Central Bank Meetings Flood the Calendar Next Week (page 1 of 2)

US Dollar - For the first time since April 2003, the national ISM survey of manufacturing conditions fell below the 50 mark, indicating that activity contracted rather than expanded in the month of November. With five out of the ten underlying components including employment, new orders and production contracting, the possibility of a recession in the US economy is growing. The weakness of the housing market is finally spreading to the rest of the economy and both traders and economy watchers are worried. The US dollar has fallen once again while the stock market tanked on the back of the report. In addition to the ISM, construction spending also dropped by 1 percent with a comparably large downward revision to the September data. Interestingly enough though, Fed President Plosser as well as the ISM head downplayed the significance of the report. They felt that a one month contraction was too little to deem the entire sector as recessionary. In fact, we would need to 6 months of sub 50 readings to label it as such. We think that if we saw 2 sub 50 readings, it would be time to be very worried. The recent data suggests that GDP in the fourth quarter will most likely take a big hit. There is little chance that the 2.2 percent growth that we saw in the third quarter will be sustained. In fact, it is very possible that we could even see growth drop below 2.0 percent. Bernanke refrained from making any comments about the economy or monetary policy today, but we know where he stands after his speech earlier this week, where he was worried about inflation but weary about growth. Looking ahead, Fed fund futures have already fully priced in a quarter point rate cut by the summer. We continue to expect a great deal of data next week with service sector ISM and non-farm payrolls the primary focus. It is quite obvious that the dollar's rally has become extended but with the proximity of 1.35 in the EUR/USD and 2.00 in the GBP/USD, those key levels may be too tempting for traders not to take stab at.

Euro and Swiss Franc - The Euro has staged an impressive rally over the past week not because the economy is doing well, but because it is not doing as poorly as the US. Relative weakness is what we have to deal with these days and unfortunately the relative weakness in the US economy is far more dominant. The Eurozone also released manufacturing sector data today that fell short of expectations, but the reading remained comfortably above the 50 boom/bust level for every country within the region. The unemployment rate even improved from 7.8 percent to 7.7 percent thanks to the contribution from Germany, who reported a surprise 86k drop in unemployment in the month of November. For the time being, the Euro's rally remains very strong and will likely continue until we hear some objections from the European central bank. Next week could provide the perfect forum as the ECB announces their monetary policy decision. Another quarter point hike to 3.50 percent is widely expected by the market but beyond that, policy remains questionable. Even Trichet himself has said that projecting into 2007 may be premature. Given the recent mild slowdown in the Eurozone economy and the potential strain brought on by the strength of the Euro, the ECB will most likely shift to neutral. Inflationary pressures are also being capped by the rally in the currency, which we expect will calm the ECB's calls for vigilance. The interest rate meeting will be the market's primary focus next week even though there will be a few key releases including Eurozone retail sales.