US Dollar: No Confidence

Boooooring. In what had to be one of the tightest trading range weeks in months the dollar spent its time going nowhere fast. By the end of the week it managed to lose 31 basis points to the euro. This 1/3 of 1% was actually the largest move of the week in the majors. If a trader went to sleep last Friday only to wake up a week later he would be hard pressed to notice that a week of FX trading passed him by.

What is causing all this churn? Fridayâ�,��"�s downdraft in the dollar was blamed on weak U of M Consumer Confidence number which printed a woeful 87.4 versus 91 expected and cast a pall on the strong Retail Sales and Housing Starts data earlier in the week. However, the true problem for dollar bulls was the shockingly small TICS report which registered only a $56.6 Billion surplus against expectations of $76.2 Billion. The shortfall was caused by massive outflow from hedge funds creating the smallest TICS surplus in months. In fact it did not even cover Decemberâ�,��"�s -$65 Billion Trade deficit. If this is a start of a trend dollar longs are in a heap of trouble as all of the US Balance Sheet concerns will come to the forefront once again with a vengeance. Much like a knife wound victim who appears to be momentarily calm before collapsing in shock, the FX market may do the same if it comes to the conclusion that there is no more money to fund the US Current Account deficit.

Euro: The Return of The Anti-Dollar

The euro spent most the week essentially basing against the greenback as every attempt by the dollar bulls to make a run at the 1.1800 figure was met with stiff resistance. The pair appears to have established a base at the 1.1850 level but Euro-zone data wasnâ�,��"�t the reason for the solid support as most reports printed within expectation showing EZ growth to be steady but hardly robust. Rather with no material bad economic news emanating from the region, the unit found value not in its own strength but rather in dollarâ�,��"�s weakness. If the US Balance Sheet problems resurface the euro is likely to return to its role at the primary anti-dollar instrument of the capital markets and may simply ignore most of the European data going forward.

Next week brings EZ Industrial Orders, the IFO and German GDP all of which are expected to post lower readings than the period prior. However, unless the data truly produces significant downside surprises, it is doubtful that the market will react strongly to the numbers. For the time being the euro remains in downtrend to the dollar, but that time may be running short as signs of a turn are starting to appear.

Yen: Rebound Yes, ZIRP No

More signs of a Japanese economic recovery last week, not the least of which was the very impressive 5.5% annualized gain in the countryâ�,��"�s GDP as the lower yen and firm global demand helped the vital export sector generate strong sales. Machine Tools orders and Current Account Surplus also posted very positive numbers with the former increasing a whopping 5.4%. Yen bulls quickly seized on the idea that the change from zero interest rate policy may be imminent, however BOJ board member Nishimura noted in a speech on Thursday that even if the Japanese central bank decides to move away from the quantitative easing monetary policy the Zero Interest Rate Policy will stay in place for the time being. As we wrote earlier in the week, â�,��"This is a crucial nuance that many yen bulls have been missing. The primary reason for carry trade liquidation and yen strength over the past few weeks has been the assumption by many market players that Japan would abandon its ZIRP posture as the Japanese economy demonstrates continued growth in consumer spending. However, the BOJ appears to be choosing a far more gradualist approach â�,�“ tightening the QEP first and only considering the change in ZIRP no earlier than next year. Should that be the case, the USD/JPY will continue to attract carry capital especially if the Fed does raise rates to 5% and the pair moves to a burgeoning 500 basis point differential.â�,�

British Pound: Wither the Consumer?

Although it posted a very placid 14 basis point loss against the buck, cable actually had a very turbulent week skyrocketing to the 1.7500 figure and then just as quickly falling to 200 points to 1.7300. After the dust settled, the unit ended up at 1.7411 nearly where it left off the week prior. The underlying volatility however, reflected the contradictory signals from the UK economy. On the one hand Industrial Production and Unemployment data improved materially, with the claimant count actually decreasing for the first time in 8 months. On the other hand Retail Sales absolutely collapsed, dropping â�,�“1.3% versus â�,�“ 0.2% projected. Overall it appears the UK consumer has hit a wall and this weakness in consumer spending is likely to slow UK growth as 2006 unfolds.

Next week, the main event risk for sterling comes from the MPC minutes which will be released on Thursday. Traders will focus on the composition of the last monthâ�,��"�s vote which kept rates steady. If the winning margin was an ultra-thin 5-4 count, than cable may get hit with more selling as another rate cut will become practically inevitable.

The Swiss Franc: Chugging Along

With the world thankfully more focused on ice skating and skiing rather than bloodshed and nuclear proliferation, it was a quiet week for geo-politics and a quiet week for the Swissie. The only major release of the week â�,�“ Producer Import prices â�,�“ came in line showing that despite persistently high energy prices wholesale inflation in Switzerland remains well contained. This actually confirms our thesis that the SNB may be far more reticent than the ECB to raise rates in 2006. The market may have already started to pick up on this idea as the euro has outperformed the Swissie this month with the EUR/CHF cross hitting 1.5600 as traders bet on widening interest rate differential between the two units. Next week should be considerably busier for the franc as a slew of Swiss data from Trade Balance to Retail Sales to KOF is due to hit the screens. Retail Sales and KOF will be the most important numbers to track, with the majority of analysts expecting solid and steady results from these economic indicators.

Boris Schlossberg is a Senior Currency Strategist at FXCM.