Dollar Dives on Diversification Discussion
None of the key drivers in last weekâ�,��"�s trade were economic in nature. The Democrats surprise sweep of Congress  on Tuesday kicked of the anti-dollar rally, but the event that really pushed it into high gear was the off the hand comment by PBOC Chief Zhou that the central bank was considering â�,��"lots of optionsâ�,� regarding its inventory of 1 Trillion of dollar reserves. Talk of possible move by Chinese into the euro spurred the EUR/USD to trade through the 1.2900 figure for the first time since August but the pair could not hold that level for long.

On the economic front consumer credit contracted sharply to the worst level since 1994 indicating that the US consumer is clearly  retrenching  right before the critical upcoming Christmas shopping season. On the bright side, the Trade deficit improved marginally but as Business week so presciently noted, â�,��"Sometime next yearâ�,�”perhaps around Christmas 2007, if current trends continueâ�,�”the U.S. will hit a milestone. For the first time in recent memory, the cost of imported goods and services will exceed federal revenues. In other words, Americans will soon pay more to foreigners than they do to their national government.â�,�

All the more reason why this weekâ�,��"�s TICS data which will be released on Thursday will be crucial in determining the direction of near term trade. Last month TICS printed at $116 Billion producing a surplus far in excess of that necessary to offset the deficit. If the trend persists the EUR/USD rally will likely be capped as the structural concerns will tabled for another month.  If however,  the flow of funds dries up, dollar woes could just be starting.  Prior to TICs , Retail Sales  will set the stage on Wednesday. Market is already negative looking for -0.4% print, so any upside surprise could create a short term boost for the greenback.

Euro Helped by Anti-Dollar Forces
It was hardly a grand slam week for euro on the economic front but the unit was propelled higher nevertheless by strictly anti-dollar forces as the Dems win and Chinese diversification talk trumped any econ releases. Economically however, the performance of the 12 member region was decidedly mixed. Retail Sakes, Factory Orders and Industrial production all plunged suggesting that the global slowdown is starting to affect the euro-zone as well. The news raises question as to whether the ECB will have the ability to raise rate beyond the 3.5% target this December.  While the export sector as evidenced by the swelling German Trade Balance continues to contribute to growth, the disturbing inability of EZ consumers top pick up the slack indicates that growth estimates  for this quarter may have to be adjusted lower.

Indeed, the Q3 GDP statistics  projected for this week are expected to report lower at 0.7% vs. 0.9% the  period prior.  The only other econ release of any significance will be the ZEW report expected to improve slightly from its Octoberâ�,��"�s reading.  The ZEW however has been consistently wrong in its assessment of economic conditions and has lost much clout in the FX market. Given euroâ�,��"�s substantial rise this week, a period of consolidation is in order, but if US data disappoints once again, the specs could  gun for the 1.3000 level where many option barriers reside.

Yen Data Bleeds Red
In Japan, core machinery orders plunged -7.4% on a month over month basis versus expectations of a 1.8% rise, Eco Watchers survey printed lower at 50.8 versus 51.5 the moth prior and Bank Lending grew an anemic 1.1% vs. 1.6% expected. The global slowdown in demand from the other G-3 regions is beginning to spread to Japan. The news once again raises questions about BoJ ability to increase rates before the year end.  Although Governor Fukuiâ�,��"�s, mildly hawkish remarks on Friday expressing concern over carry trade positions helped cushion yenâ�,��"�s fall, but his refusal to commit to a hard date on the next rate hike took the starch out of any yen counter trend rally.  The market is clearly prepared for the end of the carry trade, but until and unless the BoJ actually signals its willingness to raise rates, the carry traders will continue to flock to the USD/JPY pair taking full advantage of the interest rate differentials for the time being.

