Dollar Finds a Bid
After a seemingly endless pounding over the past several weeks exacerbated by a string of horrible economic news, the greenback finally bounced this week helped by much better economic numbers. Most positive of all were the Retail Sales figures which jumped 1.0% versus 0.2% expected. The news put to rest most of the doomsday talk about an impendingUS recession and put a firm bid underneath the dollar for the rest of the week. Friday however, saw some wild volatility as the pair first swung higher on much lower than expected CPI numbers only to come crashing down after the dollar positive TIC numbers hit the screens a half hour later. Overall, however, the tone was clearly dollar bullish as the smaller than expected US Trade deficit along with bulging capital inflows assuaged any worries regarding the structural health of the US balance sheet.

Nest week event risk is likely to have a much smaller impact on trade as the calendar is dominated by mostly second tier data. At the front of the week the focus will be primarily on PPI. If that data confirms the softness of CPI numbers on Friday the dollar may well come in for a bit more selling, but currency traders will pay more attention to the latest housing and income data. If the market receives further evidence of a â�,��"softâ�,��" rather than a â�,��"hardâ�,� landing in the US economy, the greenback may see the rally continue.

Euro Retraces the Rally
The Euro-zone calendar was relatively quiet this week and the unit traded much more in response to US data rather than its own.  On the European front the market saw mixed signals with labor costs surprisingly low at 2.0% versus 2.6% expected, suggesting that wage inflation was non-existent. At the same time CPI nudged slightly higher to 1.9%. Overall, however the economic reports suggest that price pressures in the 12 member region remain well contained - a fact that appears to be at odds with ECBâ�,��"�s persistently hawkish posture.  If this trend persists it would be hard for the central bank to justify continuous increases in the repo rates especially if the higher exchange rate begins to impact the export sensitive industrial sector. Although Industrial Production orders continued to grow at healthy pace the fact that they dropped below expectations suggests that growth going forward may slow.

Next week IFO remains the key event risk on the docket followed by German CPI and New Industrial Orders. The IFO survey of German business sentiment has consistently surprised to the upside remaining near decade long highs and in fact has led the EUR/USD higher for the past quarter. Market forecasts are for no change in the 106.8 reading, however should the number show some weakness, the unit could well come in for some further selling  as traders gun for the 1.3000 stops.

Yen â�,�“ No Respect
On Friday we wrote, â�,��"The Tankan survey of large manufacturers printed in line with expectations rising to 25 from 24 the period prior - the highest reading in 5 quarters - while the capex expectations increased at the best pace in 16 years. Despite the strong results the yen continued to weaken in Asian and early European trade as traders remained skeptical that the news would provide enough impetus for BoJ to raise rates next week. The market may well be right that no rate hike will be forthcoming December, however the solid Tankan readings and more importantly the much better than expected increase in the Tertiary activity index which jumped to 2.1% from 1.2%,  suggest that BoJ could easily make a tightening move in January of 2007 rather than in March which was the general consensus view prior to the release.  The Tertiary index results were especially interesting although they received far less attention because they suggest that the strength of the Japanese industrial sector is beginning to filter into the services arena, all of which should prove supportive to the Japanese consumption which has lagged production materially the whole year long.â�,�

Given the fact that yen is woefully oversold, the Tankan news should put a cap on any further yen weakness as speculators begin to consider the possibility that the easy money from the carry trade may have already been made.  While the interest rate spread between the yen and the dollar will remain substantial even if the BoJ bumps up rates another 25 basis points,  the currency markets are far more concerned with the relative direction of the spread rather than its absolute value.  Next Mondaysâ�,��"� BoJ meeting remains the key event risk  for the week and even if the central bank does not hike rates but hints that it would do so soon, the news might be enough to push  the yen higher.

Price Pressures Prop Pound
Pound was able to hold its own last week against the greenbackâ�,��"�s long-awaited bounce as nearly every piece of economic data out of the UK surprised higher. BOE hawks finally got some hard evidence that wage pressures may be further fueling inflation, as headline and core CPI jumped higher by 0.3% for the month and 1.6% for the year, respectively, while average earnings unexpectedly posted at a solid 4.1%. Meanwhile, RPI, the figure used to adjust payrolls in the UK, rose to an annualized 3.9%, pointing to price pressures in the pipeline for the UK. Furthermore, BOE doves wonâ�,��"�t be able to reason that two 2006 rate hikes have damaged growth, as retail sales gained a better-than-estimated 0.3%, jobless claims dropped by 5.7K with substantial downward revisions to the month prior, and the trade deficit narrowed. The big question mark for 2007 is where benchmark rates will go, as a single 25 basis point cut by the Fed or a 25 basis point hike by the BOE would put rates in the US and UK at parity.

A major point that the BOE will consider is whether house price growth will continue, and if so, how much will it contribute to CPI? A flurry of housing market data over the course of the week should help identify if the sector is still accelerating at a breakneck pace. Furthermore, the release of the minutes from the most recent MPC meeting will clue traders into the bias of the BOE. Another important piece of data, money supply growth, is anticipated to ease slightly to 13.8% year over year. However, even that rate is still near a 16-year high and is likely of significant concern to central bankers. As a result, Cable bulls have plenty of fundamental support to maintain lofty price levels this week.

