Dollar Escapes Doom
The week was full of red ink with Consumer Confidence, ISM Manufacturing, Pending Home Sales all reporting worse then expected results. But in the end only one report mattered â�,�“ the NFP was the marquee that moved the markets. Although the final print was slightly below consensus at 92K vs. 123K expected, themonth prior was revised upward from 51K to 158K â�,�“ a monstrous change that evened out the two month run rate to 120K. At that level the NFPâ�,��"�s continue to show a relatively robust US economy and put the notion of any rate cuts by the Fed firmly out of consideration for the rest of the year. The news spurred a near 100 point free fall in the EUR/USD on Friday as the pair dropped below 1.2700 level. But by late Friday afternoon the pair bounced back as traders once again began to question the pace of US growth.

Next week the calendar slows markedly with only the Trade data of any serious consequence to the FX market. Traders expect a small improvement from last monthâ�,��"�s record gap, but overall the Trade numbers are unlikely to have much impact. Trading  next week may well be driven by politics rather than economics. With US midterm elections taking  place Tuesday the greenback could see more selling pressure if Democrats sweep into Congress as FX market hates nothing  more than political change and capital flight could well be the theme of the week.

Euro Rally Ends for Naught
The euro data continued to prove positive this week with German unemployment contracting by -67K jobs far more than -23K projected while PMI Manufacturing rose to 57 â�,�“ its best reading since July.  The EZ export sector continues to drive growth in the 12 member region and although the ECB did not raise rates this past Thursday, Trichetâ�,��"�s rhetoric was resolutely hawkish keeping market expectations firmly tilted towards 3.5% ECB money by December.

The one sore spot on Eurozone performance was the sharp drop in German retail sales which fell -1.7% versus 0.6% expected gain. The news was especially surprising given the fact that spending had been anticipated to pick up during the month as gasoline prices fell, leaving more disposable income for consumers. Additionally, the 2007 VAT hike to 19% from 16% was expected to boost sales of big ticket items such as televisions and furniture for the remainder of 2006 as shoppers aimed to avoid the cost associated with the additional tax. Yet none of this materialized and the lack of consumer demand in Eurozoneâ�,��"�s largest economy opens troubling questions regarding the sustainability of EZ expansion into 2007.

Next week EZ Services PMI and Retail PMI should cast more light on the strength of EZ recovery and could help boost the unit if they beat expectations.  But the US elections will likely dominate trade on both sides of the Atlantic as the markets will try to adjust to a new change in government if the Democrats win.

Yen Right Back Where It Started
Comments from Hiroshi Watanabe propelled the yen higher in early European trade on Thursday when â�,��"Mr. FXâ�,� once again stated that there was no reason for the yen to weaken given Japanâ�,��"�s economic recovery. In response the yen dropped below the 117.00 figure against the dollar and traded through the 149.00 level against the euro. It appears that the near term  solution of Japanese monetary authorities is to gently jawbone the USD/JPY lower in the absence of any meaningful increase in interest rate policy. Initially the strategy  appeared to be working  as the market responded to Mr. Watanabe coldly calculated comments. However,  as we wrote in our note earlier in the week,  â�,��"Unless the BoJ actually intends to back up their actions with another 25 basis point hike in December or January, Mr. Watanbeâ�,��"�s words will begin to be seen as more bark than bite with the currency market demanding action rather than mere rhetoric.â�,� Ind eed by Friday, yen gains were reversed completely as carry traders came back into the pair after decent NFP numbers and no indication whatsoever that the BoJ was prepared to move on rates any time soon.

Next week the economic calendar is very muted with LEI data and the Eco watchers survey as the two prime sources of event risk. Last month the Eco Watchers perked up above 50 boom/bust level and the market will want to see if the positive sentiment can continue for another month.

