US Dollar: Still Strong
 
At first glance, it appeared that the dollar was finally going to give way in holiday shortened trading, but news for dollar bulls has been nothing but positive while Euro data stumbled badly. The only two material releases of the week - the U of Michigan survey and the LEI report both produced better than expected results confirming once again that the US economic juggernaut continues to roll on.

The true test of dollar strength however will take place next week when a slew of economic reports will provide a much better picture of the state of the US economy. Home Sales, Chicago PMI, ISM Manufacturing and GDP are on the schedule, but as is so often the case with the currency market, the most important release comes at the end of the week when NFP' will be released.  The market is looking for a very healthy jump to 214K new payrolls compared to a disappointing 56K last time. The employment number cannot really be overestimated in its importance because if it misses once again it will put every dollar bullish assumption into question - from interest policy to future growth projections for the US economy.

Euro: IFO Kills The Rally

Note that 4 out of the 5 releases for Euro-zone last week met or beat expectations. Unfortunately for euro bulls, the one that missed was the only one that mattered. The IFO survey of German business confidence dropped to 97.8 from 99 as higher oil prices, the prospect of political quagmire and the overall state of economic malaise, subdued executives optimism for the near term. Nevertheless the reading was the second highest in 2 years as Gernot Nerb, IFO's chief economist suggested, “the indicator fell lightly in November, but we have to take into account that it made a huge leap in October.”

Still, the euro is unlikely to produce any meaningful rally until the Euro-zone can demonstrate consistent economic growth. This week's ECB rate hike is already priced in and unless EZ's economic performance improves, further monetary tightening is unlikely. The Euro-zone is chuck full of data as well with German employment numbers and PMI Manufacturing all on the calendar. However, the pair is far more likely to trade off of the US economic news, although if EZ data manages to beat expectations, perhaps the euro can at least stabilize.   

Yen: 120 Or Bust

Well, the mild retrace to the 118.50 level looks to have been all that yen bulls were able to muster amidst a week of disappointing data and continued mispositionning by our book. The latest SSI data showed a mind boggling 4 yen bulls for every dollar long suggesting that 120.00 was a real possibility as every trader is still trying to pick a top in the pair. As we wrote Friday "our contrarian speculator sentiment index has once again moved to extreme levels … As long as traders continue trying to pick a top in this move and as long as Japanese authorities refuse to tighten monetary policy the dollar yen carry trade will march onward and upward."

Next week all the news is front loaded with Employment data workers Household spending and Industrial Production all due Tuesday. With institutional resistance to removing the zero rate policy still very strong and oil prices continuing to hover near the $60 handle, there are few catalysts for the yen rally.  The 120 figure beckons, after that the market will have to assess its next move.

British Pound: Sterling Suffers New Lows

We are starting to run out of alliterations to describe the seemingly weekly decline of the pound. Although the unit has the smallest decrease against the dollar this week, falling only 12 basis points, this marked the fourth week in a row that cable registered a drop in value. While the housing market appears to have stabilized other measures of economic activity continued to show weakness. Most notable of all was the CBI Industrial Trends Survey which offered no improvement with readings remaining at -25. As a result the pound hit yearly lows at 1.7065  and may well break the 1.7000 figure in the near future if the eco news continues to flounder.

Next week traders will key off PMI surveys and the Distributive Trades data. The key question facing the market is: Has the UK economy stabilized or is it on the verge if a free fall into a recession? At present  it appears as though the answer could go either way.

Swiss Franc: Swissie Rules the Day

On Friday we wrote,” The most interesting news of the night was generated by the Swiss franc, where the KOF index of leading indicators once again produced a massive upside surprise skyrocketing to 1.12 against expectations of .85. The data confirms the fact that Swiss growth is significantly outpacing the Euro-zone recovery. In reaction to the news the EUR/CHF cross, typically one of the least volatile pairs in FX, collapsed by 35 points in less than an hour as traders plowed into the Swissie.”

Swissie's only drawback is its ultra low interest rate second only to the Japanese yen in its paltry 75 basis point yield. The SNB is expected to raise rates at its December meeting to 1% but if the Fed continues to tighten the franc will be pressured by the carry trade order flow.   

Boris Schlossberg is a Senior Currency Strategist at FXCM.