SNB Outlook Takes Out Swissie
As had been anticipated for months, the Swiss National Bank hiked their target rate 25 basis points to 2.00%. Not surprisingly, the SNBâ�,��"�s December assessment was what caught the marketâ�,��"�s attention, especially as the central bank downgraded their 2006 inflation forecast to 1.1% from 1.3% while the 2007 inflation forecast was cut all the way down to a tepid 0.4% from 1.1%. Meanwhile, economic growth in 2006 was still projected to expand at a rate of about 3% and 2007 growth expectations were raised up to 2% from 1.8%. Furthermore, the SNB expressed its intent to continue normalizing rates if economic data falls in line with projections in coming months. However, Swissie did not take kindly to the downgrades to inflation forecasts, as USD/CHF gained more than 150 points over the next few days while EUR/CHF saw an even greater surge, with price pushing to record highs and ending the week just below 1.6000.

Next week, traders will only get confirmation of the SNBâ�,��"�s economic assessment, as producer and import prices should remain weak while the trade surplus is expected to narrow slightly and Q3 industrial production is anticipated to contract. However, Swissie could remain bid on carry trade liquidation, but considering that much of the easy money has likely been made on that trade, there may not be much downside potential for the USD/CHF this week.

Housing Leads Loonie Lower
Loonie was doomed last week as economic data out of Canada was disappointing at best. Inflation in the housing market wound down for the second consecutive month in October to 0.2%, marking the slowest pace since July 2005 and a long way from its recent record high set in August at 1.5%.  This reduced pace seems to line up with the other housing indicators that have hit the newswires recently.  Volatile building permits for October grew 6.1% - growth not uncommon for this specific indicator - while housing starts in November grew only 1,800 units to 225,000 on annual basis. Meanwhile, the two better-than-expected results were still below par, as new motor vehicle sales and manufacturing shipments both contracted for the month. The moderating pace in housing along with easing sales and shipments may suggest the consumer is slowly tightening the purse strings on big ticket items and more liberal domestic purchases could take a hit next.

With a busy economic calendar set up for Canada next week, Loonie traders may be feeling wary as the results could be decidedly mixed. There are two events that will likely take priority, however, as core CPI is anticipated to hit the tape at 2.1% - down from last monthâ�,��"�s 2.3% but still above the BOCâ�,��"�s 2.0% target â�,�“ while GDP is expected to edge 0.1% higher for the month. Should either or both reports disappoint, USD/CAD could rocket higher as markets attempt to price in a rate cut by the Bank of Canada in 2007.

Aussie Ignores Strong Second-Tier Data
The Australian dollar fell for the second consecutive week, as strong albeit second-tier economic data was not enough to stave off a broader US dollar advance. Recent fundamental releases were enough to boost outlook on key sectors of the Australian economy, however, with notable results in Westpac Consumer Confidence and Dwelling Starts towards the end of the week. Despite an NAB Business confidence Survey unchanged at 8-month lows, Westpacâ�,��"�s Consumer Confidence measure showed that optimism grew 11.8 percent through December. Residents seemingly shrugged off the pressures of a third RBA rate hike in October and sent the headline confidence measure from 95.0 to 106.2 on the month. Such a strong gain hints at solid consumer spending in subsequent data, with substantial employment growth underpinning optimism and demand. Later Dwelling Starts results rounded out the week of fundamental news, with government officials reporting an unexpected rise in housing demand for the third quarter.

The week ahead suggests that news continues to remain upbeat. Due up first, HIA New Home Sales may look to impress with previously bullish mortgage results underlining demand. If housing sales grow, so too will the Westpac Leading Index, which attempts to measure likely growth in the coming 3-9 months. With the previous read at 5.3 percent, bank members hope the number will boost outlook for the year to come. Finally, DEWR skilled vacancies will likely reflect a strong labor market through recent months and rebound off of Decemberâ�,��"�s 0.1 percent drop. Impressive data would only bolster the case for a February RBA hike, with current interest rate forwards pricing in a 30 percent likelihood of a 25bp gain. Needless to say, this would underpin AUD-denominated carry interest and could see the currency soar above its 18-month highs.

Will Tepid Growth Cut The Kiwi Run?
At the RBNZâ�,��"�s policy meeting held on the 6th, Governor Alan Bollard made it poignantly clear that domestic spending habits were stoking inflation even though economy was struggling with its slowest pace of growth in five years. In the past week, the fundamental dichotomy pitting struggling growth against unyielding inflation has grown once again. Keeping the pressure on the national price gauges, retail sales rose 0.3 percent in October. This is the sixth consecutive month spending has increased, despite the central bankâ�,��"�s verbal warnings that a another rate hike may be in the works if consumers could not control their hot hand. At the same time, the indicators surrounding the retail gauge brought the rest of the economyâ�,��"�s resistance back to reality.  The third quarter terms of trade index dropped 1.9 percent, suggesting exports would not be a strong contributor to growth. Sharing in the woes of weakening trade, New Zealandâ�,��"�s business base was printing modest numbers. Third quarter manufacturing activity growth decelerated to 2.7 percent growth from 4.8 percent in the previous three months, while the ANZ Business PMI stepped back in its November reading.  Further compounding the problem for the economy, but making a case for the kiwi, Prime Minister Helen Clark remarked, `We think a stronger-for-longer kiwi dollar is going to be a feature in our future.'' If politicians are picking up on the trend, this calls into question how long can the kiwi pull down the honor of the top currency.

This question may find its answer in this weekâ�,��"�s numbers.  Three quarterly reports will specifically address the major veins of the economy. Exports, which accounts for roughly a quarter of the economy, will be measured in the governmentâ�,��"�s current account balance through the three months ending in September.  Later, consumers will give an idea of how much they have spent through the final months of the year through the Westpacâ�,��"�s Consumer Confidence gauge.  Finally, the entire economy will ultimately have its temperature taken with the quarterly GDP figure. Since, there is no market consensus, any significant change could produce a genuine surprise for the market.

Boris Schlossberg is a Senior Currency Strategist at FXCM.