Slowdown City for the Dollar
From the lower than expected Existing Home numbers to the dovish Fed Statement midweek to the misses in both Durables Ex-transport and Q3 3 GDP it was hardly a banner week for dollar bulls. Slowdown is here and as we noted on Tuesday, “the cold hard facts are on the side of the euro for the time being. European data including tonight’s IFO readings shows the recovery remains robust allowing ECB to raise rates further without too much protest from EU finance ministers and politicians. On the other hand recent US releases including yesterday’s large decline in Richmond Fed index suggests that the contraction in housing is taking its toll on US economic growth. So far the fall  in gasoline prices has simply served as an offset to the drop off in demand from lower house values without spurring further US growth."

The one factor that could reverse the slide in the dollar would be a strong Non-Farm payroll number. Presently the market is handicapping a gain of 125K versus the paltry 51K print from the month prior. Furthermore, traders will  want to see an upward revision of  September data  in order to be convinced of the bounce  back scenario.  Given the decidedly  poor data so far, the chances of an upside surprise in the NFP appear to be slim. However,  NFP are notoriously unpredictable and we have long ago stopped trying to forecast them. As for the rst of the calendar it will as serve as preamble to Friday’s report with ISM release being perhaps the most important. 

IFO Shows Euro's Strength
The IFO survey surprised to the upside this week printing at 105.3  versus 104.5 expected and 104.9 the month prior. The better than expected reading was due in part to a sharp decline in oil prices and strong order flows for the industrial sector. Although IFO’s Gernot Nerb in the post release conference stated that the data does not support a move beyond the 3.5% level by the ECB, the news is bound to spark speculation that the ECB may now go to 3.75% before year end as EZ demand remains robust.

Next week the consumer sentiment data,  lower unemployment rate and PMI manufacturing numbers should all be supportive of the single currency. However, the focus if the week will be on the ECB rate announcement on Thursday. At present the market expects the central bank to hold rates steady and got ot 3.5% money by December. Yet given the robust data, a no change announcement will be viewed as disappointment by most traders and is bound to cause some sell off in the euro. 

Yen Finally Turns
Japanese CPI printed slightly lower at 0.2% versus 0.3% expected  disappointing yen bulls who had hoped that the data would spur the BoJ to raise rates another 25bp before year end. With Japanese price levels relatively benign, market consensus is that further rate hikes will not occur until next year. Still, given the latest Japanese economic performance the case of higher short term rates is simply a matter of action delayed rather than action denied. Indeed even “Mr. FX” vice finance minister for international affairs Hiroshi Watanabe noted that he did not expect further yen weakness given the economy's healthy fundamentals. Mr. Watanebe’s view were enough to tip the scales to yen bulls and the unit had its best day in months gaining against both the dollar and the euro.

Next week the calendar is relatively subdued with only the unemployment figures as possible fundamental catalysts for further yen strength. But the unit may continue to power on regardless of the lack of data.  As we wrote in our special report, the yen may be a beneficiary of the dovish Fed posture. “Although latest Japanese CPI data puts in doubt any immediate BOJ rate hikes, the mere fact that US rates will not rise further should trigger some carry trade liquidation in USD/JPY as speculators may now consider this position to be “dead money” and will look elsewhere for more fertile profit opportunities." 

Cable Takes Aim on 1.9000
Despite a light economic calendar, Cable refused to buckle under the pressure of falling below 1.8700 and eventually surged towards 1.9000 by the end of the week. GBP/USD essentially ignored the negative implications of CBI Industrial Trends release and instead, focused on the price outlook component, which rose to a reading of 12. The results signaled that inflationary expectations have not fallen to the wayside despite weaker oil prices, and are in line with the Bank of England’s concerns about second round effects on price pressures, which could keep the MPC on track to hike rates to 5.00% before year end. Hawkish rhetoric from Bank of England Chief Economist Charles Bean highlighted the central bank’s concerns when he noted during a speech in London that policy makers should “err on the side of caution” in their attempts to curb inflation and that “if inflation has settled above target, a deeper or more prolonged slowdown is potentially required to bring it down.” Meanwhile, Chancellor of the Exchequer Gordon Brown further propelled the Cable rally when he said the government will “take no risks” with inflation.

Pound sterling longs may find their profits capped as UK economic data in the week going forward could disappoint. PMI for the manufacturing, construction, and services sector are all anticipated to decline, which could indicate that businesses aren’t holding up well in a high interest-rate environment. However, the focus of the week will likely be on the final reading for M4 money supply, which is expected to sharply rise by 1.8% following August’s gain of 1.0%. The continued strong broad money growth is likely to remain an issue for the BOE, and may add to evidence backing a November hike. 

Sizzling Data Strengthens Swissie
The beginning of the week looked dour for Swissie, as USD/CHF climbed over 100 points to top out just above 1.2700 as traders anticipated a hawkish US FOMC. However, the tide turned in favor of the Swiss franc as the combination of a somewhat-dovish Fed combined with solid Swiss fundamentals left the pair to close out the week below 1.2500. The UBS Consumption indicator for September effectively erased the prior month’s losses and gained to 1.883. The rise was underpinned by consistently positive trends in the labor market and lower oil prices. Meanwhile, the all important KOF index of leading economic indicators disappointed, printing at 2.00 versus 2.24 expected while the reading from the month prior was revised downward to 2.19 from 2.32. The export dependent nation saw a slight slowdown in demand from US. Nevertheless, Switzerland is perhaps the healthiest economy amongst the majors with both budget and trade surpluses as well as an ultra low 3.2% unemployment rate, which should translate to more consumption driven growth in the near future. For the time being however, the Swissie remains vulnerable to further carry trade flows against both the dollar and the euro as interest rate expectations beyond the anticipated 25bp hike in December remain decidedly modest.

