Dollar Sells Off on Weak Data (page 2 of 2)

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 yesterday's 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 night's reports. Instead, traders chose to react to the weaker US data, North Korea's 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 country's Finance Minister's 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 country's 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, tonight's data should continue to reflect an improving economy.