US Dollar: Hailstorm Of Data

Our absolute favorite economic blogger General Glut put it best on Friday with his trenchant observation that â�,��"Fourth quarter shows the end of cheap creditâ�,�. When all is said and done and the hundreds of explanations for the paltry GDP figures of 1.1% vs. 2.5% expected are dispensed with, the ultimate truth  will rest on the fact that for the past two years the US consumer has been carrying the global economy on his back by the use of ever present and inexpensive credit in the form of home equity loans. No more cheap money - no more growth. As mon Generale notes, â�,��"Why the big cutback on spending? Obviously part of the answer is higher energy costsâ�,�¦ The neglected side of the story is the American consumer's cutback in deficit spending. In the third quarter, the US personal savings rate was -1.8%, while in the fourth quarter Americans tried a little harder to live within their means, taking the personal savings rate to -0.4%. That cutback in spending on credit meant less spending on big-ticket items that need creditâ�,�¦ which saw real spending in 2005:IV drop to its lowest point in over four years.â�,�

Both, the US stock markets and the currency markets rallied off the data though by drawing antithetical conclusions. Equities took the news to mean that Fed will stop at 4.5% while FX traders eagerly bought the Snow job from the US Treasury Secretary that the report was â�,��"anomalousâ�,� and growth was far better than reported.  Next week the truth will out as a slew of data (FOMC, ISM,  NFP) hits the market. When the dust settles traders should have a much better idea about the true direction of US economy. For the EUR/USD 1.1950 remains the critical level of support. If it gives dollar bulls will have regained control and the US growth scenario will hold for the time being.

Euro: Green Everywhere Except on Scoreboard

After bursting out of the gate Sunday night in Asia when the EUR/USD  broke the 1.2300 figure, the euro spent the rest of the week giving back the gains. By end of Friday the unit lost 30 basis points to the buck as the markets ignored the tepid US GDP figures and focused instead on the better than expected US New Homes data which suggested that US growth maintains pace allowing the Fed to continue raising rates.

Rates remain the key driver in the pairs pricing, though the consistently improving European economic performance may eventually catch the marketâ�,��"�s eye. Ironically enough, as weâ�,��"�ve pointed out in past the path to a higher euro may lie through a lower euro. The longer the currency remains within the 1.2000 area against the greenback, the more beneficial it is to the Eurozoneâ�,��"�s vital export sector which in turn should lead to a stronger EZ recovery. EU monetary affairs commissioner Almunia noted last week that EZ GDP estimates may be revised upward to 2.0% - almost double last yearâ�,��"�s performance.

Next week, German Retail Sales and EZ Unemployment data may catch the attention of the market though the pair will most likely trade off of US news events. One possible bombshell to consider â�,�“ ECB meet next week. Though almost no one expects a rate hike, a surprise move by Mr. Trichet could spark a euro rally.

Yen: Adieu Deflation?

This Mondayâ�,��"�s Asia session may tell the story of USD/JPY for the rest of the week.  Why? Workerâ�,��"�s Household Spending figures. For the past few months, the great monetary debate in Japan has centered on exactly when will the BOJ abandon its multi year Zero Interest Rate Policy instituted to fight the countryâ�,��"�s decade long battle with deflation. Last week in a hint  that a turn may be near Tokyo CPI registered its second consecutive m/m gain. In fact the numbers rose at the fastest pace since 1998. Retail Trade also posted a mild upside surprise climbing 0.5% vs. 0.4% expected.

However, the true sign of the end to deflation will occur only when the Japanese consumer begins to spend. Thatâ�,��"�s why this monthâ�,��"�s HHS figures may be so critical. Last month the numbers contracted by -0.7%. In fact in 2005 this report showed m/m declines in 7 out of 12 months â�,�“ hardly a bastion of strength.  Yet if the HHS figures do report 0.4% gain as predicted, taken together with the positive data from last week, they may convince the market that salad days of the yen carry trade may soon be over. No doubt, next weekâ�,��"�s FOMC decision could still have a strong impact on the pair, but  with USD/JPY approaching overhead resistance at 118.00, dollar bulls may find slow progress ahead unless Japanese data disappoints once again.

British Pound at Crossroads

Cable lost the least against the dollar last week, dropping only 19 basis points but eco data continued to suggest a mixed picture for UK economy. GDP performed a bit better rising 0.6% versus 0.5% expected with services expanding at 0.9% pace. Manufacturing however,  continued to suffer as the Industrial Trends survey reached a new low of -28. Housing as always remained key and to that end the BBA Mortgage Data contained some sour news. The number of loans approved dropped by nearly 20,000 â�,�“ a staggering decline to 51,233 from 71,310 in November,  So much for the UK Housing bubble. Yet despite the decline in volume housing prices have kept the bid and the market will now watch next Monday Nationwide data with caution.

The BOE is clearly fighting a rearguard action, desperately maintaining the appearance of a cool and collected inflation hawk when in fact UK economy remains on a precipice of contraction.  If this week brings further signals of weakening from PMI Manufacturing and Construction surveys,   the MPC members will feel the pressure to lowering rates soon. The 1.7500 region is key support and if news turns ugly cable may well revisit the 1.7250 lows of the most recent double bottom.

Swiss Franc KOFs It Up

Priced to perfection. That was the problem for Swissie bulls this week as the unit lost nearly 200 points against the greenback on Friday after the KOF index of leading indicators failed to meet expectations. The report printed at 1.22 versus 1.42 consensus while last monthâ�,��"�s data was adjusted downward to 1.17 from 1.36 originally reported.  The news indicates that while the Swiss economy continued to perform admirably, the growth may not be nearly as robust as the market anticipated.  Indeed,  SNB President Roth articulated that point in comments  made mid-week.  End result? Swissie may underperform on the crosses next week especially against the euro if the market begins to price in interest rate differentials. The two Central Banks are still projected to raise rates each quarter in 2006, but should SNB decide to skip a round, EUR/CHF may see more upside.

Next week Trade Balance and PMU data should offer further clues to the strength of Swiss economy.  Meanwhile overhanging the economic news will be the latest salvoâ�,��"�s in the Iranian conflict. Bloomberg reported that despite their misgivings about war in Iraq, 57% of US population supports action against Iran if it begins to develop nuclear weapons. The tension receded a bit last week after Iranians made conciliatory gestures regarding Russiaâ�,��"�s offer to process Iranâ�,��"�s uranium at Russian facilities, but somehow we donâ�,��"�t think the story is over just yet.

Boris Schlossberg is a Senior Currency Strategist at FXCM.