Dollar Doldrums
Signs of slowdown are everywhere. Philly and Richmond Fed numbers both printed lower than expected with the former registering a reading of â�,�“0.7 versus 7.0 expected while the latter came in  at 8 versus 9. Industrial Production contracted a much sharper than forecast â�,�“0.6% vs. â�,�“0.1% consensus and even the LEI number couldnâ�,��"�t meet projections rising only 0.1% versus 0.3% expected. Little wonder then that the greenback lost more than a big figure to the euro declining by 83 basis points. Yet the picture is not entirely gloomy. In what was perhaps the best piece of news of the week for dollar bulls, TICS shocked to the upside printing a whopping 116.8 Billion versus estimates of only 56.5. The figure more than offset the record trade gap numbers of -$70 Billion and removed any worries about US deficit financing for the time being. It appears that the game of â�,��"Weâ�,��"�ll buy yours if you buy oursâ�,� continues, as foreign central banks send capital to US in return forUS consumption of foreign goods. As long as this dynamic stays in place, dollar weakness is likely to be contained. Long term dollar longs can enjoy piece of mind for yet another month.

Yet last weekâ�,��"�s economic results offer few reasons to be unabashedly dollar bullish. The slowdown of US economic activity is clearly in evidence and the best that dollar bulls can  hope for is neutral Fed.  Any idle speculation about resumption of rate hikes can now be dismissed in light of last weekâ�,��"�s data.

The week ahead provides little support for a possible dollar rally as housing and GDP data are all expected to print lower. The Fed announcement on Tuesday could cause some ripples although no one in the markets expects a change of policy. Perhaps the most interesting release of the week is likely to be the Durable Goods number. If it bounces back as expected it mat revive hopes that the slowdown may be ending. If however Durables print to the downside they will be the final nail to the coffin to any hopes of economic rebound.

Euro Powers On
Euroâ�,��"�s whole story for the week was encapsulated by Tuesdayâ�,��"�s trade when we wrote, â�,��"The ZEW survey once again surprised to the downside printing at -27.4 versus -20.4 expected as investors continued to be concerned about the impact of the increase in German Value Added Tax due to go into effect at the start of next year. The currency markets however ignored the dour ZEW readings which now stand at a 13 year low. The ZEW results have been consistently wrong this year relentlessly trending down while EZ growth gathered strength throughout 2006. The euro was also supported in tonightâ�,��"�s trade by better than expected EZ Industrial Production readings which jumped 5.4% on a year over year basis. For the time being it appears that the growth generated by the export sector of the Euro-zone economy will offset any depressive effects of higher consumer taxes.â�,�  With the industrial sector continuing to grow impressively and the ECB maintaining its hawkish bias â�,�“ the market would need to see either a marked deterioration in EZ fundamentals or some miraculous uptake in US growth in order for the EUR/USD to drop below 1.2500 level for a sustained amount of time. Since neither scenario appears likely 1.2500 continues to be the bottom end of the range for the time being.

IFO is the centerpiece of event risk on the EZ calendar, but unlike ZEW it is not expected to slip much. Tradersâ�,��"� s should note however that if the IFO surprises to the downside, the impact in the EUR/USD may be severe as the market is likely to take the decline in these numbers far more seriously than the ZEW results.

Russia Buys the Yen
Japanese data last week was lackluster at best as Tertiary Index missed slightly  while LEI matched expectations, but the yen rallied 77 basis point nevertheless after Mondayâ�,��"�s news that Russian central bank announced that it was beginning to inventory some yen into its reserves. Though the amounts were small the psychological impact of the news was substantial and in reporting on the move we wrote, â�,��"Russian authorities are generally considered to be extremely astute and competent traders and tonightâ�,��"�s news clearly shows their recognition of the underlying value of the yen at current price levels.â�,�

Overall the case for yen longs rests on the following three points:

1. Last Fridayâ�,��"�s surprising statement by BOJ Governor Fukui that the central bank will consider raising rates by 25bp before the year end.
2. Record yen short positioning readings  in the latest IMM data from CME  which suggest that the carry may have become too much of a one way trade, setting up the Johnny-come-lately speculative accounts for a possible nasty turn in the pair.
3. Upbeat readings from the latest Eco Watchers survey which over the past two years tended to be an excellent forecaster of near term yen direction. 

While the pull of the carry remains a potent force in the USD/JPY trade, as we move closer to 2007 these yen positive dynamics are likely to play an ever more counterbalancing important role.

