US Dollar: Lack of Data Until Thanksgiving Keeps Carry Trades in Play

US Dollar - The US dollar refuses to sell-off, even in the face of broadly disappointing economic data. We had five independently important pieces of US data released today and even though four of the five were bearish for the US dollar, the currency managed to accelerate against the Euro, Japanese Yen and British pound. Today's price action suggests that the market is focusing more on the hawkish comments from the Federal Reserve than incoming economic data.

Given the low volatility environment and lack of meaningful data before Thanksgiving, carry traders are holding onto their long dollar positions. Both inflation and manufacturing sector data failed to live up to the market's big expectations while foreign demand for US treasuries waned after record inflow in the month of August. More specifically, consumer prices dropped for the second month in a row by a larger than expected 0.5 percent, driving the annualized rate of growth down from 2.1 percent to 1.3 percent, a four year low.

Even though CPI held on far better than PPI, the drop in both headline and core prices should give the Federal Reserve more flexibility to put their primary focus on growth instead of inflation. Improvements were seen in manufacturing activity but the results were hardly encouraging. Industrial production accelerated by a weaker than expected 0.2 percent while the Philadelphia Fed Index rose from -0.7 to 5.1.

Despite the improvement in the Philly Fed index, the fact that it did not reflect a similarly impressive rise as the Empire State survey released yesterday was disappointing enough. The underlying details of the index were also very disappointing with the key components (new orders, prices paid and employment) deteriorating.

Not all of today's news were bad however as the NAHB housing market index accelerated from 31 to 33, suggesting that the real estate market may be finding some support. Even though the Net long term Treasury flows fell short of expectations, traders seem quite pleased that inflows were able to meet the same month's trade deficit. The markets should remain quiet until the Thanksgiving holiday, which will keep the EUR/USD trapped within a 1.2750-1.2925 trading range.

Euro and Swiss Franc - The Euro weakened as the market bid up the US dollar. The only economic release on the Eurozone calendar today was consumer prices, which accelerated slightly in the month of October. CPI rose by 0.1 percent after remaining flat the prior month which left the core rate unchanged at 1.5 percent.

US data dominated the calendar today, but things will be a bit different tomorrow as we expect the Eurozone trade balance, French payrolls, wages and current account. The trade deficits of France and the Eurozone as a whole are expected to improve, but these pieces of data are not significant enough to cause a meaningful reaction in the EUR/USD. The ECB is still on track to raise interest rates before the end of the year especially after today's CPI data confirms that inflationary pressures are still prevalent. However incoming economic data suggests that the ECB may opt to put an end to their tightening cycle after their rate hike in December.

British Pound - Even though the British pound also sold off against the US dollar, it performed far better than the Euro thanks to firmer retail sales and housing market data. The strength of the housing market continues to keep consumers happy and spending. Retail sales jumped by 0.9 percent in the month of October after dropping 0.4 percent the previous month.

The RICS house price balance also increased from 46% to 48%, a 4 year high. Unfortunately, despite the more upbeat retail figures, the softer inflation numbers that we saw earlier this week and the downgraded inflation forecasts by the Bank of England still makes the odds of another rate hike by the central bank early next year very low. There is no UK data due for release tomorrow which means that trading should remain very quiet.

Japanese Yen - The Japanese Yen extended its weakness today as the lack of clarity from the Bank of Japan keeps carry trades in play. The central bank left interest rates unchanged at 0.25 percent and did not elaborate much on future policy. Bank of Japan Governor Fukui simply noted that the economy is expected to continue to expand moderately. He added that there were no pre-determined notions on the timing for the next move on rates and reiterated that they would not rule out a December hike.

At this point action has a far greater significance than words when it comes to the BoJ. They have tested the market's resolve long enough that carry traders are simply ignoring any of their hawkish comments. Except for the GDP data that we saw earlier this week, most other incoming data suggests more weakness than strength. Leading indicators were revised down to 18.2 from 20.0 in the month of September. Eventually though, the weak yen level should begin to have stimulative effects for the Japanese economy and as such, brighter times are set to come.

Commodity Currencies (CAD, AUD, NZD) - The Australian and New Zealand dollars were the only currencies to accelerate against the US dollar thanks to the recent trend of stronger economic data. Last night, wage growth in Australia accelerated while the ANZ Business PMI index for New Zealand increased from 50.5 to 56.4.

The Canadian dollar did not participate in the rally however as international security transactions dropped by a larger than expected C$3.077 billion in the month of October. The outflow was concentrated in equities, which is most likely attributed to the same month's drop in stock prices. Like Australia and New Zealand, Canada does not have any further data due for release until next week.