US Dollar
Action speaks a lot louder than words and even though the NAHB housing market index reported stronger sentiment among builders yesterday, the sharp drop in housing starts and applications for building permits that were reported today basically nullified the previous release.  The number of new building projects that broke ground in the month October fell to a six year low as demand wanes and cancellation becomes the new buzz word in real estate.  Building permits also fell for the eighth straight month, indicating that there are even fewer projects in the pipeline.  The surprising rise in the NAHB index was the primary reason why the dollar managed to rally yesterday in the face of weaker economic data.  The market thought that the housing sector was bottoming out, when it really isnââ,¬â"¢t.  We had a tremendous amount of data released over the past week and we have learned that even though the Fed remains hawkish, the trade picture was worse than expected, inflationary pressures are falling, the housing market remains fragile and consumer spending is beginning to see some real signs of weakness.  None of this is good news for the US dollar and should push the Federal Reserve further away from their current stance and give them no choice but to be more neutral with their take on inflation and outlook for monetary policy.  The lack of economic data next week should keep the market relatively range bound.  Volatilities are low and will probably continue to remain low.  However, aside from the drop in the Japanese Yen crosses, there are growing signs that the carry trade faces risk ââ,¬â€œ see our Japanese Yen section for more details.  Meanwhile aside from leading indicators, there is nothing of consequence on the US calendar next week.  It will also be a shortened trading week with the US markets closed for Thanksgiving Day on Thursday.

Euro and Swiss Franc
When all is said and done, the Euro ends the week slightly lower against the US dollar.  Like the US, the Eurozone reported mostly softer inflation data as well as slightly weaker GDP data.  The German ZEW survey, one of the weekââ,¬â"¢s key releases also dropped to a 13 year low, illustrating the gradual deterioration in the Eurozone economy.  However this has mattered little to Euro traders as the European Central Bank remains committed to their game plan of raising interest rates again early next month.  There were a few Eurozone releases this morning starting with the French current account and EZ trade balance.  Both improved thanks to lower oil prices, which reduced the import bill.  French payrolls increased less than expected, which is hardly surprising given the recent weakness in overall French data.  The much bigger surprise was in the Italian current account deficit for the month of September, which ballooned to the largest amount in over ten years.  Looking ahead, there is actually quite a bit of Eurozone data due for release next week.  We are expecting German PPI, CPI, IFO and the second release of third quarter GDP.  For France, we are also expecting GDP along with consumer spending and business confidence.  ECB officials will be speaking a number of times throughout the week including Trichet, but none of these officials are expected to divulge much about monetary policy beyond the December rate hike.  Meanwhile the Swiss Franc also ends the week slightly lower after SNB President Roth said last weekend that the currencyââ,¬â"¢s attractiveness as a safe haven asset has diminished with the launch of the Euro.  Despite the lack of economic data this week, next week is expecting the Swiss trade balance, PPI and employment. 

British Pound
The British pound came back strongly today after having sold off for most of the past week.  The market had turned very bearish on the pound after a round of disappointing inflation data followed by a more dovish BoE Inflation report.  The surprise jump in retail sales yesterday reminded traders that the economy is still performing well even though inflationary pressures are subsiding.  This falls right in line with the message in the central bankââ,¬â"¢s Inflation report, which called for stronger growth, but weaker inflation.  The BoE is not one to rush monetary policy and they are not prone to overdoing it, which means the market can be pretty confident that they will not be lifting rates until mid next year.  Next weekââ,¬â"¢s housing market and GDP release should continue to confirm that.  With inflation releases out of the way, we would not be surprised to see a continued rebound in the GBP/USD as traders reverse their prior short positions. 

Japanese Yen
Talk of carry trade liquidation is helping to send the Japanese Yen higher today.  This is something that everyone needs to start getting use to as carry trades face greater risks.  Todayââ,¬â"¢s move was sparked by rumors that a large hedge fund needed to bail out of their carry trades to fund bad energy bets.  That was later denied by the hedge fund in question, but nonetheless reinforces a worry in the FX market.  The G-20 meeting is being held in Melbourne Australia this weekend along with the BIS meeting.  The last time we heard from central bankers at one of these meetings, their comments were mostly targeted at the Japanese Yen.  We would not be surprised to hear the same this time around.  With EUR/JPY above 150 and USD/JPY not far from its recent highs, we expect government officials to continue to be critical of the weakness of the yen, which would be positive for the currency and exacerbate its strength.  Futures traders have already begun to pile out of their short yen positions as indicated by the latest IMM report.  The Icelandic Krona, which is another popular carry currency, is already beginning to see an unwinding, which may be a sign of what may be to come for the Yen. 

Commodity Currencies (CAD, AUD, NZD)
Of the commodity bloc, the Australian dollar is the only currency that ends the week stronger against the US dollar thanks to firmer wage data.  There is no Australian data due for release next week.  New Zealand on the other hand is expecting trade data, which is expected to worsen.  The kiwi struggled to rebound towards the end of the week, but even firm retail sales data could not offset the recent bearishness in the currency.  The Canadian dollar suffered the most as the combination of weak economic data and low oil prices was too much for the loonie to handle.  With crude at 17 month lows, the Canadian dollar fell to a six month low.  There is a lot of CAD data due out next week, none of which is expected to give the currency much relief. 

Kathy Lien is the Chief Currency Strategist at FXCM.