Pound the Sole Survivor
Cable was the single major to wrap up last week higher against the greenback, as GBP/USD had spent much of it pushing towards 1.9100 on speculation that the Bank of England may pursue more than one more round of monetary policy tightening. While Fridayâ�,��"�s US data erased much of Cableâ�,��"�s profits, the results of last weekâ�,��"�s data nevertheless underpinned the case for a 25 basis point hike on Thursday to 5.00%. M4 money supply, an indicator of inflation, was revised higher in September to 1.7% from 1.0%, bringing the annual rate to a 16-year high of 14.5%. Meanwhile, net consumer credit rose 0.9B and mortgage approvals hit a two-year high of 126K, signaling that the Bank of Englandâ�,��"�s August rate hike had little impact on surging demand for lending and housing. Manufacturing PMI dropped slightly more than expected in October to 53.7. A breakdown of the data showed that export orders rose from September, subsequently quelling fears that a slowdown in the US may seriously impact export growth in the UK . Furthermore, output prices gained while input prices fell for a third consecutive month as manufacturers passed on cost increases that they incurred in previous months. Finally, conditions in the UK services sector unexpectedly improved in October, as the PMI survey jumped to 59.3 from 57.0, marking the highest reading since April. The components showed gains in new business as well as business expectations, while the employment index eased back slightly, along with input and output prices. The data highlights the more optimistic sentiment by companies in the UK , and bodes well for stronger GDP growth throughout the remainder of 2006.

While next week is chock full of UK economic data, the clear focus will be on the Bank of Englandâ�,��"�s interest rate decision. Traders will hone in on any hints of further monetary policy tightening in remarks following Thursdayâ�,��"�s widely expected hike to 5.00%, as GBP/USD could unwind amidst signs that the BOE feels theyâ�,��"�ve moved far enough.

Swissie at Mercy of Weak CPI
Swissie did not fare well last week, as tepid economic reports reiterated that the stellar growth seen in Switzerland has likely already peaked. SVME PMI slipped lower than expected to 62.3 from 64.4 in the month prior. However, USD/CHF initially shook off the report as the Swiss National Bank has made it crystal clear that they expect a slowdown from the torrid growth rates seen earlier this year. Additionally, the purchase price index gained to a reading of 74.5 from 72.6, which upped the ante for strong inflation readings later in the week. The actual CPI report ran directly counter to the PMI report, however, as the figure posted much softer than expected at 0.3% against estimates of a more solid 0.8% rise. This release brings the annual rate to a paltry 0.3%, which is the lowest since March 2004 and is significantly below the Swiss National Bankâ�,��"�s target rate of 2.0%. Weaker petroleum product prices were clearly the culprit, as the core measure of inflation jumped 0.9% during the month after stagnating the month prior. Despite the weak readings, the SNB is still widely expected to hike rates 25 basis points in December to 2.00%.

While economic reports next week should signal that the Swiss labor market remains tight and consumer confidence is increasingly optimistic, Swissie will likely under pressure barring hawkish signals from SNB board member Philipp Hildebrand. However, Mr. Hildebrand will probably reiterate that growth is expected to slow, creating upside risk for USD/CHF.

Tax Plan Pressures Loonie
Loonie suffered at the hands of an unexpected announcement by the Canadian government that income trusts would be taxed starting next year. Previously, these trusts have benefited from a tax loophole and the closing of this will likely have a negative impact on corporate earnings. USD/CAD surged above 1.300 following the report, as the Canadian dollar found little support from economic data during the week. Raw materials prices dropped a whopping 5.2% in September, which should significantly reduce input costs for Canadian manufacturers and lead CPI to ease. Meanwhile, GDP matched expectations and edged up 0.3% in August, leaving estimates for the Q3 annual rate on track to hit 2.3%. However, solid employment reports saved Loonie from the wrath of US NFPs, as the labor market added 50.5K additional jobs, bringing the unemployment rate down to 6.2% from 6.4% the month prior. Job growth was centered primarily in oil-rich Alberta, where energy companies boosted output and hired workers to meet demand. Furthermore, Canada has relied on job gains, rising housing prices and the oil boom to keep households spending and offset the impact of higher interest rates, a stronger domestic currency, and weaker demand from the US.

The outlook for the Canadian dollar next week may not be bright, as the economic calendar is chock full of weaker estimates. Ivey PMI is expected to indicate that producers anticipate slower demand, and may subsequently cut output. Meanwhile, Canada â�,��"�s trade surplus is estimated to narrow, led by a decline in energy exports due to price declines. While the data should be tepid across the board, traders are unlikely to shift from their expectations of a neutral policy bias by the Bank of Canada, leaving Loonie vulnerable to US data and commodity prices.

