Dollar: End of Non-Stop Selling?
The EUR/USD finally took out the 1.4500 figure, but US economic data was far more dollar friendly this week than at any time in the past month and as we noted on Friday, “We continue to believe that the EUR/USD is near the end of its current rally and while it may make another run at the 1.45 figure, any additional gains going forward are likely to be small and slow.”

One reason for our skepticism is the decidedly positive slew of economic reports that hit the screen last week that refute the dollar bearish notion that US economy is on the verge of a recession. US GDP, for example printed a far better than expected 3.9% while Friday’s Non Farm Payrolls report nearly doubled the expected 88K print by recording a gain of 166K new jobs. While these are hardly blockbuster numbers, US economic news suggests that the growth remains remarkably resilient despite the troubles in the housing and the finance sectors. The data therefore indicates that there is little need for further easing from the Fed for the rest of the year, and as markets begin to adjust to more neutral Fed monetary policy, the relentless dollar selling should come to a halt.

Next week the ISM Non-Manufacturing number will take center stage on Monday with markets looking for only a small drop from the month prior. The data for the services remains comfortably above the 50 boom/bust level and therefore should only elicit minor interest from the market. The end of the week brings the Trade Balance, expected to improve, and an updated reading of U of M Consumer sentiment data. Given the fact that employment data surprised to the upside, consumer sentiment should improve as well. In short there is nothing on the docket to prevent a possible dollar rebound this week, but dip buying euro bulls may have other ideas.

Euro – ECB is the Key
Euro barreled its way through 1.4500, benefitting from the massive anti-dollar sentiment in the currency market. But with positive US data greatly reducing the possibility of further Fed rate cuts for the rest of the year, the market is likely to turn to rate differentials once again. As we noted on Friday, “At this point the EUR/USD is trading on pure momentum, driven by sheer speculative demand. Euro bulls may be counting on a hint of a possible year end rate hike from the ECB at next week's rate announcement meeting, but if no such signal is forthcoming from Mr. Trichet and company the pair becomes vulnerable to a sharp sell off in the near future.”

The ECB meeting on Thursday remains the key to further gains in the euro. Although no one expects the central bank to hike rates in November, the European monetary authorities generally like to prepare the market for any policy moves. To that end Mr. Trichet’s commentary will be crucial in signaling whether the bank will tighten in December. ECB officials have been uniformly hawkish in their recent statements, but it remains to be seen if they will be willing to raise rates in the face of record high exchange rates for the EUR/USD. Already signs of a slowdown are evident in German manufacturing data which slipped to its lowest reading in 18 months. We doubt whether European officials will risk pushing the EUR/USD to 1.5000 and should they assume a more neutral stance the euro could fall as profit taking kicks in.

Yen Remains Dependent upon Carry Trade Unwinds for Support
The Japanese yen finished the week mildly lower after the Bank of Japan confirmed, yet again, that they have little room to raise rates as they voted 8-1 to leave the benchmark lending rate at 0.50 percent for the tenth consecutive meeting. Indeed, Bank of Japan Governor Toshihiko Fukui said this past week that global financial markets remain volatile and that the BOJ must “implement monetary policy carefully.” Though businesses have performed well in recent months, improvements in the corporate sector have failed to filter into households as quickly as the central bank had projected, as wage growth has been sluggish. As a result, limited discretionary income has left consumption figures fairly lackluster and CPI growth negative as retailers have very little pricing power. Even still, Governor Fukui and the sole dissenter in the vote, Atsushi Mizuno, remain biased towards normalizing rates in the near-term. Nevertheless, with last week’s indicators showing that labor earning fell, retail trade growth remains negative, and the jobless rate surprisingly picked up, there is almost no chance that the BOJ will hike rates until well into the first quarter of 2008 at the earliest.

Upcoming economic event risk is not expected to force major volatility in the Japanese currency, as markets have proved largely indifferent to domestic economic data. Indeed, the yen is likely to trade off of developments in global risky asset classes, and speculators are eager to see whether the US Dow Jones Industrial Average will recover from last week’s sharp declines. The Dow dropped 1.5 percent over the course of the week, and carry traders will be keeping an eye on a recovery in the index so that high-yielders will continue to outperform their lower-yielding counterparts. Otherwise, markets will watch for any particularly large surprises out of the leading economic index, machine orders, or the Eco Watchers survey.

Cable Rallies to 2.09 on a Slow Week, What Will the BoE Meeting Do?
The UK economic calendar was hardly supportive of the pound last week. Nevertheless, GBP/USD broke to fresh 26-year highs in a move that pushed all the way up to 2.09. Weeks ago, few would have thought these heights would have been possible considering the lingering threat that credit problems could flair up once again (a fear that still has risk premium in LIBOR rates). However, the real driver behind the GBP/USD’s power advance was undoubtedly a prevailing and consistent anti-dollar undercurrent. Indeed, various record dollar lows were recorded for a number of the majors this past week despite strong employment, growth and improving interest rate outlook. Does this mean the pound is sailing on borrowed time? Certainly, if we continue to see data like that over the previous docket, the currency could quickly loose buoyancy.

