By DailyFX - US Dollar - The market has been very quiet today but traders should not lose sight of the fact that last week...

... marked a major turning point for the US dollar. After slowly strengthening since the month of August, the uninteresting changes that the


Fed made to their FOMC statement last Wednesday led to extremely interesting price
action in the currency market. The US dollar saw its longest stretch of weakness
since July and for the most part, the weakness continued into the new week.
Although the greenback rebounded against the Euro and Canadian dollar, it extended
its sell-off against the rest of the majors. This mornings US data was hardly
helpful as weaker growth in spending was offset by stronger growth in income. The
problem is that economic growth is at risk while the inflation outlook is unclear.
Even though core consumer prices increased strongly in the month September, core PCE
and the price index in the third quarter GDP report fell short of expectations.
Even todays annualized PCE deflator increased less than expected despite a
revision to last months core PCE month over month number. The Federal Reserve is
on hold at the moment and not likely to move until next year at the earliest. This
means that going forward, it will be a matter of carry versus growth. The US
5.25 percent interest rates are still very attractive, which could bring carry
trades back into style, but if US data indicates that growth is taking a major turn
for the worse, the markets projections for a rate hike may become too much for
the US dollar to handle. Meanwhile despite todays quiet price action, this is a
big week in the currency market with the G7 countries releasing a tremendous amount
of data. In the US tomorrow, we are expecting consumer confidence along with the
Chicago PMI report. Given the weakness in industrial production, Philly Fed and
ISM, the Chicago PMI report is expected to drop and even if it manages to rise, the
strength will probably be shrugged off as other data suggests weakness in the
manufacturing sector nationwide. The Conference boards consumer confidence
reading however is predicted to be strong after last Fridays rise in the UMich
consumer confidence survey.

Euro and Swiss Franc In contrast to its global counterparts, the Euro did not
manage to extend its strength against the US dollar. Economic data was decent with
the French business survey rising 4 points to 17 and unemployment dropping by 20k,
bringing the jobless rate down from 9.0 percent to 8.9 percent. The weakness in the
EUR/USD can be mostly attributed to earlier EUR/JPY selling. The 150 level has
proven to be staunch resistance in the pair and traders have been adamant about
keeping it below that level. There is a ton of Eurozone economic data due for
release tomorrow with German retail sales as the highlight. After stagnant consumer
demand in August, a revival is expected for the month of September. The Eurozone
economy is doing well for the most part, which will keep the central bank on track
to raise interest rates. There has been no news out of Switzerland. However, for
those who listened to the Swiss Finance Ministers comments last week about the
Franc needing to strengthen against the Euro, awards were doled out in the form of
profits. EUR/CHF fell for three consecutive days which was its longest stretch of
weakness since mid September. There is no data due for release from Switzerland
until Wednesday.

British Pound - The British pound easily took out the 1.90 level against the US
dollar to register gains for the fourth consecutive trading day. Economic data
continues to print strongly which is fueling the recent strength in the currency
pair. Housing market indicators such as consumer credit and mortgage approvals
highlighted further growth in the sector while faster money supply growth indicated
inflationary pressures. Collectively, this suggests that the Bank of England will
soon be delivering another interest rate hike, which is actually quite possible
given last weeks hawkish comments from BoE officials. The central bank will be
meeting next week and the odds are already in favor of bringing rates up from 4.75
percent to 5 percent. Even though there are a number of economic releases scheduled
between now and then, none are expected to shift the outlook.

Japanese Yen The Japanese Yen is firmer today against the US dollar and Euro
thanks to a smaller than expected drop in industrial production in the month
September. Although a drop in IP is certainly nothing to write home about, the
underlying rebound in exports is encouraging. We continue to believe that the weak
Yen will have broad sweeping benefits for the country and the economic data is
beginning to show that. In fact, traders are closely anticipating this evenings
monthly report from the Bank of Japan. Even though interest rates are not expected
to be changed, the central bank could express more optimism about economic activity
and inflation which would be very positive for the currency. In addition to that,
unemployment, personal income, PMI, PCE, housing and construction starts are also
due for release. The market is also looking for improvements in all of the
reports.

Commodity Currencies (CAD, AUD, NZD) Oil prices are back below $60 a barrel and
that has hit the Canadian dollar along with a larger than expected drop in raw
material and industrial product prices. For a country that is heavily dependent on
oil exports, the drop in price of their most valuable commodity will eventually hit
the economy as well. It is only a matter of time. New Zealand data also helped the
currency rebound with building permits hitting an 18 month high and business
confidence improving. Even though Australia did not have any economic data
released, the combination of a rise in gold prices and the prospect of another rate
hike by the central bank have the market bidding up the currency. This mornings
Sydney Morning Herald had an article suggesting that the Australian government would
be very unhappy if the Reserve Bank of Australia did not raise interest rates. The
recent improvements in Australian economic data support the latest strength in the
currency.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com

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