By DailyFX - US Dollar - After a week of losses, the US dollar is finally bouncing. It remains to be seen whether this...

... move is real however because the data was not the main catalyst, instead the price action and timing of the breakdown suggests that the market was just tired of shorting dollars.


The 400 point verticalization of the
Euro against the dollar and the 600 point move in the British pound over the past
few days tempted many traders to take profits ahead of the Feds Beige Book
report, which turned out to be neither dollar bullish nor dollar bearish. The
various Fed districts echoed the same themes as Chairman Bernanke earlier this week.
Their number one concern was the housing market and the fact that both sales and
prices were falling. Even though consumer spending is picking up in the districts,
they are cautiously optimistic about growth, which is no surprise given that the
report was submitted on November 20th, a few days before Black Friday. In terms of
inflation, they saw some moderation in prices for construction materials and energy
products, but it is not enough to give the Fed a reason to move interest rates. The
one piece of good news was their assessment of the labor market, which they felt
still remained tight. The other pieces of economic data that was released this
morning were also mixed. Even though third quarter GDP printed strongly at 2.2
percent, the core PCE, which is an inflation measure was revised down from 2.3 to
2.2 percent. New home sales dropped 3.2 percent in the month of October, but the
report contained underlying strength as prices increased 1.9 percent. The housing
market still remains very vulnerable and is far from stabilization. Therefore, the
overall takeaway is that the market is comforted by the firmness of the GDP report,
but the dollar is not out of the woods. Although a further recovery is likely, the
major downtrend should still remain intact.

Euro and Swiss Franc - Comments on the Euro were the days main focus as the
market listened for any type of concern from ECB officials about the level of the
Euro. The French Finance Minster repeated that the EUR/USD above 1.30 requires
vigilance, but no one has really paid attention to his words because they came from
a politician rather than a monetary official. ECB President Trichet refused to
comment on the level of the currency but he did say that excess volatility was
unwelcome. This caused a very mild sell-off in the currency because the central
bank President stopped short of calling the move brutal. Weber made a similar
comment as Trichet while ECB members Stark and Noyer refrained from commenting on
the currency. The ECB is delivering one collective message, which is a tactic they
are known for. Perhaps they want to make sure that the market continues to fully
price in their December hike, so that there isnt a major spike come December 7th.
Mean while there was only one piece of Eurozone economic data released today and
that was French unemployment. After dropping by 50,000 in the month of September,
unemployment increased by 5,000 in October, leaving the unemployment rate unchanged
at 8.8 percent. There is a lot more data due for release tomorrow including German
unemployment, French consumer confidence, French PPI and Eurozone GDP. Should the
data come out weak, the sell-off in the Euro may not be as sedate as it was today.
Over in Switzerland, the tiny country reported a much weaker KoF leading indicator
report. The index fell to the lowest level since February 2006 which comes in
contrast to the rise in the UBS Consumption Indicator that was reported yesterday.
This contributed to the Swiss francs slide against both the Euro and US dollar.
Consumer price numbers are due for release and if they come out weak, the franc
could extend its losses.

British Pound - Unsurprisingly, housing market data printed strongly this morning
with net consumer credit and mortgage approvals both rising. In fact, mortgage
lending increased by the biggest amount in 3 years, illustrating the resilience of
the housing market, which has been the primary driver of the economy. Money supply
remained unchanged, suggesting that for the time being, inflationary pressures are
not running away. More housing market data is due for release tomorrow but the
markets main focus should be on the Gfk consumer confidence report and the CBI
distributive trades survey. Both are predicted to be strong and if that is really
the case, it could help the GBP/USD find some sort of support.

Japanese Yen - Stronger Japanese data was reflected in the currencys
performance against the Euro, British pound and Canadian dollar, but the rebound in
the US dollar was so dominant that it overpowered the gains in the yen. Industrial
production increased by 1.6 percent in the month of October, which was quite a
surprise considering that the market was expecting the index to fall by 0.4 percent.
Vehicle production also increased by 12 percent, which we believe must be tied to
the weakness in the Yen against the Euro. The value of the Yen is making it very
inexpensive for Europeans to import Japanese made cars. Meanwhile we also heard
some bullish comments from Japanese officials last night. Both the Bank of Japan
Governor Fukui and Finance Minister Omi said that the economy is expanding
moderately and they are optimistic about its economic outlook.

Commodity Currencies (CAD, AUD, NZD) - The commodity currencies were all weaker
against the US dollar despite the rise in oil and gold prices. Australia had a
horrid trade balance number reported last night as well as weaker construction work.
New Zealand reported disappointing building permits and stronger money supply
growth. Canada reported a drop in industrial and raw material prices, which
indicates softer inflationary pressures and a rise in the current account balance.
Australian retail sales are due for release tonight and the recent trend of data
suggests that spending could slow. Canada is set to report GDP, which is predicted
to be stronger.


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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