There were few market-moving indicators crossing the wires last week; but nearly every one that merited traders’ attention was disappointing. The GfK consumer sentiment report for October stirred bearish sentiment when it met expectations for a -8 print, matching a 22-month low. Looking a little deeper into the data, the disappointment only deepened as the component measuring plans for making major purchases dropped to a 12-year low. Sentiment in the business sector seemed equally dour as the manufacturing PMI dropped to its lowest level since January. The rest of the market-worthy data crossing the ticker was related to the housing. Mortgage applications for September fell to a 26-month low 102,000-unit pace while the PMI construction survey slid to an 8-month low on slowing orders and employment. Hope for better days was salvaged by the leading Nationwide House Prices report for October, which marked a rebound from its 11-month low in the previous month.

In the days ahead, the fundamental winds will certainly pick up; but the data may actually be a burden to the pound’s advance if the consistently lower forecasts prove accurate. Covering nearly every corner of the economy, the October PMI services survey, BRC Retail Sales Monitor, BRC Shop Price Index and visible trade balance are all penciled in for different days. Perhaps generating a little greater interest, economists are forecasting a Nationwide consumer sentiment report heading in the same direction the GfK figure was led, while the industrial production gauge is set for a modest improvement despite the expensive pound and high input costs. Everything considered though, the BoE’s rate decision holds the greatest potential for surprise. There is no policy change expected and the ECB may steal the show; a pass over rates in November by the MPC could actually be interpreted as sign of hawkishness in the face of a faltering housing market and tepid inflation. Any hint towards future policy will be quickly absorbed.

Will the Swiss Franc Tackle 3-Year Highs this Week?
The liquidation of carry trades sent the Swiss franc surging against the US dollar, Euro and British pound in the middle of last week, but carry trade related flow may not be the only reason why the Swissie is stronger. After falling to a 21-month low, Swiss manufacturing activity rebounded last month as indicated by SVME PMI, which hit 60.7. Clearly, producers are still seeing demand for their goods growing, which should keep output levels lofty and the labor market resilient. In fact, these conditions have also kept domestic demand solid, as the UBS consumption indicator unexpectedly jumped to 1.992. Meanwhile, consumer prices were a bit stronger than expected at an annualized 1.3 percent pace amidst weakness of the Swiss franc relative to its European counterparts. However, SNB board member Thomas Jordan played import price growth down, saying that even though the bank remains vigilant on franc weakness, they do not see any signs of inflation being stoked and rate differential still favors carry trades. Will this shift somewhat in December? The SNB is still considered somewhat eager to continue on with their rate normalization cycle, and given the robust economic conditions and mounting consumer price pressures, the bank may have just enough fundamental impetus to follow through with a rate increase.

Looking ahead to this week, the status of the greenback and carry trades will largely determine price action for the USD/CHF pair as event risk remains relatively thin. Indeed, the trend for the beleaguered pair is clearly down, and with weakness in the US dollar one of the primary forces pervading the FX markets, there is little reason to fight it. The release of the Swiss unemployment rate shouldn’t make waves for the Swissie pairs, as it is anticipated to hold steady at a five-year low of 2.6 percent. Meanwhile, the SECO consumer climate index is forecasted to ease back to 11 from 15, but still indicate broad confidence.

Canadian Dollar Sets Record Highs – When Will USD/CAD Slide End?
The Canadian dollar continued setting incredible heights against the US dollar, as overwhelming speculative buying on strong economic data pushed the USD/CAD to record depths. Continued calls for a short-term loonie correction have fallen on deaf ears, and indeed the currency finished higher for the eighth consecutive week of trade, a feat last seen in 1996. Intraday USD/CAD bounces have been met with fresh selling, and there remains admittedly little hope for a more substantive rebound. Yet currencies, much like any other asset class, rarely move in a straight line. Overwhelmingly consistent Canadian dollar gains may be eventually met by similarly strong declines, but it remains unclear when we may see such a turn. Forex speculative positioning has remained extremely net-long the Canadian dollar for quite some time now, which typically leads to worthwhile corrections. According to CFTC Commitment of Traders Data, Net Non-Commercial longs actually dipped from recent peaks through the week ending October 30. The CAD uptrend remained little disturbed, however, and we see relatively little scope for a worthwhile retracement.

