By DailyFX - US Dollar - A surprisingly strong Empire State manufacturing survey and hawkish FOMC minutes has helped the US dollar climb higher against...

... everything except for the Euro.

Although manufacturing conditions in the Empire State are hardly reflective of
manufacturing conditions nationwide, the fact that the index rose to 26.7 in
November from 22.9 when it was originally predicted to drop is very encouraging.
However traders need to be very cautious of reading too much into the number because
the Empire state index has increased for 3 straight months, while the Philly Fed,
Chicago PMI and ISM index have not. The Philadelphia Fed index, which is due for
release tomorrow tends to be a much more reliable leading indicator for
manufacturing conditions nationwide, so before getting too excited about the recent
manufacturing sector weakness reaching a potential bottom, we would also need to see
similar strength in the Philly Fed. As for the FOMC minutes, it appears the view
that inflation is higher than desired is one that is held by nearly all Fed
Presidents. Although they acknowledge that there are still downside risks to
economic activity, they appear to be a bit more comfortable with the growth outlook,
especially as the labor market remains tight. Clearly inflation was more important
than growth to the Federal Reserve last month, but we think that things will be
changing going into the next meeting. We have already seen weaker consumer spending
and signs of softer inflationary pressures. Consumer prices tomorrow will be
deciding factor of whether the EUR/USD will have what takes to make a run for 1.30.
Yesterdays producer prices suggest that CPI could also have fallen significantly
in the month of October. However, the key number to watch will be core prices
because that is the Fed’s top concern. If annualized CPI does not drop from its
present rate of 2.9 percent, it will still be holding at 10 year highs, which would
give the Feds inflation concerns validity.

Euro and Swiss Franc - The Euro was the only currency that managed to accelerate
against the US dollar today. Despite weaker industrial production figures, central
bank demand continued to keep the currency propped. The Euro broke down yesterday
when the French Prime Minister called for collaboration on dealing with the Euro
level. The German governments unwillingness to participate threw cold water on
that attempt. The Eurozones largest member believes that the ECBs
independence should be respected and they said that they have no problem with the
present level of the Euro. Unlike Japan, the ECB has a far greater sway on the
markets than the heads of the European governments. With only a few weeks to go
until another interest rate hike, the market is shrugging off any weak Eurozone
economic data. Industrial production in the month of September dropped by a larger
than expected 1.0 percent, led by weakness in France. The Eurozone is also expected
to release consumer price data tomorrow. Even though the ECB is adamant about
raising rates, the annualized CPI number is predicted to be lower than their 2.0
percent target. Meanwhile the Swiss Franc is weaker against the Euro today after
SNB President Roth acknowledged the reduced safe haven bonus of the Swiss Franc
after the introduction of the Euro.

British Pound - The British pound suffered greatly today against both the US
dollar and Euro as the double blow of a more dovish November Inflation report and
weaker employment data sent 2007 rate hike expectations down the tube. After a
barrage of weak consumer and producer price data, the Bank of England was forced to
downgrade their inflation outlook. They were more optimistic about growth but that
may not be enough to warrant another first quarter interest rate hike. Traders
have been piling into the long GBP trade after the previous batch of stronger
economic data and hawkish comments from the BoE. The market was pricing in a more
than 70 percent probability of 5.25 percent rates by February, which would put the
UK on par with the US. The latest data however makes it far more likely that rates
will remain on hold through the first quarter of next year. Tomorrows retail
sales data should help the British pound recover some of its recent losses as the
strong housing market helped to keep consumers spending healthy.

Japanese Yen - Disappointing tertiary activity data and a tsunami warning has sent
the Japanese Yen lower. Despite yesterdays firmer GDP report, there are still
many parts of Japanese economy that remain very fragile. The Bank of Japan is
expected to leave interest rates unchanged tonight at 0.25 percent. No surprises
are expected from Fukui who only recently confirmed his hawkish stance. The BoJ
will also be releasing their monthly report. It will be interesting to see if the
central bank has any comments on the Q3 GDP release. For the time being, short yen
carry trades are still working, but policymakers are increasingly concerned. The
Japanese government is specifically afraid that a massive carry trade unwind would
send the yen skyrocketing, which in turn would cause a big blow to their export
sector.

Commodity Currencies (CAD, AUD, NZD) The Commodity Currencies were all down for
the day on the back of weaker economic data. Australian wages rose by a less than
expected 0.8 percent in the third quarter while house price growth slowed from 3.5
percent to 2.2 percent. These two pieces of data suggests softer inflationary
pressures which come in slight contrast to the Reserve banks recent statement on
monetary policy. Canada also disappointed with larger than expected drops in
Canadian manufacturing shipments and new motor vehicle sales. Both sectors have
been hit by lower energy prices and a stronger Canadian dollar. Even though New
Zealand reported very strong retail sales the previous day, dovish comments from the
RBNZ kept pressure on the kiwi. RBNZ Governor Bollard warned that any increase in
interest rates would cause considerable strain on the household sector which is
already saddled with a tremendous amount of mortgage debt. They are watching the
sector closely in fear of a ratings downgrade, which suggests that they may have
already one hand on the rate cut button.


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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