Next week the economic calendar is considerably more active with CGPI numbers, GDP readings, Tertiary Index and BOJ meeting all crowding the docket. Whether any of the news proves positive for the yen remains to be seen. It may all be the case of lots of heat and little light as the underlying fact of low yen rates still remains.  However, further deterioration of US data may be enough to spur new rounds for carry trade liquidation as traders may begin to anticipate possible US rate cuts early next year. In either case the USD/JPY pair remains in a precarious balance and could well see more volatility ahead.

Pound Propped by Solid Data
While Pound gained throughout the week on solid results out of the retail and housing sectors, the marquee event was the Bank of Englandâ�,��"�s Monetary Policy Meeting. The BOE raised its benchmark rate to 5.00% as expected, but in a classic buy the rumor sell the news dynamic Cable sold off in the immediate aftermath of the announcement. As we said last week, â�,��"One possible reason for the drop aside from sheer profit taking may be some trepidation on the part of speculators that the cumulative weight on BOE rate hikes could begin to weigh on UK consumer sentiment by increasing debt service costs. Clearly, the central bank is confident hat that the UK economy can absorb the additional rate hikes, but time will only tell if the central bankâ�,��"�s hawkish stance at the time of clear evidence of global economic slowdown may in fact be a case of too much tightening too soon."

With substantial event risk in the week going forward, Cable may finally see the turn that traders have been looking for. Although CPI is estimated to rise 0.3%, continued weakening of PPI and a deceleration in wage growth could fuel speculation that the BOE has been too aggressive on monetary policy tightening. Additionally, markets will be looking towards the central bankâ�,��"�s Quarterly Inflation Report to gain perspective on their estimates for the remainder of 2006 and 2007, which could signal a change from the BOEâ�,��"�s present staunchly hawkish bias.

Hildebrand Single-Handedly Propels Swissie
USD/CHF dropped about 150 points throughout last week, and though the economic releases were fairly optimistic, it was commentary from Swiss National Bank member Philipp Hildebrand that thrilled the Swissie bulls. Mr. Hildebrand said that the SNB could continue to tighten monetary policy â�,��"even if our forecast signals no imminent inflation threatâ�,� in order to avoid future financial distortions. The comments left traders pricing in a December hike of 25 basis points to 2.00%, despite tepid inflation 0.3% year over year in October, which is well below the SNB's 2.0% target. Meanwhile, the SECO consumer climate survey rose to a reading of 13 from 12, however, the increase was lower than expectations. Additionally, unemployment in Switzerland held at a two and a half year low of 3.2% for the second consecutive month as the number of job vacancies slipped to 11.2K from 11.3K in September, indicating that the Swiss labor market should continue to remain tight and underpin continued growth in the country.

The sole economic release for next week, producer and import prices, may leave traders thinking the SNB is being excessively hawkish, as the figure is expected to slip 0.2%. However, the market will be looking for comments from the BIS meeting of G10 central bank governors for remarks on not only Swiss growth, but global expansion as well.

Oil Offsets Ivey to Leave Loonie Unchanged
The best way to discuss Loonie trade this week: Choppy. The pair ended the week right about where it started as strong economic data and greenback weakness were offset by lower oil prices. Ivey PMI started Monday off with a bang as the closely-watched survey jumped to 59.9 in September. Looking underneath the numbers the employment index reflected continued expectations of robust labor growth while a rise in inventories  implied that businesses continue to build stockpiles in anticipation of strong demand. Additionally, Canadian residential starts hit a three-month high 223,000 units in October, suggesting the housing market continues to contribute to strong consumer spending which should extend economic expansion.

Meanwhile, after crude oil jumped above $61/bbl on Thursday, the commodity sunk to $59.89/bbl as the International Energy Agency trimmed global oil demand estimates for 2006. Additionally, the markets have yet to feel the effects of the much-talked about cut in production by OPEC, which was expected to buoy prices. Should crude prices sustain these sub-$60 levels for an extended amount of time, Loonie could come under significant pressure.

