US Dollar Nears Record Lows as Durable Goods Orders Plummet
The US dollar barely missed hitting record lows against the Euro today and traded down across the majors as Durable Goods Orders were released at a much weaker-than-expected -1.7 percent. In fact, estimates had been for a 1.5 percent rise on the back of transportation gains as Boeing reported stronger orders during September. Looking at the less volatile component that excludes transportation was a bit more optimistic, as orders for durable goods rose a mild 0.3 percent while nondefense capital goods excluding aircraft, a leading indicator for business investment, rose 1.0 percent. Later in the morning, New Home Sales for the month of September looked, on the surface, like a surprisingly strong figure. Indeed, the index rose 4.8 percent in September from the month prior to 770K while supply levels fell back to 8.3 month and median prices jumped to $238,000 from $232,100. Sound great, right? Wrong. A deeper look into the data shows that these “improvements” came simply because the revisions were so much lower for prior months, specifically August, that it made the September data look positively radiant. The August reading was amended to reflect that new home sales dropped to a nearly 11 year low of 735K while supply levels were revised all the way up to 9 months. Why all of these revisions? The new home sales report is based off of contract signings, but revisions come into play when cancellations occur before the actual closing if, for example, the homebuyer can’t get approved for the financing. As a result, it’s pretty clear that this report is unreliable as a gauge for the status of the housing sector given the amount of adjustments made to the index. Fed fund futures continue to price in an 86 percent chance of a 25bp cut on October 31, and with the housing sector still deteriorating and US equities teetering at current levels (the DJIA and S&P both closed little changed for the past two days), the FOMC is likely to follow the market’s lead and take the benchmark lending rate down to 4.50 percent next week.
 
Commodity Dollars Push to Multi-Year Highs as Oil Hits New Record Above $90/bbl
The commodity dollar gained steam yet again on Thursday as crude oil prices rocketed 3.9 percent higher to close at a record of $90.46/bbl amidst news of new US sanctions against Iran and warnings of an attack on Kurdish militants by Turkey. In fact, USD/CAD stretched lower to hit a fresh 31-year low of 0.9612 while AUD/USD jumped to 13 year highs of 0.9090. Not to be forgotten, NZD/USD edged above the 0.7600 level as the RBNZ policy statement indicated a somewhat hawkish bias. Nevertheless, with interest rates at a record high of 8.25 percent, the probabilities of another rate increase are negligible in the near term. The RBA, on the other hand, does have the potential to hike in the near-term, and speculation is mounting that they will tighten policy at their November meeting before the Federal Elections on November 24.

Euro: Will Rising Import Prices Lead the ECB to Hike?
Import price growth in Germany accelerated more than expected during the month of September, at a rate of 0.6 percent, led by petroleum product prices as oil rocketed higher. The news heightens the prospects that the European Central Bank will keep rates steady and maintain their hawkish bias. While inflation seems to be largely isolated to energy related products (suggesting core pressures are relatively stable), the possibility that these costs will leak into other product groups is considerable. However, we’ve started to see investor sentiment suffer, as the German IFO survey of business confidence dropped to a 20-month low of 103.9, while the outlook figure slumped to a nearly two-year low of 98.6. The rapid appreciation of the Euro, speculation that the ECB may hike, rocky financial market conditions, and oil at record highs has undoubtedly taken a toll on optimism. The question is: will it impact business and consumer spending? We have yet to see this occur, but with Europeans feeling leery of current and future conditions in the economy, the ECB will not want to exacerbate the mentality and trigger a more substantial slowdown.

Japanese Yen: CPI, Industrial Production Unlikely to Raise BOJ Hike Prospects
The Japanese yen has been the main beneficiary of the buildup of risk-averse sentiment throughout the financial markets, which has also pushed equity indices like the DJIA and Nikkei 225 lower. However, with trendline support for USD/JPY looming near the 113.00 level, a plunge in the equity markets may be the only trigger for the pair to take on the August lows once again. Fundamental data out of Japan has not been able to drive price action across the yen pairs for quite some time, and upcoming news is unlikely to be any different. Tokyo consumer price measures are anticipated to show that deflation still reigns for the ninth consecutive month, leaving the Bank of Japan no room to implement further rate normalization. Despite the tightness of the Japanese labor markets, wages have failed to rise and as a result, consumption growth has been extremely anemic. As a result, businesses simply do not have the ability to pass through any price increases to the consumer if they plan on actually selling anything.

British Pound Continues to Consolidate Amidst Light Data Flow
Economic data out of the UK has been extremely thin this week, leaving Cable to consolidate near the 2.0500 level. The sole piece of data today showed that mortgage approvals dropped during the month of August, suggesting that the Bank of England’s tightening cycle earlier in the year has finally started to take a toll on the housing market. Nevertheless, BOE Governor Mervyn King shows few signs of letting up on his hawkish bias despite softer inflation pressures, leaving the central bank unlikely to cut rates until at least Q1 2008.

Kathy Lien is the Chief Currency Strategist at FXCM.