A very sleepy session to the start of the week in FX as Japan's markets are closed for a holiday and US celebrates Columbus Day with Banks and Fixed Income markets closed here as well. In Germany, Angela Merkel and Gerhard Schroeder have finally settled their differences with Mrs. Merkel taking the helm of the Chancellorship and Mr. Schroeder stepping down from all governmental posts. The coalition government will have an equal number of CDU and SDU Cabinet members with the Socialists holding the foreign ministry post and Mr. Stoiber expected to become the next finance minister. The news provided a mild boost to the euro as the political uncertainty surrounding Germany for the past three weeks appears to have been resolved. The market, however, is skeptical about the effectiveness of the "grand coalition" government and the euro is unlikely to receive any long term benefit from this outcome until both parties can demonstrate to the world that they will set aside their partisan differences and will legislate in a businesslike manner.  We are actually more optimistic than the consensus view about the possibility of coalition rule.  Germany is clearly in need of serious restructuring and with neither the far right nor the far left able to sabotage the reform agenda, the two mainstream parties may just be able
to create a workable plan of action.   

On the economic front, the German Trade Balance reported a bit softer at 11.6 Billion euros vs. 12 Billion expected, but the shortfall wasn't for lack of export growth which increased by a substantial 3.5%. Rather, the record energy prices of the past month helped to push Imports up to a whopping 6% month over month gain.

Energy costs also played havoc with UK inflation numbers, as UK Output PPI rose for the third straight month jumping to 3.3% annual level. The BOE is now caught between a rock and a hard place since it is unable to lower rates to stimulate lagging consumer demand for fear of exacerbating inflation.  With UK economy generally leading the US economy by six months, we fear the exact same dynamic may face the dollar. Over the week-end Fedex announced 5.5% rate increases, the highest in nine years, an action that is likely to reverberate throughout the US economy and only turn the Fed more adamant in its rate hike policy. All of this tightening is likely to cap any further appreciation in housing and it turn make the US consumer even more gloomy as we approach the Christmas season. 

Boris Schlossberg is a Senior Currency Strategist at FXCM.