US Dollar: What to Look for in the FOMC Minutes
A delayed reaction to Friday’s non-farm payrolls report as well as the market’s expectation for tomorrow’s FOMC minutes has taken the US dollar higher against every major currency today. Even the New Zealand dollar, which was firmer against the US dollar for most of the day turned lower towards the end of the US trading session. Tomorrow’s FOMC minutes are from the September 18 monetary policy meeting, which was when the central bank lowered both the Fed funds and discount rate by 50bp each. Although the credit markets have stabilized quite a bit since the rate cut and there have been no new blowups in the financial sector, the Fed’s reasons for taking the preemptive move could still trigger sharp market movements. If the Fed decided to deliver the larger interest rate cut not because the US economy needed it, but because they wanted to avoid making successive cuts, then that would lower the likelihood for interest rates to be cut at the end of the month and consequently rally the US dollar. On the other hand if the move was taken because the Fed felt that the US economy had deteriorated so much that a 50bp Fed Funds and discount rate cut was necessitated, then that would be bearish for the US dollar. We expect the market to react more significantly to the former rather than the latter because recent economic data including non-farm payrolls could give the Fed the luxury of waiting until December before lowering interest rates again. Towards the end of the week, our focus will turn to trade, inflation and consumer spending. The weakness of the US dollar should help to narrow the trade deficit while boosting inflation. Consumer spending is the biggest potential market mover this week (it is not due out until Friday). The strength of payrolls in September and the upward revision to retail sales in August suggest that retail sales could be stronger than the market is currently expecting. Overall, it seems to be shaping up to be a dollar positive week.

Euro Slips Back Towards 1.40
The Euro is slipping back towards 1.40 on the back of a smaller than expected rise in German factory orders as well as mixed commentary from ECB and IMF officials. Despite the German Economics Minister’s comment that he is not losing sleep over the current level of the Euro this morning, recent economic data indicates that as much as some officials may try to deny it, the strength of the currency is indeed having an impact on the economy. Factory orders rebounded only 1.2 percent, following the biggest drop in at least 16 years. Although ECB officials seem to agree that price stability is subject to upside risks, ECB member Bini-Smaghi indicated today that if Europe wanted to act to weaken the strong Euro, they did not need to wait for the G7 meeting later this month. Is he trying to say that the ECB may physically intervene in the Euro? Probably not because the currency is already falling off its highs, and Germany, the Eurozone’s largest member, remains comfortable with the current level of the Euro. Also, the ECB would far sooner verbally intervene before physically intervening. Meanwhile IMF Rato’s comment that the dollar is undervalued is also pressuring the EUR/USD. Tomorrow we have more comments from ECB officials as well as the German trade balance and industrial production. Both numbers are expected to be softer given the weakness in factory orders and the recent strength of the Euro.

Are the Commodity Currencies Finally Reversing?
The Australian, New Zealand and Canadian dollars are all softer today due to the drop in commodity prices and broad dollar strength. After hitting a new 23-year high overnight of 0.9034, the Australian dollar gave back all of its gains to end the day below 90 cents. Although economic data was mixed with ANZ job advertisements falling and the AIG Construction PMI index rising, the strength of the Australian economy should be the envy of countries like the US who is still struggling. The same can be said for Canada, despite the currency’s fall today. Employment numbers were exceptionally strong on Friday, paving the way for another rate hike by the Bank of Canada. As for New Zealand, house prices fell for the first time since the beginning of the year last month, but even that has only put a minor dent in the kiwi’s rise. Whether this is a real reversal in the commodity currencies or another blip before further gains is contingent upon oil and gold prices. If they have peaked, so will the Australian, New Zealand and Canadian dollars.

British Pound Hit by Weaker Economic Data
The British Pound is weaker against the US dollar following mixed economic data. Input prices in the month of September were hot, but output prices were weaker than expected. This indicates that even though oil prices are driving up the cost for raw materials, these higher costs have not been passed on to factories. Part of this may be due to the weakness that we are beginning to see on the factory level. Even though the monthly growth rate of industrial production was stronger than expected, the annualized pace of growth slowed materially. Overall, the latest data indicates the difficult situation that the Bank of England is facing at the moment. Inflationary pressures remain high but economic growth is slowing.

Mild Move in the Dow Leads to Mixed Performance in the Japanese Yen Crosses
The Japanese markets were closed for a public holiday in Japan last night, so there was no economic data released. Tonight we have the Eco Watchers index but that is not expected to be market-moving. The big event this week is the Bank of Japan interest rate decision; yet even that may not cause any significant movements in the Japanese yen since there is only a 3 percent change for a quarter point rate hike. Instead, yen traders should continue to keep an eye on the Dow. Should the stock market resume its rise, we could see fresh gains in carry trades. The dollar could extend its gains against the yen given the bullishness of last week’s non-farm payrolls release. Major resistance for the pair is not until 119.

Kathy Lien is the Chief Currency Strategist at FXCM.