Yield Yield Yield

Consider this. Next week a sitting Vice President of the United States my be indicted by Special Prosecutor Patrick Fitzgerald. Hurricane Wilma is headed straight for the Florida peninsula after dumping more than 40 inches of rain on the Yucatan. President Bush suffers frim Nixonian -like approval ratings of 37% while Brent Scowcroft, one of the most trusted consigliore of the Republican establishment is about to unleash a no holds barred critique of the Iraq war in this Monday's New Yorker magazine. Yet against this backdrop of political turmoil and uncertainty, the greenback continues is unstoppable ascent against the euro gaining another 108 basis point for the week. The dollar bulls rallying cry of “Yield, yield, yield!” seems to trump all other concerns as the market is now convinced that 4.25% Fed funds rate is in the bag.

None of the dollar dour events mentioned above may come to pass,  in which case the  bulls may continue to control the price action for the near term as they gunning for  yearly lows in the EUR/USD. However this week, we believe that event risk clearly lies with the greenback so caution should be the order of the day.  

Yes or No                      

A schizophrenic week for the euro as disparate messages from Issing who sounded hawkish at the beginning of the week were countervailed by Gonzales-Paramo whose dovish statements on the future of ECB rate hikes drove the unit down 100 points in a matter of 2 hours in Friday's trading.  With euro now lagging the dollar by 175 basis points the ECB must begin to close the interest rate differential if the euro is to have any meaningful chance to rally in the near term. But with state of Euro-zone recovery still tremendously fragile, European monetary authorities are very cautious in their policy posture for fear of stifling what little growth there is.

The economic data however, has not been bad. With Industrial Production jumping 2.6% as lower euro fuels export driven demand and the ZEW survey printing at  39.2, though lower than expected but still an improvement on the month prior sings of a rebound continue to become evident. Next week the calendar is practically barren with only inflation at the front of the week and Consumer Confidence data on Friday. Though it is tempting to argue for a euro long as fundamentals show improvement, given the recent price action in the pair we believe no one should play hero until such time that EUR/USD can clear and hold the psychologically important 1.2000 barrier.

Unrelenting Rise

Woe unto any yen longs! They have had to endure one of the strongest trends of the year as the carry trade speculators plowed into the pair  driving it up by 600 points over the past two months with virtually no correction along the way.  Last week the story was much the same as the week prior with yen chalking up the worst performance of the all the majors, as it lost 152 basis points to the dollar. However, having nearly tagged the 116.00 figure several times the price action may be displaying the first signs of exhaustion.  On the fundamental front, Japanese economic performance continues to show improvement.  Case in point was last weeks Tertiary Index results which printed far in excess of expectations at 1.70% vs. 0.9% projected.

Next week the focus will turn to employment and Worker Household Spending which is expected to post a small increase compared to last year. If oil can finally tumble below the $60 handle and Japanese eco data remains firm perhaps the long suffering yen longs will get some relief.

Pound Holds Its Own

In a week of  dollar dominance the pound was the lone dissenter barely giving ground against the greenback as the unit only lost 1 basis point versus the greenback. The source of it's strength was the surprising rebound in UK Retail Sales which jumped by 0.7% versus projections of only 0.3% gain.  The market took that news as evidence that UK consumer may yet be alive and kicking which could rescue this years Christmas shopping season and forestall any further BOE rate cuts.

Still the notion that UK economy may have escaped the worst is far from certain, especially in light of the latest story from FT that notes earning warnings from UK companies have increased at the biggest rate since 9/11. With only CBI Industrial Trends and Mortgage Lending figures on the horizon, the eco calendar holds little event risk this week which most likely means that the pound will trade off US newsflow and continuing speculation regarding BOE actions.

Swissie Retraces

Like the pound the Swissie gave ground against the greenback only grudgingly dropping just 72 basis points for the week. Arguably running the best economy amongst the majors at the moment, the franc is hampered only by its ultra low interest rates. However, with SNB likely to raise rates at the December meeting to 1% perhaps some of the selling pressure on the Swissie from the variety of carry traders will begin to ease. In the meantime next week brings the UBS Consumption Indicator and the KOF index which should continue to provide further proof that Swiss economy is expanding nicely.