US Dollar Breaks Down as Consumers Buckle (page 2 of 2)

British Pound - Unlike its peers, broad dollar weakness was not enough to drive the British pound higher. With the much awaited November inflation report due out tomorrow, the market is questioning whether the Bank of England will actually retain its earlier hawkishness. Softer consumer price figures today followed weak producer numbers yesterday.

CPI rose by a modest 0.2 percent in the month of October, keeping the annualized pace of growth unchanged at 2.4 percent while core prices also stayed steady at 1.4 percent. The market was originally pricing in another quarter point rate hike by the first quarter of 2007 and today's price action reflects a shift away from that expectation.

We do want to point out that even though CPI and PPI came out weaker, the retail price index which is an older measure of the most basic retail goods increased to the highest level since June 1998. This suggests that inflationary pressures in other parts of the economy may still be prevalent and if so, would validate the BoE's most recent rate hike.

Japanese Yen - The Japanese Yen is stronger across the board today thanks to solid GDP numbers. Growth accelerated by 0.5 percent in the third quarter, bringing the annualized pace up to 2.0 percent. This is the seventh straight month of higher quarterly GDP growth, which suggests that if things continue this way, we could see an interest rate hike by the Bank of Japan early next year.

The current weakness of the Japanese Yen only provides an additional stimulus to the economy and we expect incoming economic data to reflect that. The Bank of Japan begins their monetary policy meeting tonight. No rate changes are expected and Fukui should be reiterating his recently hawkish stance. In the meantime, short yen carry trades continue to face major risks.

Commodity Currencies (CAD, AUD, NZD) - The Australian and New Zealand dollars are stronger against the greenback thanks to solid economic data. New Zealand reported very strong retail sales. Originally expected to drop by 0.1 percent, sales increased by 1.2 percent in the month of September. On a quarterly basis, retail sales also rose by a stronger than expected 1.0 percent. The data suggests that the economy is not doing as poorly as people may think and consumers are continuing to spend despite the damaging impact of the strong kiwi on the export sector.

In Australia, even though the NAB business confidence index remained unchanged, business conditions accelerated and the wholesale / retail sector reported strong gains. There was nothing out of Canada today although manufacturing orders and shipment data are due for release tomorrow. The drop in energy prices and the strong Canadian dollar should have hurt orders which may explain why the Canadian dollar is softer today.