Next week Retail Trade and CPI figures will set the tone for trade.  Lower oil prices are likely to have muted any inflationary pressures but at the same time should have stimulated better retail activity. In short chances of another BOJ rate hike before year end remain strong.

Pound Rebound
Cable rallied nearly 300 points over the course of the week despite tepid inflation data. UK Q3 GDP surprised the markets at 0.7%, beating estimates of a slowdown to 0.6% and bringing the annual rate to a 2-year high of 2.8%. But GDP ran counter to the data posted earlier in the week, as employment data was weaker, with jobless claims surprisingly rising 10.2K and average earnings falling to an annual rate of 4.2%. Next, retail sales dropped 0.4%, raising the question: if the resurgence in the housing market and weaker oil prices couldnâ�,��"�t boost consumer spending, what could? With the solid GDP figures, traders apparently had nothing to fret about, but they will certainly be wondering if the Bank of England will take the wait-and-see approach in November, or if theyâ�,��"�ll act preemptively as they did in August and hike rates 25 basis points. Even with inflation slowing in September, CPI is still at 2.4%, well above the central bank target of 2.0% and is estimated to remain higher than that level until 2008. Additionally, the two newest members of the MPC, Sentance and Besley, proved to be enthusiastically hawkish as they were the only ones to vote for a hike in October. As we mentioned last week, there are two other camps, â�,��"the moderates who were open to the idea of the hike but were hesitant to implement one at this time for fear of triggering excessive market expectations of additional rate increases and doves who saw no need to tighten policy at present.â�,� The GDP release may be the incentive those camps need to strike a more hawkish note in November with a hike to 5.00%.

The week going forward will be much lighter on data, with only CBI Industrial Trends and BBA Mortgage Approvals set to be released. Pound bulls may continue to stand their ground, as both reports are anticipated to improve and could subsequently heighten the bias for BOE tightening.

Sizzling Data Strengthens Swissie
Strong economic results dominated the Swiss calendar, leading USD/CHF to drop over 150 points throughout the week to trade below 1.2600 and causing EUR/CHF, which recently hit a 4-week high, to dip below the 1.5900 level. First, the trade balance reached a record high of 1.80B, far better than expectations of a rise to 1.35B. Exports propelled the surplus higher as the weaker Swissie during the month of September made products from the country cheaper and more attractive. Meanwhile, retail sales jumped an annualized 4.5% in August from 2.1% in July. Though the retail sales indicator is notoriously volatile, the report bodes well for growth in Switzerland , as consumer spending and, as a result, domestic demand, remain robust. Producer and import prices wrapped up the week and posted unchanged in the month of September, causing the annual rate to ease to 2.5%, the lowest since April. With crude prices likely to rebound amidst an OPEC cut in production, inflation figures such as producer and import prices could accelerate in coming months. Meanwhile, comments by SNB member Phillip Hildebrand made during the week were somewhat dovish, as he said in an interview that he sees no risk of overheating in Switzerland despite strong economic growth. Additionally, he noted that trends in lending and real estate are not a concern, as monetary aggregates signal weakening. Swissie was unfazed by the commentary, and instead focused on the stellar data as the SNB is widely anticipated to continue normalizing rates with a 25 basis point hike in December to 2.00%.

With mixed data expected out of Switzerland in the week going forward, event risk for USD/CHF may be centered on the greenback side, with FOMC action set to take place on Wednesday. Focus on the Swiss side will be on the most important gauge for the country, the KOF Leading Indicator, which is projected to slip to 2.24. However, the estimate is still well above average and very close to the 6 �,½ year high of 2.48, underpinning the solid growth which led the SNB to raise GDP forecasts for 2006 to 3% from 2.5%. Meanwhile, the UBS Consumption Indicator for September should hold near 1.708, as household spending has been encouraged by low unemployment numbers, optimistic consumer sentiment, and lower oil prices.

Falling Oil Prices Halt Loonie's Swift Appreciation
After breaching the psychologically significant C$1.1400 level for only the fourth time since March, the USDCAD plummeted to fresh monthly lows on a bullish Canadian CPI report. With core inflation at a robust 1.7 percent year-on-year, Fridayâ�,��"�s report was more than enough to erase the previous week of Loonie weakness. Indeed, the turn in inflationary pressures was enough to send Canadian bond yields to their highest level since August.

