US Dollar
Fully prepared to sail through Monday’s session on a relatively quiet calendar, dollar-denominated pairs were instead put into motion by a number of factors outside the realm of the rigid docket. Initially holding to the momentum that followed through the close on Friday, the bears finally caught up to the dollar when liquidity from Asian, European and North American markets aligned. With all in tune, the fundamental thread of the morning was followed to the Bank of International Settlements’ quarterly report released over the weekend. Not for the faint of heart, the dense reading found few daring to take on the text. However, its influence was felt nonetheless when the Financial Times ran an article honing in on the dollar holdings of the OPEC group. According to the report, dollar holdings in the oil cartel have fallen from 67 percent to 65 percent, a two year low. While this may not seem to be a substantial change, it offers statistical support to warnings made by a number of monetary officials that they would be diversifying away from dollars in order to ease exposure to further capital losses with the currency. Another report, from the National Association or Realtors, had also garnered the attention of dollar traders. The largest trade group in the industry, the NAR suggested the worst of the housing slide is over; and expected existing home sales to rebound in the first quarter. With the anti-dollar trend maturing into the afternoon hours in New York, the biggest single move through the session was triggered by comments made by former Fed Chairman Alan Greenspan. Proving he still has clout over the market, the dollar was sent to new lows when a report from Reuters quoted Greenspan as saying he expects the dollar to be weak for a few years. Amongst all of the impromptu reports this morning, there was still one economic release that held some sway over the market. Preempting Thursday’s retail sales report, wholesale purchases this morning reported a 0.5 percent contraction in October. With the 1.5 percent drop in the previous period’s release, this was the first back-to-back drop in sales in over three years.

Euro and Swiss Franc
The Euro gained for the first day in five, as broadly dollar-bearish comments and data allowed the single currency higher through the week’s open. Likewise significant, sharp JPY losses boosted the EURJPY to fresh all-time highs and provided cross-currency support for the EURUSD and EURGBP. Weaker second-tier Eurozone data was not enough to slow the advance, but Euro bulls contained the initial upward drive in anticipation of tomorrow’s FOMC meeting. Though markets broadly expect little change in tone from the monetary policy committee’s stance as seen through October’s announcements, risk-averse traders have resisted adding to long positions. Underlying risks, options traders have driven overnight implied volatilities well into double digits at a whopping 13.25 percent. Euro traders likewise look forward to tomorrow’s German ZEW data results for indication of investor confidence in the continent’s largest economy. Predicted to bounce off of 7-year lows, the ZEW Economic Sentiment should show that pessimism moderated through the month of December. If it continues lower, we could see the EURUSD lose some of its Monday gains.

British Pound
Softer than expected inflation data was not enough to keep the Pound lower on the day, with a later anti-USD rally keeping the GBPUSD above the psychologically significant 1.9500 mark. Morning Producer Price Index data showed that Core Producer Output prices grew more slowly through the month of November—perhaps indicating that the Bank of England would acquire a more neutral stance on monetary policy. Tomorrow will subsequently be a critical day of data for the United Kingdom, with the Consumer Price Index to underline the level of inflationary risks to Europe’s second-largest economy. If CPI comes in softer than expected, we could certainly see a GBP sell-off on a decline and flattening of the domestic yield curve. Synthetic forwards have currently priced in full expectations of a 25 basis point rate hike through January. Of course, if inflationary data does not display signs of overt price pressures, the MPC will almost definitely keep repo rates unchanged through the medium term. 

Japanese Yen
The Yen fell broadly lower against major currencies, as waning expectations of an imminent Bank of Japan interest rate hike stripped the currency of its recent appeal. With the 10-year Japanese Government Bond up almost 40 small points on the day, yields fell a whopping 5 basis points to 1.635 percent by the Asian open. Perhaps interestingly, however, synthetic forward rates continued to price in a full 25 basis point BoJ target rate hike by December. Late CGPI data did little to boost outlook on the future of perennially low domestic interest rates, with the Corporate Goods Price Index dropping 0.1 percent through the month of November. Other than tomorrow’s US FOMC meeting, Yen traders look forward to late Thursday’s Tankan Capital Expenditures report, with a likewise firm emphasis on simultaneous Tertiary Industry Index results. Any downward surprise in either of these figures would almost certainly sink hopes of higher rates through December, with any possible rate hike to come some time in the first quarter of 2007.

Commodity Currencies (CAD, AUD, NZD)
The commodity bloc found a healthy anti-dollar bid this morning, though fundamentals were not in support of the trend. Canada’s economic calendar was the busiest with a new housing price index for October and third quarter labor productivity report. One of the pillars of consumer strength, inflation in the housing market decelerated to its slowest rate since July of 2004. Labor productivity in similar fashion, fell short of the expected rebound by contracting 0.1 percent, prompting the market to predict a rate cut from the BoC could be further away than initially thought.  Across the Pacific Ocean, the sole New Zealand indicator came up short.  The third quarter terms of trade index fell 1.9 percent as exports marked their first decline in a year while the import side chalked up its sixth straight rise.

Kathy Lien is the Chief Currency Strategist at FXCM.