings that unexpectedly strong US data through December was probably boosted by unusually mild weather are beginning to ring true as the market absorbs the latest round of numbers, which showed weakness in consumer sentiment, the labour market and housing starts. These prompted the market to adjust its Fed expectations from only giving a 56% chance of one 25bp cut by the end of 2007 early last week to now fully pricing in one rate cut this year. Given the change in market sentiment, we think Wednesday's core CPI reading could instigate more market action either way. Our economists expect an unchanged 0.2% m/m rise (consensus 0.2% m/m) with the view that energy prices have probably held down overall CPI in January. Apart from CPI, the only event of note is the release of the minutes from the Jan 31 FOMC meeting. Consistent with Chairman's Bernanke's comments last week, we do not expect the minutes to reflect any imminent easing, but risks to economic growth will likely be highlighted, and the current message of policy staying on hold pending a clear break in data should remain. Of course, what the Fed's counterparts from across the Pacific do on Wednesday may yet pile on the pressure on the USD further if the BoJ announce a policy rate hike.
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