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**Back from a week in snow filled Michigan to find more snow in NY!

The U.S. dollar shot higher against the Japanese Yen following a stronger than expected retail sales report.  Consumer spending rose 0.5 percent in January with sales excluding autos rising  0.6 percent.  After a surprisingly weak holiday shopping season, the January numbers tell us that consumers cashed in on gift cards and took advantage of beginning of the year discounting. Demand was particularly strong for electronics, food, beverages, sporting goods, general merchandise and online shopping.  Also spending in December was not nearly as bad as initially reported with the decline in retail sales revised up from 0.3 to 0.1 percent.  The price action suggests that dollar bulls were particularly happy about this report because the smaller decline in December should lead to an upward revision to Q4 GDP.  Overall the numbers indicate that U.S. consumers were not as frugal at the end of 2009 as initially thought and are already picking up spending in the beginning of the year.

Meanwhile higher yielding currencies such as the euro and the Australian dollar are still reeling from China's 50bp hike in the reserve requirement ratio this morning.  China is slamming the brakes on their economy by forcing banks to extract money from the financial system and resurrecting concerns about how their tightening measures will affect the rest of the world in the process. Yet before turning too bearish, it is important to mention that China usually increases liquidity before the Chinese New Year (which is on Sunday) and begins withdrawing it after the holiday. It is already the end of the week in China which means that the tightening will really go into effect after their week long holiday. The seasonal factor along with the stronger U.S. retail sales report could help the major currency pairs such as the EUR/USD and AUD/USD recover some of their earlier losses.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.