Collapse of the Greenback
What began as technically based, liquidity starved rally last week has turned into a full fledged dollar rout this week as US economic data has started to flash warning signs of recession. Both Chicago PMI and ISM printed below the key boom/bust level of 50 â�,�“ for ISM this was the first time since spring of 2003.  Furthermore,  5 out of the 10 subcomponents of ISM fell below 50 including employment â�,�“ which tends to be a leading indicator for next Fridayâ�,��"�s NFP. In short, a blizzard of bad data has destroyed most dollar longs and if the  bad news persists the greenback may be caught in a perfect storm  as liquidation will become disorderly and traders will dump dollars regardless of price.

Next week ISM Non-Manufacturing may buy the dollar a small reprieve if it  surprises to the upside especially given the fact that services are a much larger part of theUS economy than manufacturing. If that index can remain comfortably above the 50 level it may cool some of the speculation regarding a possible 2007 US recession. All eyes however will be focused as usual on the Non Farm payroll report due next Friday. Employment growth will be critical to Fedâ�,��"�s ability to maintain its hawkish tone. If job growth begins to slow, the pressure on the Fed to begin easing will increase exponentially which in turn could open the floodgates to additional  dollar liquidation.

Euro Shows No Weakness
The story for euro bulls this week could not be more positive. Not only did most of the eco data prove supportive to the unit but the persistently hawkish ECB members allayed any fears that the central bank may hold off on any rate hikes due to the rising currency. The big reduction in German unemployment which decreased to -86K form -30K expected was the most impressive statistic of the week suggesting that the 12 member region was generating organic growth despite the clear headwind for the export sector. With both Consumer and Business confidence improving and ECB reportedly comfortable with 1.3500 EUR/USD, the unit may  yet have more room to go to the upside.

Next week promises to be as active on the Euro-zone side as on the US side. PMI services and retail sales will be announced at the front of the week and ECB rate hike and press conference dominates the calendar at the end of the week.  Retail spending has been the Achilles heel of the EZ economy, as the consumer has been persistently hesitant to spend money despite the improving economic environment. Therefore, this monthsâ�,��"� numbers may take on a greater significance as the market will look for confirmation that the EZ recovery is indeed for real. As for the ECB press conference, Mr. Tichet will most likely be as non-committal as ever, offering little fresh news for the market.. However if he minimizes the impact of the rising currency on overall EZ growth, FX traders will take his nonchalance as a green light to push the pair higher.

Yen â�,�“ Still in a Quagmire
On Friday we wrote, â�,��"Another night of heartbreak for yen longs hoping that the eco data will would provide them with support for a December rate hike from the BoJ, as almost all the numbers  from employment to CPI to spending printed below forecast. While the jobless rate continued to remain near 8 year lows suggesting tight labor markets,  the job to applicant ratio slipped at bit from 1.09 to 1.06 indicating that demand may have peaked. The troubling aspect of the Japanese data is that jobs are not translating into stronger consumer spending. With overall household spending still â�,�“2.4% less than a year ago and with CPI increasing a very modest 0.1% rate the BoJ finds little reason to raise rates just yet.â�,� By the end of the week the yen did appreciate  against the dollar rising 53 basis points but it  lagged the other majors and traded at yearly lows against both the euro and the pound.

Next week Capital Spending may start the week off positively for the yen but the overall calendar is relatively barren with only the Eco Watchers survey at the end of the week. The Eco Watchers is our favorable gauge of consumer strength in Japan and if it manages to produce  an upside surprise it may signal a possible turn in the currency itself. But PM Abe is scheduled to meet with Governor Fukui ahead of the  BoJ policy meeting which starts on the 18th and given Mr. Abeâ�,��"�s preference for a dovish monetary policy, it appears that the consensus call for a January rather than a December hike is going to be correct. The only factor that could alter that scenario is a strong Tankan result on December 15th.

Uncontainable Cable
Pound continued to propel higher this week as the anti-dollar stance was alive and well in the markets and the GBP/USD pair racked up nearly 500 points in gains while EUR/GBP dropped to three-week lows. The economic data of the week, however, was decidedly mixed as UK housing and lending reports prove to be unstoppable with surprise jumps higher in both prices and mortgage lending. While this implies that the Bank of Englandâ�,��"�s two 25 basis point hike in the second half of 2006 have yet to slow down the booming housing market, consumer confidence figures could be starting to tell a different story. GfKâ�,��"�s sentiment survey unexpectedly slipped as households were more pessimistic on everything from their personal future finances, the economic situation in the next year, and the climate for major purchases. Additionally, CBI Distributive Trades indicated that retail sales declined to the lowest level since March while expected sales for December declined to the weakest reading since August. Overall, the data does not bode well for the retail sector ahead of the holiday shopping season. As weâ�,��"�ve pointed out recently, UK data has been at odds with Cable price action, and at some point it will run into the wall of reality, but for the time being Pound continues to trounce the greenback as GBP/USD longs may be looking to target 2.000.

The week going forward is full of estimated disappointments, with consumers anticipated to indicate a more negative bias once again and the industrial sector likely to slow further as export growth moves at a snailâ�,��"�s pace. Although the BOE is widely anticipated to hold rates at 5.00% after last monthâ�,��"�s 25 basis point hike, traders will be anxiously awaiting commentary from central bankers to gauge policy action for 2007.

