Dollar is mildly up against commodity currencies as risk appetite is hit by unexpected rate hike from China. The PBoC raised the benchmark 1-year deposit rate by 25bps to 3% and the 1-year lending rate by the same amount to 6.06%, effective Wednesday.

The is the second hike in just over a month, with the prior hike on both benchmark rates on Christmas day. The move is inline with the central bank's pledge in January that fighting inflation would receive priority this year China's inflation jumped to a 28-high of 5.1% last November and much is needed to be done to bring inflation back down to the government's target. The news sent commodities down on expectation of slower demand where copper pulls back by 1% after making record high earlier this week. Crude oil also, dips sharply through 86 level. The development sends Aussie, and to a lesser extent, Loonie lower and provides some support to the greenback. Though, dollar's strength elsewhere is so far mild.

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Sterling is mildly lower after UK Chancellor of the Exchequer Osborne announced to introduce a full-rate bank level this year, not phasing in. And, the tax will be permanent. Additional GBP 0.8b will be raised and Obsorne said such substantial sum of money will help the government and help Britain deal with its budget deficit. Data from UK saw BRC retail sales monitor rose 2.3%, RICS house price balance improved to -31% in January.

Euro remains supported by ECB Governing Council member Mersch said yesterday that if price hikes trickle through the economic system in the form of secondary effects, ECB is is obliged to intervene vigorously. Though, Mersch also noted that if the 2013 projection to be released in March shows the current inflation is only a temporary increase, then there's no danger.

width=272The strength in the common currency is so far mild as markets still remember Trichet's comment that there's no immediate plan to hike rates even though inflation exceeded ECB's target of 2% for two consecutive months. Data from Eurozone saw German industrial production unexpectedly dropped -1.5% mom in December.

Other data released today include Japan Money Stock M2+ CD rose 2.3% yoy in January, Bank lending dropped -1.8% yoy in January, current account surplus widened to JPY 1.56T in December. Swiss unemployment rate dropped to 3.5% in January.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 82.16; (P) 82.31; (R1) 82.46; More.

USD/JPY dips mildly today but loss is limited. Intraday bias is neutral with 4 hours MACD crossed below signal line. Though, we're still favoring the bullish case that choppy fall from 83.67 has completed with three waves down to 81.12. Hence, we'd expect the current retreat to be brief and above 82.45 will target 83.19 resistance first. Break should bring resumption of rise from 80.93 through 83.67 to retest 84.49 key resistance. On the downside, however, below 80.93 will target a new low below 80.29 instead.

In the bigger picture, with 85.92 cluster resistance (38.2% retracement of 94.97 to 80.29 at 85.89) intact, there is no confirmation of reversal yet and the longer term down trend in USD/JPY is possibly still in progress for another test on 79.75 (1995 low). Note that USD/JPY is possibly picking up downside momentum again. Decisive break of 79.75 will target 61.8% projection of 94.97 to 80.29 from 84.49 at 75.41 next. On the upside, break of 84.49 resistance, though, will argue that a medium term bottom is likely formed and will turn focus back to 85.92 cluster resistance for confirmation.

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Economic Indicators Update

GMTCcyEventsActualConsensusPreviousRevised
23:50JPYJapan Money Stock M2+CD Y/Y Jan2.30%2.30%2.30% 
23:50JPYBank Lending incl Trusts Y/Y Jan-1.80%-1.80%-1.90%-2.00%
23:50JPYCurrent Account (JPY) Dec1.56T1.55T1.15T 
00:01GBPBRC Retail Sales Monitor2.30%---0.30% 
00:01GBPRICS House Price Balance Jan-31.00%-38.00%-39.00% 
05:00JPYEco Watchers Survey: Current Jan44.345.545.1 
06:45CHFUnemployment Rate Jan3.50%3.50%3.60%3.50%
11:00EURGerman Industrial Production M/M Dec-1.50%0.20%-0.70% 
13:15CADHousing Starts Jan170K171K171.5K 

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