Overnight gains in the U.S. dollar were supported by better than expected retail sales numbers. This holiday shopping season was not nearly as weak as some economists had feared with consumer consumption rising 0.5% in the month of December. If we exclude the impact of the 1.6% drop in gas prices and the volatile spending on autos, retail sales was even stronger, rising 0.6% last month. While the Empire State manufacturing survey dropped to -7.78 in January from -7.3, which was significantly worse than expected and producer prices fell for the third month in a row, consumer spending is the backbone of the U.S. economy and the stronger number overshadowed the weaker reports. It is always encouraging to see steady job growth turn into stronger spending but compared to the third quarter, spending growth in Q4 slowed and this means it will provide less contribution to GDP. Therefore even with the upward surprise in retail sales, today's U.S. economic reports are neither exceptionally weak or strong and explains the limited rally in the U.S. dollar.

Meanwhile 2013 FOMC Voter Rosengren spoke this morning and while he expects growth to accelerate, the Boston Fed President said low inflation and high joblessness warrant stimulus and continued accommodation as long as "we are projected to miss on both elements of the dual mandate." He admitted the Fed will eventually need to sell some assets but doesn't expect it to happen for most of this year.

Even though the dollar benefitted from the upside surprise in retail sales, it is the Yen weakness that pushed all of the major currencies lower. The 1% drop in USD/JPY triggered large declines in pairs such as EUR/JPY, NZD/JPY and CHF/JPY. EUR/JPY selling for example has driven EUR/USD lower. Over the past few weeks, the one way sell-off in the Yen and the promise of even easier monetary policy caused a surge in demand for Yen funded carry trades. However last night, Japanese Economy Minister Amari's comment about the potential negative aspect of an excessively weak currency triggered a wave of profit taking and deleveraging. Considering that USD/JPY has become extremely overbought, corrections are not surprising but it is important to realize that Amari's bark is bigger than his bite because the Japanese would never stand in the way of Yen weakness especially with their economy at its current state. Yen weakness also goes a long way in achieving Prime Minister Abe's goals of ending deflation and boosting growth.