The coming week of trade will prove far less eventful in terms of scheduled fundamental data, and we suspect that Canadian dollar momentum may slow. Notables on the ledger will include a total of three relevant housing reports, while a Friday Trade Balance release could likewise provide short-term volatility across CAD pairs. Tuesday's and Thursday’s housing numbers are expected to show continued growth in the domestic housing sector, as impressive labor growth continues to fuel consumption across the broader economy. Indeed, recent data showed a whopping 63,000 new jobs created in October. Given an unemployment rate at 33-year lows, there is little reason to believe that household spending will slow through the medium term. That very same demand threatens to harm the International Trade Balance, however, with a powerful domestic currency fueling already-brisk demand for foreign production. The trade surplus is unsurprisingly expected to contract through October, but we have seen relatively limited market moves on recent trade reports. As such, we look to the price of oil and general speculative sentiment as the main drivers for USD/CAD volatility through the coming days of trade.

Australian Dollar Surges to 23-year High Ahead of RBA Announcement
The Australian dollar continued its surge to significant highs on overwhelmingly bullish speculative sentiment, with rallies in gold prices and positive economic data fueling demand for the Aussie. Spot gold prices breached the psychologically significant $800 mark for the first time since 1980, and the commodity price-sensitive Australian dollar followed suit. Strong demand for high-yielders likewise boosted the Asia-Pacific currency, and the AUD/JPY currency pair initially set 16-year highs through early-week trade. Tumbles in global stock markets limited bullish momentum on the popular carry trade pair, however, and bearishness on the Dow Jones Industrial Average threatens to derail carry trade gains. Bullish economic data mitigated the effects of Dow losses on the AUD/USD pair, and impressive jumps in Retail Sales figures boosted the likelihood of higher Australian interest rates through the medium term.

The upcoming Reserve Bank of Australia interest rate announcement will likely be the highlight of short-term trade, with analysts predicting that the central bank will boost rates by 25 basis points to 6.75 percent. Indeed, all 27 analysts polled by Bloomberg News believe that the bank is certain to hike rates, and we can hardly argue with such assessments. Overwhelmingly positive economic data and strong commodity prices threaten to ignite inflationary pressures in the Australian economy. Wednesday night’s Employment Change figures are expected to show a robust 20,000 jobs gain through the month of October, leaving the Unemployment Rate at 33-year lows. Any disappointments in either the rate decision or the labor data could easily cause a pullback in the AUD/USD, but it seems as though risks remain to the topside for the Australian dollar ahead of both key reports.

The Kiwi Trails the Aussie, Have the Bulls Run their Course?
The New Zealand dollar is losing its steam. Over the economic calendar has seemingly gone back into hibernation; and growing volatility in risk appetite/aversion and anti-dollar sentiment seem to be benefitting the kiwi’s contemporaries more than the New Zealand unit itself. The waning appeal of the high yielder is not all-together that surprising however. In the past few weeks, monetary policy has turned notably neutral. Despite the 16-year high in core inflation, RBNZ Governor Bollard’s suggestion that data is weighing ever more heavy on future rate decision is lingering in the back of carry traders’ minds. As for economic appeal, the Australian dollar is easily a superior alternative for a higher yield (especially with the RBA expected to hike in at its meeting this week). Back in New Zealand, the economic calendar for the past week was littered with a number of modest improvements for second tier indicators. The October NBNZ business confidence report jumped to a seven-month high as survey participants forecast greater sales. Bolstering the inflation picture, the money supply rebounded from a 20-month low – though this is hardly a sign that hike is around the corner. Out and out a disappointment for rate watchers was the 8.3 percent drop in building permits. As a key factor in Bollard’s decision to hike rates four consecutive meetings earlier this year, any lost ground on this front only acts to as a reminder of how high the NZD/USD actually is.

Looking at the docket ahead, there are very few indicators that boast the necessary influence needed to put the kiwi back on pace to match its recent record highs. From the short list of viable economic reports, only the quarterly wage and employment reports promise any kind of volatility in the usually quiet Asian session hours. The Labor Cost report for the third quarter is expected to grow 0.8 percent, a repeat of the second quarter. However, such an indicator would likely be taken as a sign of strength considering wage growth has been one of the primary sources of consumer spending. The other just happens to be employment growth. Anxious kiwi bulls will watch the employment change from the second quarter to the three months ending in September. Hiring is already expected to decelerate from 0.7 percent to 0.4 percent. Should it slow any further, and/or the unemployment rate tick higher, forecasts for sustained consumer spending will quickly dim. And, while the market whiles away the time between scheduled event risk, a tense eye will no doubt be kept on commodity prices and equity markets. Should risky assets start to drop, the stumbling high-yielder will likely be among the first assets to be put on the chopping block.

Boris Schlossberg is a Senior Currency Strategist at FXCM.