US Dollar: Unstoppable
 
Trade deficit at record -$66 Billion? No problem. The market looked at what is now almost an -$800 Billion annual gap between what US imports and what it exports and simply shrugged off the news as though it was a petty  debt amongst friends. When will the market finally care? Perhaps when US deficit reaches a nice round sum of $1 Trillion dollars, speculators will stop and begin to ask - how will this ever be paid back?

Until such time, the havoc in France and the inopportune announcement of a 3% VAT tax hike in Germany kept the euro pinned and dollar bulls in control of the pair for the majority week.  The  EUR/USD ended down yet another 68 basis points - its fourth losing week in a row. 

In contrast to last week, next week is brim full of economic news with Retail Sales, TICS and PPI numbers most important data on the calendar.  With economic reports back to the forefront it will be interesting to see if the greenback can sustain its momentum in the face of what may prove to be challenging data.

Euro: Done?              

While the streets of Paris burned, European industry hummed.  In one of the more surreal weeks of trading in FX the euro plummeted ever deeper below 1.2000 territory even as economic data continued to present a positive picture. With German Retail PMI, Industrial Production and Current Account all printing materially better than expected results euro should have at least stabilized but the market ignored all economic facts as traders focused on the incendiary situation in France which by the  end of the week appeared to have cooled off.   However, just as hostilities began to simmer down, Germany announced the passage of the 3% VAT tax which the market took very badly, with most participants fearing that it will have major negative repercussions on consumer demand.  Whether this is true or not remains to be seen, but we noted on Friday, “It is more than ironic that markets have decided to reward the dollar for engaging in  the most profligate fiscal spending policy in the history of the country (the present Administration has amassed more foreign debt than all other prior US governments combined)  while punishing the euro for attempts at fiscal responsibility.”

Next week ZEW and GDP may finally provide some support to the beleaguered currency, but for the time being the ball remains in dollar longs hands.

Yen: Topping Out?

Oil dropped to $57.50 per barrel while US Trade Balance ballooned. No matter. The yen remained at near two year low levels against the greenback and the only positive piece of news for yen bulls was that the rate of ascent in USD/JPY has stalled. Momentum precedes price so perhaps every anti-carry fader can take solace in the fact that the turn is near. However, the eco backdrop offered few positive reasons to trigger a yen rally as Eco Watchers data and the Machine orders demand both dropped below expectations. On the bright side Industrial Production continued to percolate rising 0.4% against 0.2% projected.

It is becoming clearer each day that lower crude prices represent the final piece of the puzzle for Japanese recovery. While industry has been able to withstand the hike in costs, Japanese consumer spending is being pinched despite  generally strong economic performance. If oil continues to remain below $60 and begins to test the $55 handle the effects of the “virtuous cycle” on Japanese consumers should translate into better growth and spending.  All of this long winded analysis boils down to simply this: although the carry costs are brutally punishing to the yen longs, the move up in USD/JPY appears far closer to the end rather than the beginning. While dollar bulls eagerly focus on the 120 figure, a drop to 115 level is just as likely, if the carry liquidation trade starts to take hold as we head into the end of the year.

British Pound: Bleak But Pehaps Double Bottoming

Signs of deterioration in the UK economy continued to surface last week with Industrial and Manufacturing Production producing worse than expected results. To add salt to the wound, Tony Blair was handed his first major legislative defeat by the members of his own Labor Party who rebelled at the new rights-depriving provisions in the anti-terrorist bill. According to the latest poll by Populus published in The Times. 44 per cent of respondents believe it would be better to have current chancellor of the exchequer Gordon Brown take over as prime minister. Though Brown is greatly respected in the FX world, signs of turmoil and disarray at 10 Downing street did not exactly infuse currency traders with confidence vis a vis cable. Nevertheless, the unit only lost 43 basis points for the week against the greenback as BOE kept the rates unchanged.

Next week will see a slew of data including unemployment and inflation gauges as well as news from the housing front through the RICS survey. Traders will need to see some positive results if the pound is to have a chance to rally, though having approached its yearly lows, the unit could gain simply on dollar weakness if the shorts decide to begin covering their positions.

Swiss Franc: Bump In The Road

Data last week signaled the first signs of slowdown in Swiss recovery in over a month as SECO consumer climate and Unemployment report both showed slightly worse than expected results. However the Swissie held its own against the greenback slipping only 30 basis points and continued to gain strength against the euro as markets expectations of an SNB rate hike in December were far more definitive than those of an ECB hike during the same time frame.  Yet another reason for traders to favor the franc these days is the geo-political and financial risk of its much larger next door neighbor. While the riots in France received headline coverage last week, perhaps a more interesting piece of news emanated form the ECB which stated that the bank would only accept A- graded or better collateral from its member nations in its repo operations. This was a not-so-subtle attempt by the central bank to imbue some fiscal discipline into Greece, Portugal and most importantly Italy in order for them to comply with EZ mandated rules regarding expanding budget deficits. With the franc's  fiscal prudence and stability serving as a marked  contrast to the problems in the EZ it remains an attractive anti-dollar bet.

Boris Schlossberg is a Senior Currency Strategist at FXCM.