Weak Data Is Only Beginning to Hurt the US Dollar (page 1 of 2)

US Dollar - Action speaks a lot louder than words and even though the NAHB housing market index reported stronger sentiment among builders yesterday, the sharp drop in housing starts and applications for building permits that were reported today basically nullified the previous release. The number of new building projects that broke ground in the month October fell to a six year low as demand wanes and cancellation becomes the new buzz word in real estate.

Building permits also fell for the eighth straight month, indicating that there are even fewer projects in the pipeline. The surprising rise in the NAHB index was the primary reason why the dollar managed to rally yesterday in the face of weaker economic data. The market thought that the housing sector was bottoming out, when it really isn't. We had a tremendous amount of data released over the past week and we have learned that even though the Fed remains hawkish, the trade picture was worse than expected, inflationary pressures are falling, the housing market remains fragile and consumer spending is beginning to see some real signs of weakness.

None of this is good news for the US dollar and should push the Federal Reserve further away from their current stance and give them no choice but to be more neutral with their take on inflation and outlook for monetary policy. The lack of economic data next week should keep the market relatively range bound. Volatilities are low and will probably continue to remain low. However, aside from the drop in the Japanese Yen crosses, there are growing signs that the carry trade faces risk - see our Japanese Yen section for more details. Meanwhile aside from leading indicators, there is nothing of consequence on the US calendar next week. It will also be a shortened trading week with the US markets closed for Thanksgiving Day on Thursday.

Euro and Swiss Franc - When all is said and done, the Euro ends the week slightly lower against the US dollar. Like the US, the Eurozone reported mostly softer inflation data as well as slightly weaker GDP data. The German ZEW survey, one of the week's key releases also dropped to a 13 year low, illustrating the gradual deterioration in the Eurozone economy. However this has mattered little to Euro traders as the European Central Bank remains committed to their game plan of raising interest rates again early next month.

There were a few Eurozone releases this morning starting with the French current account and EZ trade balance. Both improved thanks to lower oil prices, which reduced the import bill. French payrolls increased less than expected, which is hardly surprising given the recent weakness in overall French data. The much bigger surprise was in the Italian current account deficit for the month of September, which ballooned to the largest amount in over ten years.

Looking ahead, there is actually quite a bit of Eurozone data due for release next week. We are expecting German PPI, CPI, IFO and the second release of third quarter GDP. For France, we are also expecting GDP along with consumer spending and business confidence. ECB officials will be speaking a number of times throughout the week including Trichet, but none of these officials are expected to divulge much about monetary policy beyond the December rate hike.

Meanwhile the Swiss Franc also ends the week slightly lower after SNB President Roth said last weekend that the currency's attractiveness as a safe haven asset has diminished with the launch of the Euro.