US Dollar Backs Down from Resistance, US Holiday May Delay Breakouts Next Week

The US dollar was not able to make a successful break higher on Friday, as a look at the trade-weighted US dollar index (DXY) shows solid resistance at 88.35. Indeed, we saw that the CBOE’s VIX volatility index managed to cool from yesterday’s record close, while Treasury yields on two, five, and 10-year notes and 30-year bonds rose from their lowest levels since the Treasury began regular issuance of the securities. The markets appear to be hopeful that President-elect Barack Obama’s selection of New York Federal Reserve Governor Timothy Geithner to be the next Treasury Secretary will yield a solution to the credit crisis. Looking ahead to next Monday, the National Association of Realtors (NAR) index of existing homes sales is forecasted to show on Monday that purchases fell 5 percent during October to an annual rate of 5 million from 5.18 million. Other factors to watch within this report including median home prices, which were down 9 percent in September from a year earlier, and supply levels, which had fallen to 9.9 months in September from 10.6 months. Overall, there are downside risks for both the sales and price components, as deteriorating labor markets along with tight credit conditions do not bode well for a recovery in the US housing sector in the near term. Additional key releases for the next week include Q3 GDP revision and consumer confidence on Tuesday along with durable goods orders on Wednesday. It is also worth noting that the US markets will be closed on Thursday for the Thanksgiving holiday and will also close early on Wednesday and Friday. This could lead to lower liquidity, which would normally signal the potential for quiet trading, but since volatility remains so high we could actually see exceptionally choppy price action.

Euro, British Pound Consolidations Continue as Euro-zone PMI Signals Deepening Recession

The euro continues to consolidate within a narrowing wedge formation that has most recently kept EUR/USD contained to a tight range of 1.2450 - 1.2600. Likewise, the British pound whipped between 1.4700 - 1.5050 over the course of the day with little in the way of fundamental drivers. European economic data released this morning didn’t have a big impact, as the euro jumped at 5:00 ET despite the disappointing results of the Euro-zone PMI reports. Indeed, composite PMI showed that the Euro-zone’s manufacturing and service sectors contracted at the fastest pace in at least 10 years in November. Euro-zone GDP figures have already reflected recession, as the economy contracted 0.2 percent during both Q2 and Q3. Given the dismal nature of this PMI reports, it seems likely that GDP will probably fall negative during Q4 as well. Looking ahead to Monday, the IFO index of German business confidence is forecasted to show broad declines in sentiment on the business climate (from 90.2 to a 5-year low of 88.7), current economic conditions (from 99.9 to a 3-year low of 96.8), and the outlook for growth (from 81.4 to a record-low of 81.0). However, the November 11 release of the German ZEW survey shows that investor confidence on the economic outlook improved very slightly, while sentiment on current conditions fell further. Overall, businesses, investors, and consumers are likely to hold a cautious view of growth going forward, especially as the Euro-zone tips into recession and financial market instability shows no signs of easing. The release of this indicator at 4:00 ET tends to be a short term market-mover for the euro, though traders shouldn’t look for follow-through during the rest of the day.

Japanese Yen Pulls Back From Resistance as Dow Gains During Last Hour of Trading, Closes Up 6.55%

The Japanese yen tumbled on Friday as a last-minute surge in risk appetite lifted carry trades. Indeed, the Dow Jones Industrial Average ended the day up 6.55 percent at 8,046.66, but all of those gains were made during the final hour of trading. With our latest forex correlations report showing a tight correlation between USD/JPY and the Dow, it’s easy to see why the Japanese yen ultimately ended the day down 2.34 percent against the US dollar, over 3 percent versus the British pound and euro, and more than 5 percent against the Australian dollar and New Zealand dollar. In economic news, the Bank of Japan left rates steady at 0.3 percent, as expected, but issued bearish commentary saying, “The outlook remains highly uncertain and given the slowdown in overseas economies and the turmoil in global financial markets, it will likely take some time for the necessary conditions for Japan’s economic recovery to be satisfied.” However, Bank of Japan Governor Masaaki Shirakawa also suggested that he wanted to avoid a return to Zero Interest Rate Policy (ZIRP), as additional rate cuts “would have many adverse effects on the functioning of the money market.” Regardless, we rarely see Japanese interest rate outlooks have a large impact in the forex markets, as risk trends dominate the direction of the Japanese yen.

Canadian Dollar Brushes Off Plunge in CPI, Gains Could Accelerate on Canadian Retail Sales

The Canadian dollar generally brushed off the weaker-than-expected results of Canadian CPI on Friday, as the currency ended the day up nearly 4 percent versus the greenback. Focusing on the data, Canadian CPI fell by the most since 1959 during the month of October, bringing the annual rate down to a 5-month low of 2.6 percent. The decline was led by gasoline prices, but even the Bank of Canada’s core measure of CPI slipped, though the annual rate held steady at 1.7 percent. Nevertheless, the data suggests that inflation in the country is likely to fall below their 2 percent target sooner rather than later, and thus, Credit Suisse overnight index swaps are now close to fully pricing in a full 50bp cut at the BOC’s next meeting in December. Looking ahead to next week, Tuesday’s release of Canadian retail sales is forecasted to have gained 0.3 percent in September, and excluding autos, retail sales are forecasted to have risen 0.2 percent. However, there is potential for a surprisingly strong reading given the solid employment numbers we’ve seen lately. In fact, the Canadian economy has added on workers for the past three months, and a record 106.9K in September alone. Furthermore, the September reading of Canadian wholesale sales surprisingly jumped 1.5 percent, and can sometimes serve as a good leading indicator for the headline retail sales report. As a result, this 8:30 ET release has the potential to lead the Canadian dollar higher, though a disappointing figure could weigh the Loonie down.

Terri Belkas is a Currency Strategist at FXCM.