Is an RBA Rate Hike So Certain?
The Australian dollar weakened significantly against most of its international counterparts last week. Against its sister commodity currency the New Zealand dollar, the Aussie unit slid consistently; while against the Canadian and US dollars, the drop was sharp before the close of the week.  This somewhat precarious  sell off in the currency underlying one of the worldâ�,��"�s strongest economies seems unusual given the heavily favored interest rate hike from the central bank in just a few days, but the indicators for the period forced some caution regarding that expectation. By midweek, AiGâ�,��"�s manufacturing gauge had already sparked worry when it dropped unexpectedly.  This weakness was exasperated the following day when retail sales growth in September slowed for the fourth consecutive month.  With a monthly read of 0.1 percent expansion, far short of expectations, the quarterly report had also came up short with a 0.4 percent pace.  Finally, the September trade account placed another weight on GDP outlooks when a 1.0 percent drop in exports cause the deficit to below to A$646 million.  This was three consecutive hits to the economic outlook with less than a week before the RBA was scheduled to decide the future of the nationâ�,��"�s overnight cash rate.

However, despite the number of dour indicators futures markets are still fully pricing in a 25 basis point rate hike on Wednesday morning in Australia.  Such unequivocal optimism behind another shift comes largely from stubborn inflation and the nature of the new RBA Governor.  Governor Glenn Stevens has vocalized his hawkish leanings since taken the head position.  And since he is charged with keeping inflation under control, it isnâ�,��"�t difficult to understand why.  Recently, third quarter inflation barely budged in to a 3.9 percent annual pace, despite the sizable slide in energy.  On the other hand, much of the expected pass through of cheaper oil will likely be seen in October.  This will place a lot of pressure on the proprietary leading TD Securities inflation gauge for September.  If price pressures ease any further, the combination of weak inflation, slowing growth in important sectors, and expectations of the worst drought in a century on the way could cause a huge upset in the market with a pass over on a rate hike.

Can Kiwi Stay Afloat Without Another 25bp?
Kiwi bulls pulled ahead last week, driving their favored unit higher against the Japanese yen and Australian and US dollar.  Such a strong run seemed unwarranted given the reversion to the normally light economic calendar, but the market seemed not to have any trouble pushing the currency higher.  Though the docket was a little light last week, the few numbers that hit the wires were still encouraging for the economy and underlying currency.  Monday was saw building permits and money supply releases for the month of September.  Construction approvals grew 6.1 percent over the month, supporting the theory that New Zealanders are weathering the high lending with their unshakable spending habits.  The money supply on the other hand was not so convincing.  For the year through September, growth in the broad measure slipped to 13.4 percent from 15.4 percent, reinforcing RBNZ Governor Alan Bollardâ�,��"�s decision to leave lending rates unchanged.  This report couldnâ�,��"�t hold sentiment down for long though as a strong NBNZ business confidence report for October boosted expectations for a stronger economy in the final quarter of the year.  The report was the most optimistic since March of 2005 as predictions of activity, employment and profits were boosted.

In the week ahead, kiwi traders wonâ�,��"�t have to scrounge for market worthy reports from the island nation.  Two third quarter reports will provide official government figures of a broader outlook for certain sectors of the economy.  The theme in the weekâ�,��"�s numbers will be employment.  On Monday, labor costs in the private sector will start trading off with a strong footing.  Compensation costs are expected to rise 0.8 percent versus the 0.6 percent pace of growth in the three months before.  A report of this caliber could help economists readjust their GDP predictions as consumer spending expectations rise.  The real interest however will lie with the same periodâ�,��"�s unemployment rate. Hitting a record low in the second quarter, market participants and monetary policy makers alike will be looking at this report as a potential leading indication of a possible turn in the consumer sector.  This large group has been responsible for the unquenchable levels of inflation and consistent pace of growth.  If their ranks begin to falter, the next rate change may come in the form of a cut rather than a hike.

Boris Schlossberg is a Senior Currency Strategist at FXCM.