With mixed economic data on the calendar, Canadian dollar movements will be centered on commentary from the BIS meeting of G10 central bankers early in the week and the conference of G20 central bankers and finance ministers at the very end of the week. Traders will be looking for clues regarding not only Canadian expansion, but global growth as well, along with the impact of energy prices on the economy.

RBA Hike Provides Few Fireworks
As was broadly expected, the Reserve Bank of Australia lifted the nationâ�,��"�s overnight cash rate for the third time this year at its meeting this past Wednesday.  Tacking on an additional 25 basis points, the benchmark lending rate is now at 6.25 percent, offering a yield second only to fellow com-dollar the kiwi.  A sterling example of markets pricing in approaching event risk, the Aussie showed little reaction in the aftermath of the positive turn.  Not even the increasingly hawkish comments from officials in the brief statement that followed the decision could lead the bulls to take out the 0.7750 level with conviction.  In the release from the RBA, officials sought to justify the additional burden on lending rates by citing the stubbornly high quarterly consumer report.  The note went on to warn that the central bank saw significant â�,��"risks of inflation exceeding 2-3 per cent over the medium term,â�,� providing some of the most transparent comments from the group in some time.

So why then did the Aussie turn for an extended leg down shortly after the bullish rate hike and post-commentary?  After the RBA announced the actual hike, the speculation and anxiety surrounding the event was finally flushed from the system.  What was left was the bleak reality of a number of weak economic indicators released earlier in the week. October inflation, construction and retail activity had all missed their mark in the days leading up to meeting.  The straw that broke the camelâ�,��"�s back though was an unexpected 32,100 head drop in employment that had oddly enough accompanied a drop in the jobless rate to 4.6 percent.

Looking ahead to next week, there will be no rest for the weary.  The first few active sessions will bring an October business and consumer sentiment survey that will reflect the offsetting impacts of the nationâ�,��"�s drought and cheaper energy prices. The housing price index for the third quarter will act as a reliable barometer for a market that has been the key driver of consumer spending and economic growth over the past few quarters. Finally, traders will also keep an eye out on the surge in Gold which will underpin the Aussie if it continues its upward ways.

New Zealand Inflation Still at It
Though there were only two indicators on deck for the New Zealand dollar this past week, they provided the mixed sentiment that would drive the unit further away from its previously set highs.  The fundamental scene seemed bright at first blush early Monday morning in New Zealand.  Third quarter labor costs added more of the inflationary backing that the hawkish speculators in the market needed to keep the kiwiâ�,��"�s advance going.  Including overtime, income prices rose a record 0.9 percent over the three months, marking up a 3.0 percent pace on the year.  After the greater than expected drop in the CPI report for the same period just a short time ago, the new numbers boosted speculation just enough to bring the currency to 0.6730 against its US counterpart.  But any extension higher was not meant to be as the only other indicator for the week sabotaged hopes that a rate hike could still be considered by the first half of 2007.  The jobless rate for the three months through September grew to a higher than expected 3.8 percent.  The 9,000 New Zealanders finding themselves out of work may signify the current level of monetary stringency is finally taking its toll.  Now it remains to be seen whether the moderating effects of a 7.25 percent lending rate will seep through to consumer spending.

In the days ahead the New Zealand dollar will be confronted by technical and fundamental indicators that may shake the currency from its newly settled range.  On the inflation front, producer prices could tip the balances of the consumer/wage price axis.  With no official consensus heading into the week, correlations will need to be drawn to business activity, fellow price gauges and commodity prices for the same period.  Energy prices will likely be the first factor for the market to jump on for expectations, though other reports have shown that the full effects of the drop in crude oil will not be fully recorded until the fourth quarter.  Furthermore, the third quarter NZIER business survey reported 48 percent of those participating expected to raise prices in the months ahead.  Despite the possibilities for factory inflation however, third quarter retail sales will be front and center.  With no expected rebound in the works, weak consumer spending could close the books on any possibility of an eventual rate cut until at least the second half of 2007.

Boris Schlossberg is a Senior Currency Strategist at FXCM.