US Dollar
The dollar quietly weakened throughout the US trading session. We released our FXCM Speculative Sentiment index this morning at 10:30 am EST, at which time the SSI ratio for the EUR/USD remained net long from last week. Later in the afternoon however, the ratio flipped to net short, which as our favorite contrarian indicator, coincided perfectly with the pop higher in the Euro. The catalyst for the move upwards was the much weaker Philadelphia Fed survey and mildly disappointing industrial production report. The market had expected the manufacturing activity index to slow to 15.5 from 17.3, but the index slipped all the way down to 11.5. Yet it is still encouraging that the index remains in expansionary territory. Also, shipments as well as the number of employees did improve this month. As far as industrial production goes, even though the growth was weaker than expected, the expansion was still positive and on top of that, was the strongest growth in seventeen months. Economic data released earlier this morning was also mixed. Housing starts dropped 5.6 percent in the month of October from 2.13 million to 2.01 million while building permits experienced an even deeper dive. We have noticed that over the past few weeks, there have been more and more evidence of brewing weakness in the housing market. This comes as no surprise since we have said repeatedly that higher interest rates equal higher mortgage costs, which will eventually stifle the market's strong and shockingly resilient demand. Jobless claims highlighted an improving labor market picture with claims falling 25k over the past week from 328k to 303k.
Euro
The Euro is showing signs of trying to form a short term bottom against the dollar. Continued speculation surrounding a possible rate hike by the European Central Bank as early as December may also be helping the currency a bit. Economists are expecting a 25 basis point rise in the next meeting despite heavy pressure from business leaders and certain individuals within the government. The latest buzz comes from rumors following a write-up in a fund advisory report. The ECB has been very concerned about inflation from food and energy prices and that they will continue to rise into the first half of next year. The EU Commission has already lifted its inflation forecasts for both this year and next year. It seems that the group expects inflation to be above the central bank's target for another year. By the same token, the ECB also cut its growth forecasts from 1.6 percent issued back in April to 1.3 percent for this year. Our opinion remains that a hike in December is unlikely, especially since the central bank expects growth to be weaker than they initially thought. In addition, the recent downtick in oil prices should also alleviate some inflationary concerns. The only piece of notable data today was Eurozone industrial production for the month of September, which contracted by 0.4 percent, instead of increasing 0.5 percent as expected. This depressing data caused only a slight blip for the Euro as traders realized that production may have slowed during that month due to high oil prices. Also, as the Euro has fallen dramatically over the past three months, the currency is so oversold that it would take a disastrous announcement to cause a serious sell off. With production in the US also coming in as disappointing today along with other less-than-stellar data, the Euro pushed its way up after the US markets opened.
British Pound
After struggling for ten consecutive trading sessions, we finally saw a day of strength in the British pound. Compared to the rest of the majors, the rally in the pound was rather marginal. Concern about the future of UK interest rates as well as the overall health of the UK economy has pound bulls worried. October retail sales in the UK, rose, as expected, by 0.2 percent from September and 1.5 percent from the same month last year. This is the third month in a row that sales have increased; signaling a slow recovery in consumer spending is beginning after a year-long slump. Unfortunately, much of this gain continues to be from retailers offering price incentives in order to keep sales volume up. The gloomy consumer spending may take a heavy toll during the upcoming holiday season as many retailers have already started offering the sales that normally start much closer to the December holidays. As the UK saw a larger than expected drop in inflation in a release on Tuesday, the Bank of England can focus on stimulating economic growth. A recovery in retail sales does not support another rate cut, however businesses are cheering for one as this may not be a true recovery in spending.
Japanese Yen
The yen finally saw some relief today from the continual dominance of the dollar as it rebounded from the two-year lows hit during yesterday's trading. Rumors that there may be another revaluation of the Yuan in the works as US President Bush visits China next week is one of the catalysts that is driving the yen higher as traders believe that strengthening the Yuan will allow for a strengthening of many East Asian currencies. The People's Bank of China denied these rumors early this morning, but the yen shrugged off these comments quickly as the PBoC has a history of trying to catch the market by surprise. The only fundamental announcement out of Japan today was the final numbers for machine tool orders in October, revised up from the preliminary announcement of 0.8 percent, to 1.1 percent. The Bank of Japan also began its monetary policy meeting today, with an announcement due out tomorrow, but this also is having little effect on the yen as the policy makers are not expected to change their position anytime soon.
Kathy Lien is the Chief Currency Strategist at FXCM.