US Dollar
The currency market never likes uncertainty, especially at such a geopolitically sensitive time which explains why traders sold the US dollar after hearing news that an unexplained gas odor is circulating in the air in New York City.  This caused a brief shutdown of schools and the transit system.  Given that Mayor Bloomberg has no good reason to explain the odor and neither does Con Edison, the reaction in the US dollar could be tied to mild speculation of terrorism.  However as the gas passes in the city, so does the market’s jitteriness.  FX traders have a short attention span and we recall back in August when there was a similar mysterious odor that was never explained in the other boroughs of the city.  Traders will soon realize that Friday’s non-farm payrolls report is too strong to ignore, especially as a leading indicator for this Friday’s retail sales report.  Consumer credit for the month of November was exceptionally strong as the rise in credit card purchases confirmed the 1.0 percent increase in consumer spending during the same month.  Another positive month is expected thanks to the low level of oil prices and a strong labor market.  However retail sales are not due for release until Friday.  There is no data on Tuesday, which means that we could tread water until the trade balance on Wednesday.  The real wildcard is oil.  There have been reports that Israel is planning to secretly destroy Iran’s uranium enrichment facilities while Russia shuts down the Druzhba pipeline to Belarus.  Both have the potential to heat up while temperatures in US begin to cool.  After walking out in a t-shirt this Saturday to enjoy the 70 degree weather here in NY, we are prepared to don our winter jacket for the 28 degree low expected on Wednesday night.  This sharp shift in temperatures should be very positive for oil prices and less so for the US dollar.  Therefore as long as we don’t have another gas leak tomorrow like we did today, there could be a continued correction in the US dollar after the three days of extensive gains last week. 

Euro
Even though the Euro closed higher against the US dollar today, since breaking down after the strong US non-farm payrolls report on Friday, the currency pair has essentially done nothing.  Traders are trying to quietly chip away at the 1.30 price level, but their efforts have yielded little results thus far.  The European Central bank will be holding a monetary policy meeting this week and even though no changes are expected, comments from ECB President Trichet could decide whether the rock solid support below 1.30 can be broken.  Oil prices are now trading not far from their one year lows which could encourage the head of the central bank to pare back his hawkish stance.  If he does, it would certainly not be positive for the Euro.   Meanwhile the big surprise today was the drop in German retail sales.  Economists had originally been expecting a strong up tick in consumer spending after seeing the sharp rise in business confidence and the improvement in the labor market.  However the prospects of an increase in the Value Added Tax actually restrained spending in the month of November.  If we do not see a pickup in December, Germany could really be looking ahead to a meaningful slowdown in growth as individual households fail to benefit from the improvement in the corporate sector.   Looking ahead, we have German trade data and industrial production due for release.  The market is still expecting firmer numbers from the manufacturing sector.  Should we see another downside surprise, the Euro could remain under pressure heading into the ECB meeting.  Russia’s shutdown of the Druzhba pipeline deals a significant blow to Germany and Poland who also receive oil from Russia through the pipeline. 

British Pound
With no economic data on the calendar today, the British pound outperformed both the Euro and the US dollar.  Improvements in economy have sparked talk of an interest rate hike as early as February by the Bank of England.  We will need to see this speculation proved by this week’s batch of economic data.  We are expecting retail sales, the trade balance, industrial production and more housing market reports.  The Bank of England has a monetary policy meeting scheduled for Thursday but no rate decisions are expected.   Wage growth appears to have held up well which should encourage more spending by UK consumers this holiday season.  Reports from individual retailers such as department store chain John Lewis have been quite promising as well. 

Japanese Yen
The Japanese markets were closed for the “Coming of Age” day overnight as the yen sold off against the majors.  Finance Minster Omi was on the wires this afternoon talking about the need for the yen to reflect fundamentals.  His comments were mostly positive for the currency as he felt that the economy was recovering and noted that the specific interest rates levels should be left to the central bank.  The Bank of Japan is expected to adjust interest rates next week.  This would be the second time in six years that the central bank has lifted interest rates.  Although the yen could continue to rally ahead of the decision, its impact could be limited because another rate hike would only bring rates to 0.5 percent, which is still the lowest of the industrialized world.  In all likelihood, the central bank will do just what they did last year, which is to give the market ample time to absorb the change before lifting interest rates again. 

Commodity Currencies (CAD, AUD, NZD) 
After having sold off significantly last week, the Australian and New Zealand dollars bounced today while the Canadian dollar sold off.  Australian data was stronger than expected with building approvals increasing and job advertisements rising by the largest amount in 7 months.  The Australian economy is rebounding, but we will need to see tonight’s retail sales and Thursday’s job data to confirm that.  The Canadian dollar is weaker following the comments from Bank of Canada Governor Dodge over the weekend.  He said that he was not surprised by the weakness in the currency given the drop in resource prices.  The weakness should be short lived however as oil related geopolitical risks rise.  Both Russia’s dispute with Belarus and the conflict between Israel and Iran pose upside risks to oil.  The Bank of Canada released their winter business outlook report and the majority of businesses expect sales volume to remain the same.

Kathy Lien is the Chief Currency Strategist at FXCM.