Green light Still On for the Euro, But Be Careful of What You Buy (page 1 of 2)

DailyFX Fundamentals 11-09-07

By Kathy Lien, Chief Strategist of DailyFX.com

Busy Trading Week Ahead: What's Next for the US Dollar

It has been an extremely active week in the financial markets with the Dow falling over 500 points, the US dollar hitting a fresh record low against the Euro and carry trades breaking down. Traders who thrive on volatility should not be disappointed in the week ahead because we have an extremely heavy economic calendar that will tell us whether Federal Reserve Chairman Ben Bernanke was right to be more worried about growth than inflation. The forecasts for October retail sales are low (0.2 percent) because many of the nation's largest retailers have missed their sales forecasts. However, don't forget that non-farm payrolls over the past few months have been exceptionally strong and gasoline prices in the month of October remained steady, so retail sales could still beat expectations. Also, we expect both producer and consumer prices to surprise to the upside given the rise in food and energy prices. Does this mean that we are looking for a bottom in the US dollar next week? No. There could be a second half of the week rebound, but over the medium term, we still expect the US dollar to weaken because even if retail sales was strong last month, there is a good chance that holiday sales could suffer. Gas prices could jump at any moment; yesterday we already reported that some gas stations in California are charging as much as $5 a gallon. So the worst is not behind us and a rise in inflationary pressures will only make US consumer spending and the overall US economy more vulnerable to a sharp slowdown in growth. In addition to retail sales, PPI and CPI, we are also expecting pending home sales, the Empire State manufacturing survey, the Philly Fed manufacturing survey, the Treasury International Capital flow report and industrial production.

Green light Still On for the Euro, But Be Careful of What You Buy

Of all the high yielding currencies (which basically excludes only the Japanese Yen and Swiss Franc), the only one that did not fall against the US dollar today was the Euro. Not only is that a testament to the currency's strength, but it is also a reflection of what could be to come for the Euro. We continue believe that 1.50 is not only possible but probable. Three different ECB officials were on the wires today repeating everything that Trichet said yesterday about inflation and exchange rates. The view within the ECB appears to be very unanimous with inflation a far bigger concern than growth. Weber even said that the level of the Euro is not a factor in their monetary policy decision which can only mean that they don't care if it strengthens further. Of course, there will be a point when they do care, but that may not be until the Euro surpasses 1.50. With Trichet's comments this past week, the green light stays on for further Euro strength. In the week ahead the Eurozone economic calendar is comparatively lighter than the US calendar. We are only expecting the ZEW survey of analyst sentiment, German and French GDP and Eurozone consumer prices. Given that US retail sales and inflation data are due for release, the better buy next week may be the relative strength plays over than the EURUSD itself, such as EURGBP or EURCAD.

USD/CAD: Time for a Bottom

We had first talked about the potential for a USDCAD bottom on Wednesday, when we reported a drop in open and long positions in USDCAD according to the FXCM Speculative Sentiment Index.