Swissie Solid on Hike Expectations
Swissie made a successful push below the 1.2000 level this week, despite the copious amount of economic data pointing to a marked slowdown in Swiss expansion. The most important gauge for the countryâ�,��"�s growth, the KOF leading indicator, posted weaker than expected in November at 1.73, marking the fifth decline in a row and pointing to further deceleration in the first half of 2007. Furthmore, Q3 GDP proved to be disappointing at 0.4%, while Q2 was revised down to 0.6% from 0.7%. The annual figure was also lower than estimated, posting at 2.4% in Q3 with Q2 revised lower to 3.0% from 3.2%. The data signals that growth in Switzerland has likely peaked, as exports and retail sales weaken from their previous breakneck pace. Nevertheless, the Swiss National Bankâ�,��"�s resolve to normalize rates despite tepid expansion has helped to keep the Swiss franc bid, especially over the course of the past two weeks.

With sparse data on the Swiss calendar, USD/CHF price action will likely be more dependent on news from the US side until Friday, when SNB President Roth speaks. Markets are already anticipating a December hike to 2.00%, but traders will be looking for clues as to the pace of monetary policy action next year and outlooks for growth in  2007.

Loonie Misses the Anti-Dollar Boat
The Canadian dollar was the sole loser against the greenback this week as data indicated that the economy contracted for the first time in 18 months. From the monthly breakdown, the underperforming sectors were obvious, as manufacturing plunged 1.4% while industrial production eased 1.4%.  This combo offers yet another sign of the weakness in the sector that is suffering under a Canadian currency that has risen 40% in 4 years.  Another disturbing change came from the retail and wholesales groups, which track domestic demand, as wholesale sales plunged 2.1% while the pace of growth in the retail sector was cut to a paltry 0.2% from 0.8%. Loonie was also vulnerable on the release of labor market results. Though the unemployment rate had been anticipated to tick higher to 6.3% from 6.2% and level of employed people increased a better-than-expected 22,400, a breakdown of the results showed that all of Novemberâ�,��"�s net job gains were the result of part-time additions, while full-time positions dropped 18,100. This indicates that much of the improvement was a result of seasonal hiring and could point to a potential weakening of the labor market after the holidays.

The Bank of Canadaâ�,��"�s monetary policy meeting is likely to set the stage for Loonie price action this week, as traders will be looking for commentary from central bankers regarding the â�,��"balanceâ�,� of risks for the economy. Some traders may up the ante on bets that the BOCâ�,��"�s next move will be a cut. Additionally, with such weak results in manufacturing already reported for Q3, Ivey PMI for November could be critical to either the bull or the bear point of view.

Aussie Rallies on Gold Prices
The Australian dollar rallied to fresh 18-month highs, as broader declines in its US namesake pushed the currency as high as 0.7927 by weekâ�,��"�s end. Broadly mixed Aussie data had relatively little net effect on currency markets except to drag the AUDNZD to the lower end of its three-month range. Weakness following Mondayâ�,��"�s poor trade balance report did not keep the AUDUSD down for long, with subsequently strong Retail Sales data reinforcing the uptrend that showed little signs of slowing. Sharp profit taking on Friday left it flat through the close, but the coming week of data could potentially see the Aussie test the psychologically significant 0.8000 mark.

Starting off the week of market-moving data, Government officials will report the results of the closely followed Current Account Survey at 00:30 GMT Tuesday. Analysts predict that the figure improved through the third quarter of the year, but risks to median estimates may remain to the downside with demand for high Australian yields placing a strain on the balance. The subject of Australian yields will likewise come into play just two hours after the Current Account news, with the RBA set to announce rates following its December meeting. The central bank is widely expected to leave rates unchanged and subsequently release no new commentary following the report. Speculation over the future rates will draw attention to the Q3 GDP on Wednesday to be followed by unemployment on Thursday. Outlook is mixed for the two reports, with stronger GDP likely to be followed by rising unemployment albeit off recent 30-year lows. Needless to say, any surprises in the data could cause large price swings in AUD pairs, with AUD bulls focused on a retest of 9-year highs at the psychologically significant 0.8000 mark.

Taking Advantage of the Kiwi Carry
The Kiwi was floating higher against most of the liquid pairings last week, but no where was the bullishness more obvious than in the NZDUSD.  Aided by some of the worst US data in months, the New Zealand currency was able to rally 170 points against its American counterpart.  While the NZDUSD is a skewed example of the Kiwiâ�,��"�s appeal, there is an underlying draw to the unit; namely the carry.  While the dollar fundamentals contributed its fair share to the pairâ�,��"�s move, the real interest was in the possibility of a Fed rate cut that would widen the pairâ�,��"�s spread even further than its current 2 percent.  With a number of central banks laying out their plans for monetary policy in the coming days, the kiwi will need to make its own mark when the RBNZ meets Wednesday.  As the possibility of a rate hike, cut or pass is thrown around by the central bankers, they will need to take recent economic developments into account.  From the past weekâ�,��"�s docket, a few indicators will play their part.  The 14.1 percent growth in the money supply through the year ending October will keep the risk of inflation in the forefront.  Also, testing the temperature of the economy, the once struggling manufacturing sector is now the most optimistic it has been since February of 2005.

While both of these indicators are intriguing for the most hawkish, a rate hike is still seen as a long shot in the futures markets. For last weekâ�,��"�s strong few pieces of data, they will likely be regarded with a skeptical air as the RBNZ focuses on its core inflation responsibilities rather than preempt through factory activity numbers.  Another reason to believe Governor Alan Bollard and his board will shun a hike are ominous remarks he himself released in the past.  At the last meeting in October, in which he decided to leave interest rates untouched, the Governor said, â�,��"inflation pressures appear to be abating gradually.â�,�  More recently, Bollard even weighed in on the currency saying it â�,��"appears high relative to some underlying fundamentals.â�,�  If there was any truth to these comments, and it just wasnâ�,��"�t an unsuccessful way of talking down the currency, a rate hike (or suggestion of an impending hike) would certainly exacerbate the â�,��"misalignedâ�,� market valuation.

Boris Schlossberg is a Senior Currency Strategist at FXCM.