It should be a relatively quiet day for currencies with U.S. markets closed in remembrance of Martin Luther King Jr. There is no U.S. data on the calendar, which means we can expect consolidative price action in the foreign exchange market. The dollar is trading slightly lower against all of the major currencies with USD/JPY struggling to hold the 104 level and the AUD/USD bouncing above 88 cents. We don’t have much in the way of U.S. data this week but the Q4 earning season is in full force, which means that the dollar should take its cue from equities.

In fact, the sell-off in the Nikkei overnight is the primary reason why USD/JPY is trading lower this morning but the victory of a leftist mayor in a tiny city in Okinawa also contributed to the weakness in stocks and strength in USD/JPY because the mayor opposed plans to relocate a U.S. military base that was crucial to rebuilding ties with the U.S. The victory of Susumu Inamine in Nago is a major embarrassment that also deals a significant blow to Prime Minister Abe who threw his support and financial resources behind Inamine’s opponent. While these political developments won’t have a major impact on Japan’s economy, the air base has been a source of tension between the U.S. and Japan for decades and is therefore affecting Japanese assets including USD/JPY on this quiet trading day.

Meanwhile stronger than expected fourth quarter GDP numbers from China triggered another wave of short covering in AUD/USD. The Chinese economy expanded by 1.8% in the fourth quarter, which was weaker than expected but on an annualized basis, the economy slowed by only 0.1% to 7.7% against expectations for a slowdown to 7.6%. While the data shows China’s economy losing momentum towards the end of the year, the slowdown was not as large as economists had feared. Most of the other highly anticipated reports were in line with expectations. Industrial production growth slowed to 9.7% from 10% while retail sales growth slowed to 13.6% from 13.7% in December. There’s no escaping the reality that China is losing its mojo but this is part of their plan to focus on domestic growth and structural reforms over the next 5 to 10 years. The only upside is that the slowdown is gradual which is apparently enough to trigger a relief rally in the AUD/USD. According to last Friday’s IMM report, speculators are still very short A$ but the number of short contracts have moderated slightly in the last 2 weeks indicating that some investors are closing their shorts in preparation for a stronger short squeeze to 90 cents.

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