By DailyFX - US Dollar - Disappointing US data has sent the dollar tumbling to a fresh monthly low. Although the University of...

... Michigan consumer confidence survey increased last week, the Conference Boards number dropped from 105.9 to 105.4.

Consumers were less optimistic about the current state of the economy, but were optimistic about
the future. With oil prices low and interest rates steady, it is not surprising to
see consumers adopt a more jovial mood as we get closer to the holidays.
Manufacturers however did not share the same sentiment. The Chicago PMI report
dropped from 62.1 to 53.5, the lowest print since August 2005. Inventories
accumulated to the highest level since the 1970s, which suggests that some harsh
measures may need to be taken to rein in those numbers. Chicago is not the only
region to be suffering from the slowdown in the manufacturing sector as the
Philadelphia Fed index reported a very sharp drop earlier this month. Even thought
the US is a service based economy, the weakness of the manufacturing sector is still
very important. Todays data suggests that we could see a fairly deep retracement
in the national ISM report due out tomorrow. The only upside surprise today was in
the employment cost index. However rising labor costs is a burden for companies and
hardly a very promising development. Tomorrow we get a first peek at how Fridays
non-farm payrolls report could turn out through the ADP release. Last month the ADP
payrolls number came out far below the markets forecast for payrolls and
interestingly enough, the ADP number was the more accurate projection for payroll
gains in the month of September. The latest reports confirm that the Fed needs to
leave interest rates untouched until early next year. Fed Fund futures are
currently pricing in a 70 percent probability of a 25bp rate cut in the first half
of next year.

Euro and Swiss Franc. There were disappointments from all around the Eurozone
this morning, but early morning losses were quickly erased after US data also failed
to live up to expectations. Even though German consumers and businesses have been
more optimistic, the behavior of consumers does not reflect that. Retail sales were
originally predicted to rise by 0.6 percent, but instead, it dropped by 1.7 percent,
which was the third consecutive month of falling consumer demand as well as the
biggest drop since May 2004. French consumer confidence also weakened against
expectations for an improvement while France and Italy both reported larger drops in
producer prices. The fact that actual data shows weakness makes it logical for the
market to shrug off the improvement in yet another sentiment index. Later this
morning, the Eurozone reported a small up tick in industrial confidence. With
growth indicators weakening and inflation estimates falling, the ECB may begin to
tame down their calls for more interest rate hikes. They are still expected to lift
rates by another quarter point, but warnings are already beginning to filter in.
ECBs Draghi said today that weaker US growth could drag Eurozone growth lower as
well. We get a one day break on European data, but Thursday delivers a very heavy
calendar with the highlight being the ECB monetary policy meeting and President
Trichet’s accompanying press conference.

British Pound The British pound has rallied for the fifth straight day against
the US dollar and it is no surprise as UK data continues to surprise to the upside
while US data surprises to the downside. The GBP/USD currency pair is a perfect
example of a strong weak pairing. The US dollar has lost more value against the
British pound than the Euro because the UK economy is performing far better than the
Eurozone. Consumer confidence continues to improve in the month of October as the
housing market powers ahead. The annualized pace of house price growth only slowed
from 8.2 percent to 8.0 percent as the 3 month growth rate was the fastest pace
since September 2004. This follows yesterdays report that mortgage approvals hit
the highest level in 18 months. Furthermore, merger and acquisition flow continues
to fuel strong demand for the British pound.

Japanese Yen Even though Japanese economic data was very weak last night, the
Yen managed to stage a strong rally. With yen shorts at record levels, there were
no sellers left to take the currency even lower in response to last nights
reports. Instead, traders chose to react to the weaker US data, North Koreas
agreement to rejoin nuclear talks as well as the lowest level in the US ten year
yield spread over JGBs in 8 months. There have been plenty of warnings that carry
trades are at risk and perhaps the market is finally heeding that warning.
Meanwhile last night, household spending dropped by 6 percent, the biggest since
December 2001. The labor market also worsened with the jobless rate ticking higher
from 4.1 percent to 3.2 percent. Housing starts came out firmer, but small business
confidence dipped into contractionary levels. The Bank of Japan left interest rates
unchanged at 0.25 percent and downgraded their core inflation forecast. Fukui did
remain slightly hawkish however as he talked of gradual rate hikes in the future.

Commodity Currencies (CAD, AUD, NZD) Commodity currencies are up across the
board today as commodity prices rebound. Canada reported slightly stronger GDP
growth in the month of August, but the Canadian dollar responded less to that than
the late afternoon reversal in oil prices. The New Zealand dollar continues to
remain very strong, despite the countrys Finance Ministers attempt at talking
down the currency. Cullen said that the kiwi dollar was at stubbornly high
levels as interest rates continued to drive foreign demand for kiwi denominated
investments. This is not the first time that Cullen has expressed dissatisfaction
with the countrys currency. He did so last month on September 26 to be exact.
That was the same day that the NZD/USD topped out at 0.6725 and fell 158 pips in one
day. The market has barely reacted to the most recent comments, but only time will
tell whether this will be a delayed reaction. The Australian dollar has also been
very strong as private sector credit prints in line. Tonight we are expecting
retail sales and the trade balance. Judging from the recent strength in prior
reports, tonights data should continue to reflect an improving economy.


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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