US Dollar: A Week Of Reckoning

Did someone say data deluge? This is the week when dollar bulls put their money where their mouth is. IFR markets ever prescient John Noonan writes, “The FOMC meeting on Tuesday will be the main event for the markets this week…FX analysts feel that 'no change' to the statement will be USD supportive, as the market will start pricing in the possibility of two or three more hikes to follow the 25bp rise on Tuesday. On the other hand a change in the language would likely result in the USD coming under broad pressure, as many longer-term players see the end of the Fed tightening cycle coinciding with the resumption of the USD bear trend.”

However, the FOMC meet is not the only item on the calendar. Both Trade Balance and the TICS data are on the agenda as well as Retail Sales, IP and Empire and Philly Fed. This is the final week before most major market players  close their books for the year and the amount of news flow may create some end of year volatility as everyone crowds in to place their bets.

Euro: Two Steps Forward One Step Back

The euro managed to squeeze out a gain of 80 basis points this week aided in no small part by bargain hunting from a variety of Central Banks looking to diversify their reserves at near year low prices. 

The week began on a positive note for the Euro-zone with Retail PMI numbers nudging higher to 50.7 from 50.6 the month prior. The report provided further evidence that EZ consumers were awakening from their two year slumber, as the export led recovery was finally taking hold in the region. German Industrial Production also perked up smartly rising 1.10% versus 0.7% expected. But the end of the week was marred by horrid French Manufacturing data which dropped -2.40% far steeper than the 0.1% projected rise. As we wrote on Friday, ”The plunge was precipitated by a decline in auto sales caused by higher oil prices and dour consumer sentiment. Given the fact that riots engulfed the country in November, next months data may not be much better.“

Sentiment surveys take center stage next week as both the ZEW and IFO are expected to release their readings. Market anticipates only slight improvement in tone which is consistent with  the gradual pace of the EZ recovery. In short if the euro is to get a lift it will be far more likely come from anti-dollar bets rather than anything the single currency can muster on its own.

Yen: Perhaps a Pause?

The yen managed to lose only 4 basis points to the greenback this week, which given the recent history of trading in the pair could actually be considered a win by yen bulls. The eco news was mixed with Household Spending rising 2.0% vs. 1.8% expected but GDP printing materially lower at 1.00% vs. consensus of 2.30%. Still between the two the Household spending number is more important, as the contraction in GDP was primarily a result of curbs in government spending which is essentially code words for make work projects, while the rise in HH Spending - for the 2nd month out of last 3 - may finally signal that the Japanese consumer can begin powering the Japanese economy.

Next week, it will be interesting to see the market's reaction to the FOMC rate hike. The yen has been mercilessly pounded by carry traders and the Fed's move will add yet another 25bp to the spread. The news may be mitigated by the release of the quarterly Tankan survey - the country's most important economic release which is expected to show a rise to 23 from 19. If however, the Japanese data disappoints and the Fed retains its hawkish rhetoric, 121.50 may give way and yen longs may scramble for cover.  

British Pound: Pound the Indomitable

You have to hand it to pound bulls. UK economy has hardly been a bastion of strength, with scores of economic releases producing sub par results, yet the unit continues to climb higher raking in the largest gain against the greenback amongst the majors this week. Despite the fact that Industrial Production once again fell below expectations and PMI Services continued to show a contraction in growth, the unit rose 128 basis point versus the dollar. Part of the reason for the strength was the BOE announcement to keep rates at 4.5% thus maintaining a slight but positive spread to the dollar. At a time when yield seems to be the primary focus of the global speculative community the FX market decide to give cable the benefit of the doubt.

Next week attention turns to UK employment data and Retail Sales numbers. For sterling bulls it will be crucial to see some signs of stabilization and possibly recovery in UK economic demand. Otherwise the harsh reality that the country may be sliding into a recession will begin to weigh on both the BOE and the FX market.

Swiss Franc: Solid As a Watch

Swiss economy performed much like the country vaunted watches - no surprises. The unemployment rate remained at 3.7% far lower than its much larger next door neighbor and the Swissie continued to make headway against the euro reaching a 1 month low of 1.5359.

Next week the much anticipated SNB rate hike may provide further fuel for gains especially if the Central Bank assumes a hawkish posture. Despite its strong economic performance, the franc has been weighed down by carry flows. If the market becomes convinced that the SNB is on a mission to hike in 2006, those pressures will abate and the EUR/CHF cross may weaken further as traders factor in the growth differentials.

Boris Schlossberg is a Senior Currency Strategist at FXCM.