But the sudden rally came to a halt as plummeting oil prices sent the currency lower. Indeed, the price of crude oil reached fresh 11-month lows, as markets showed doubt that recently announced OPEC cuts would be either enforced or effective in supporting prices. The commodity price likewise weakened after Russia â�,�”the worldâ�,��"�s second largest oil exporterâ�,�”announced that it would not follow suit in cutting production. If commodity prices continue south, there is relatively little doubt that speculators may cut long positions in the coming week of trading. Indeed, some analysts feel that risks remain to the downside for the Loonie, with any bearish news likely to spark US dollar strength in the USDCAD currency pair possibly to the 1.1500 level.

One possible source of strength for the Loonie next week could come from Mondayâ�,��"�s retail sales report.  Analysts predict that headline growth reached 0.8 percent in Augustâ�,�”keeping year on year growth above a robust 5 percent. A bullish report would only increase speculation that strong spending will continue to drive inflation higher through the final quarter of the year. Though BoC rhetoric has been hardly hawkish, traders have driven synthetic forward rates 30 percent probability of a hike in the next two monthsâ�,�”a far cry from previous expectations of a rate cut by the first quarter of 2007.

Aussie Hunkering Down for CPI
The Aussie dollar returned to price levels long thought to have been left behind.  Once the AUDUSD cleared the 0.7500 figure, momentum plowed into the unit even though the fundamental support for such a move was questionable at best.  From the sparse offerings of the economic agenda this past week, the real attention grabber was Fridayâ�,��"�s third quarter trade price indices.  Though most of the Aussieâ�,��"�s move had been booked by the time these numbers hit the wires, the import and export inflation indicators confirmed the speculation for  an additional rate hike decision only two weeks away and counting.  Most interesting of all was the fact that the import index which holds a high correlation to the CPI numbers contracted only -0.3% rather than â�,�“1.0% expected.  This news  bodes well for next weekâ�,��"�s price gauges as it could signal the relief in energy prices may have less impact than originally estimated.

Peering ahead, the Australian dollar sits right next to a significant level of resistance against the US dollar near the .7600 barrier therefore results from both the PPI and CPI price gauges could tip prices either way.  The third quarter producer price index, like the import figure before it, is expected to benefit from the remarkable decline in crude prices in the latter half of August and all through September.  As for the CPI release, the market is predicting the quarter pace to step down to 0.7 percent growth, but the annual pace is expected to remain at a relatively high 3.7 percent level forcing the RBA to remain vigilant in the face of inflationary pressures.

Entering into a trading week it is important to appreciate these event risks with keeping RBA Governor Glenn Stevenâ�,��"�s hawkish rhetoric in mind.  Recently, the head policy maker said he was looking for CPI to guide him in further decisions.  Traders have already turned bullish as futures are currently pricing in an 84 percent chance at a rate hike in November.

Carry Supports Kiwi Before Rate Decision
Although there was little important economic data on the Kiwi calendar last week, the unit appreciated a massive 150 points against the greenback.  Since the current bullish wave began in late June, NZDUSD has risen nearly 800 points or 13 percent fueled by the highest yield out of all the major currencies. As long as New Zealand maintains its top credit ratings, traders see stubbornly robust consumer spending and government regulated monetary policy as a means for assuring free money for some time.

Could the already lucrative spreads widen further? This is the question that will jostle the currency market early next week. Third quarter CPI will be eagerly digested by market participants who will then have less than 24 hours to position themselves for the biggest spat of event risk for the week â�,�“ the RBNZ rate decision.  More may hinge on this inflation gauge than most may think.  Central Bank Governor Alan Bollard is charged with keeping price growth between 1 and 3 percent, an arduous task given the shaky state of the economy.  Keeping this in mind, economists expect annual inflation for the period to hold well above this very specific cut off.  Though Bollard was able to assure the Government council after the bankâ�,��"�s last decision that a pass on further policy tightening would be best in order to judge whether inflation would moderate with energy prices, this same song will probably not fly for much longer.

Going into the this week, the market consensus is for yet another pass on policy.  However, the undercurrent for speculation behind another hike is strong; and this will likely provide volatility no matter which way the RBNZ decides to go.  Should another 25 basis points be added to the current 7.25 percent lending rate, the 0.7630 high marked on September 26th may easily crumble.  Alternatively, if officials decide to forgo a hike, traders will still greedily digest the comments that would accompany the announcement.  Either way, the Kiwi could be looking at another week of substantial volatility.

Boris Schlossberg is a Senior Currency Strategist at FXCM.