• Euro Reversal Underway
• Busy Week Could Deliver Volatile Moves in Dollar
• Yen Rebound Could be Short-lived

US Dollar
On a day devoid of any significant economic data, we saw a violent reversal in the dollar.  There was not much to explain the move on the wires aside from heavy rounds of stop triggering.  We did see a weaker than expected existing home sales report, but with interest rates soaring, a slowdown in the housing market was far from surprising.  However in our opinion, after some position squaring and profit taking ahead of the Thanksgiving holiday, US traders returned in force to assess what this week could bring for the markets.  There are a tremendous amount of key economic data and events that will undoubtedly trigger big moves for the majors.  The biggest focus is the first interest rate hike in 2.5 years for the European Central bank.  The market will be paying very close attention to the accompanying press statement to see if the Eurozone could possibly be the next major country to undergo an aggressive tightening cycle in the months ahead.  In the US, there is a barrage of important data on the calendar including GDP, non-farm payrolls, consumer confidence, durable goods, Chicago PMI and ISM. The week has started off on a softer note with Black Friday and weekend holiday shopping coming in slightly weaker than expected.  Although retailers overall had a good weekend, most of the revenues were generated by deep discount retailers such as Wal-Mart while mall based and specialty stores failed to see any major jumps in revenue.  The market has also not forgotten about the Fed's cautious comments last week.  In the minutes from their November 1st meeting, some members warned about going too far with rates and the group mulled over the need to change the rate language before long.  Meanwhile, the Treasury refrained from accusing China from manipulating its currency once again.  When dealing with China, the US government is treading very carefully, trying its best to balance recognition of China's latest moves with pressure for more changes sooner rather than later. 

Euro
The EURUSD looks as if it has finally been able to make a real turn.  As we had mentioned last week, technicals, fundamentals and sentiment were all lining up to forecast an imminent breakout to the upside.  Technically, we were seeing higher lows and higher highs, fundamentally, the ECB is gearing up for a rate hike while sentiment as measured by the FXCM SSI was encouraging a turn.  With all three still supporting an upside move, today's rally may be illustrative of a real bottom.  Yet, as we all know, currency moves can turn on a dime and this week there are plenty of catalysts that can cause it to do so.  First off, if Trichet says loud and clear on Thursday that the rate hike is a one off move and there will be no more follow-up moves, then the Euro rally could lose momentum.  Secondly, if any of the US data due for release this week comes in exceptionally strong, dollar upside momentum could resume.  Most interesting though still seems to be the observation we made last Monday.  We had said that over the past 5 years, aside from 2001, we saw pretty big trending moves in the month of December, all of which were dollar negative and Euro positive.   As we move into the first week of December, history seems to be repeating itself and should this continue, we have yet another supportive argument for a continuation of today's rally in the EURUSD. 

British Pound
Broad dollar weakness has helped the British pound rally one percent against the greenback.  This is the most significant rebound that the beleaguered currency has seen in over a month.  Unlike in the Euro, traders will probably be looking for opportunities to sell on rallies rather than to buy on an upside breakout.  If you recall, it was only last week that the Bank of England trimmed both inflation and growth forecasts.  Highlighting the continued disparity within the central bank, BoE Chief Economist Bean forecasted a pickup in growth next year while late yesterday, BoE Deputy Governor Barker raised concerns about long term growth.  The market still expects another rate cut early next year, which will keep the UK as the solitary member of the rate cut camp.  Today's mergers and acquisition flow should give sterling bears an even better reason to look for opportunities to reinitiate short positions.  Britain's Rexam Plc announced plans to bid for the bottle business of France's Saint-Gobain for approximately EUR4.5 bln.

Japanese Yen
The dollar has broken below the 119 level against the Japanese Yen.  At this juncture, it may still be premature to call the latest move a top in USDJPY.  Although the yen could be benefiting from today's drop in oil prices, unlike the Euro, fundamentals is not supporting a reversal.  Retail sales for the month of October came in weaker than expected while the Japanese government continues to crush hopes for an end to the country's zero interest rate policy.  According to LDP Chief Nakagawa, Japan has yet to "completely overcome deflation."  This echoes the Prime Minister's recent comments that the country may not be prepared for a move away from quantitative easing.  This also means that while the Fed will be continuing to move forward with its interest hikes, Japan will continue to stand put, at least for the time being.  This growing interest rate differential in favor of the dollar should support further gains in USDJPY.