Economic data set to be released in the week going forward should prove to be Swissie positive and could lead to a third week of gains for the currency. First up, SVME PMI is expected to slip to 64.0, however, the reading is still well above the 50 boom/bust level and bodes well for the manufacturing sector. Meanwhile, traders will be eagerly anticipating the CPI, which is expected to rebound 0.8% in October as raw material prices (excluding petroleum products) accelerate. While such a marked rise in inflation would tend to up the ante for a greater-than-expected rate hike by the central bank, it will take more than one month of price pressures to steer the SNB from their very deliberate 25 basis point path to a more aggressive 50 basis point tightening scheme. 

Loonie Gains on Oil Over $60
In a choppy week of trading, USD/CAD dropped back to below 1.1200 as the currency essentially ignored the fundamentals and moved in line with crude oil, as the commodity tipped above $60/bbl once again after Britain's Royal Navy said it was deploying forces to counter a possible threat to the world's largest oil export terminal in Saudi Arabia. The sole positive economic release of the week was Canadian retail sales, which rose more than expected at a rate of 1.0% on the back of strong auto sales. Healthy gains were posted in many of the other major sectors as well, and could help to balance expected GDP declines in Q3 from the slowdown in exports to the US. On the flip side, CPI dropped 0.5% in the month of September, dragging the annual rate to a tepid 0.7% due to a combination of a plunge in gasoline prices and the effects of federal tax cuts. The Bank of Canada has its own measure of inflation, however, with an index reading of 2.3% year over year. The figure is above the BOC’s 2.0% estimate from the October Monetary Policy Report, and could leave central bankers concerned that the risks of economic growth and inflation are not balanced quite yet.

While the beginning of the week could provide lackluster results for Canadian dollar bulls, improvements in GDP and signs of a tightening labor market could further Loonie gains later on. Industrial and raw material PPI are expected to fall sharply by 0.7% and 3.5%, respectively, in line with the markedly weaker petroleum product prices during September. Meanwhile, August GDP is predicted to rise 0.3% while the employment change in October is estimated to pick up by 18K, which would lead Loonie longs to believe that economic expansion has yet to slow in Canada. 

CPI Spurs Aussie Advance
Inflation was the theme for the Aussie dollar last week, and bulls were quick to jump on the better than expected data.  The first inklings of strong price data for the third quarter came with the producer price index’s print.  For the three month period, the gauge slowed its gait from 1.0%, but impressed nonetheless when traders compared it to the 0.8% consensus issued previous to the release.  In spite of this however, the real market movement came with Wednesday’s consumer gauges. The market’s, and RBA’s, favored inflation indicator, the consumer price index shirked expectations of a more exaggerated contraction by shaving only 0.1 percentage point off of its annual pace to 3.9%.  Furthermore, the core (or Market Prices) measurement actually grew over the same period to step up to a 2.1% rate, the fast pace since the final months of 2002.  These numbers will undoubtedly be revisited in the days ahead as the policy meeting on tap in two weeks approaches.  On the other hand, market participants may also draw on the RBNZ’s own pass to support a theory of no change.

In the days ahead, a number of indicators will offer the fundamental fiber needed to keep the Aussie moving while eager volatility traders bide their time in anticipation of the following week’s rate meeting.  Crowding the docket next week, a broad range of indicators provides an encompassing view of the Australian economy.  Wednesday in the Land Down Under, AiG’s Performance of Manufacturing Index for October will reveal how factories are adjusting to the appreciating currency and cheaper raw material prices. The following day will provide both a trade report and monthly and quarterly retail sales release. 

Kiwi Plummets on RBNZ Rate Decision
It was a tough week for Kiwi bulls, as the NZDUSD saw its largest single-day decline in over 7 months following the Reserve Bank of New Zealand’s interest rate decision. Traders showed their dismay with the RBNZ’s decision to leave the OCR at 7.25%, as 3-month LIBOR forward rates had priced in a full 25bp hike through the week. The news came just a day after government officials announced that Consumer Price inflation dropped to an annualized pace of 2.8%—precisely within the central bank’s 2-3% target zone. A pronounced unraveling of carry trade-related Kiwi longs overshadowed subsequent Trade Balance data that showed a national deficit at its lowest since June. The surprising Net Exports figure was enough to pull the NZDUSD off of monthly lows, but the upswing scarcely recovered a third of the RBNZ-linked decline. Regardless, the Kiwi seemed to make a significant rebound by the Friday close, as broad US dollar weakness pushed the NZDUSD to pre-RBNZ levels.

New Zealand markets may see considerably less volatility in the week ahead, as a comparatively quiet economic calendar is unlikely to provide the excitement seen in last week’s trading. Due up first, government officials will report on the level of building permits growth through the month of September. Given the month-to-month volatility in the index, traders are unlikely to post significant reactions in the absence of a move well above or below recent growth. The following economic release may see considerably more interest, however, as markets wait to see if New Zealand business confidence can continue to regain ground after dropping to all-time lows in February. Given the relief rally following this past week’s interest rate decision, risks likely remain to the downside for the NZDUSD. Indeed, at just 75 points below 8-month highs, it seems that the Kiwi may give further ground before continuing its previous uptrend.

Boris Schlossberg is a Senior Currency Strategist at FXCM.