Dollar Wavers But Doesn't Budge Much
Inline was good enough this week for dollar longs. Non-Farm payrolls printed at 128K near the expected value of 120K and though hardly a banner result, the news was sufficient to drop the EUR/USD by more than 70 points in a matter of minutes of Friday. The move was more of relief rally  rather than a true sign of dollar strength as near record euro long positioning skewed the order books and triggered a price adjustment in the pair. By end of the day. However, remorse set in and the Euro managed to gain 66 basis point for the week.

Looking beyond the headlines, the data was even weaker than the surface figures with wages rising a paltry 0.1% and hourly workweek contracting to 33.8 from 33.9 hours. Overall the data suggested that US economy  is clearly slowing down â�,�“ fact that was affirmed by slightly weaker ISM Manufacturing report  that followed the NFP and hour and half later. Nevertheless, though  lackluster, US economic growth is nowhere near the danger of tipping into recession for now and that news perhaps more than anything assuaged  traderâ�,��"�s worries and help to keep the bid underneath the buck.

Next week, the holiday shortened calendar is exceedingly light with the Fed Beige Book and ISM Services as the only releases of note. The 1.2700-1.2900 range that we have been trapped in for the past month is likely to continue  until dealing desks return to full staff the week following and the markets get a better handle on whether US growth slows further or stabilizes at these levels.

Euro Stays Steady
ECB held its second press conference of the month and Mr. Tichet remained resolutely hawkish, stating  the need for vigilance and essentially telegraphing to the market the prospect of further rate hikes to come assuming EZ growth maintains its present trend. We wrote on Friday that, â�,��"It is worthy to note that with tonightâ�,��"�s GDP report the EZ growth rate  now trails USâ�,��"�s by only 30 basis points (2.6% vs. 2.9%) while at the same time EZ interest rates are fully 225 basis points lower than US rates (3.00% vs. 5.25%) In light of this massive discrepancy it is reasonable to assume that the monetary policies of the two largest economies in the world will likely converge as we proceed towards 2007.Therefore, as ECB hikes rates further while the Fed remains stationary, the concomitant rebalancing in yields should favor the euro in the intermediate term time frame assuming all other factors remain the same.â�,�

Next week the European calendar will highlight PMI services PMI, Retail and Retail Sales data. There is a strong chance that EZ Retail Sales may disappoint to the downside given the contraction in German Retail Sales this week after the end of the World Cup Tournament. Generally, the consumer remains the missing piece in the Euro-zone growth story. In July higher oil prices weighed on demand, but as crude recedes from its highs, freeing a greater amount of discretionary income the pace of spending in the region should pick up providing support for further   EUR/USD rallies.

No Yearning for Yen
The nightmare for yen longs continued last week as the single currency posted record lows against the euro while GBP/JPY traded within 15 points of the 224.00 level before finally coming off the highs. The latest bout of selling was precipitated by the surprisingly weak economic data which included a decline in Industrial Production numbers to-0.9% against expectations of a 0.8% increase a greater than expected fall in Retail Trade to -1.7% and a surprising  contraction in Labor Cash Earnings to -0.1%. The news all but erased any last hopes for an additional rate hike from the  BOJ  by yearâ�,��"�s end as traders bet that the weaker economic climate and change of political leadership in September will put a freeze on any policy initiatives.  

The relentless decline in Japanese Government Bond yields  over the past month has also weighed on the yen like a slab of concrete. The benchmark 10 year issue traded to within a few basis points of  1.60% level. To put that number into perspective only one quarter ago most fixed income investors expected JGB yields to reach 2.00% by this time of the year. The  sharp drop in the long  end the yield curve and stalemate in the short term rates have combined to create a toxic environment for any yen long positions as the currency continues to be subject to carry trade speculators who have grown ever more emboldened with each new release of weak economic news from Japan.

Next week the Eco Watchers survey will be a key focus as this sentiment gauge gave an early warning sign of a slowdown in Japanese economy and may perhaps signal a pick up.  In summary as we wrote on Thursday, â�,��"Given the typical pattern of yen trading should a new yen positive theme emerge in the markets after the Labor day holidays the speed of carry trade liquidation could be fast and furious. Therefore while present day fundamentals provide little reason for establishing yen longs, probability cautions us against taking on new yen shorts so late into the move. â�,��" 

Housing Data Boosts Cable
Housing problem? What housing problem? Traders looking across the pond saw a very different picture than the dour results in the US housing sector. In UK, housing continues to boom as both Mortgage Approvals and Nationwide House Prices increased better than expected. The underlying strength of housing lent support to cable which rose to within 10 points of the 1.9100 figure before coming off the highs.  Since housing to a large extent governs BOE interest rate policy, traders started to handicap the possibility of another 25 basis point rate hike from the central bank before the yearâ�,��"�s end. 

The outlook for next week looks a bit more problematic as Construction PMI, Services PMI, and BRC Retails Sales Monitor are all expected to print lower readings than the month prior. However,  traders will also keep a keen eye on Manufacturing and Industrial Production data. That sector has been the Achilles heel of the UK economy and if the market begins to see some stabilization in that area the move to take cable higher  may accelerate

Swissie Is a Mixed Bag
Swissie data stumbled for the first time in quite a while as both KOF and the UBS Consumption Indicator printed below expectations although both remained near record highs. The slowdown was caused primarily  by the higher price of oil which dampened consumer spending. On the other hand the SVME PMI figures  skyrocketed to a six year high proving that the countryâ�,��"�s industrial sector is firing on all engines. The weaker currency which has declined by 4% against the euro over the past 3 months helped fuel the growth of Swiss industry which has benefited strongly from this competitive advantage. As Swiss economy continues to surprise to the upside,  the news raised fresh speculation that the SNB may chose to increase rates by full 50bp rather than the market consensus of 25bp at its next meeting on  September 14th.

Next week the GDP data and CPI numbers should go a long way to resolving the debate regarding rates. While Swiss economic  growth has been superb the country inflation rate has been inordinately low tempering any necessity for SNB to become hawkish. IF June CPI numbers propelled by higher oil prices hint of stronger inflationary pressures then the argument for a 50bp rate hike could find additional support and along with so could the Swissie.

Boris Schlossberg is a Senior Currency Strategist at FXCM.