Japanese Yen catapults in thin trading (page 1 of 2)

US Dollar

As traders leave early for the three day weekend and even close their books until the New Year, you could almost hear a pin drop at most trading desks.

Unsurprisingly, US data was very mixed, leaving no clues on the state of the US economy as we prepare to step our feet into 2006. Durable goods orders jumped 4.4 percent in the month of November, but this sharp rise was primarily due to a four fold increase in orders for Boeing's aircrafts. Stripping out the transportation component, orders actually fell 0.6 percent, which was far weaker than the market's 1.0 percent forecast.

Confidence as measured by the University of Michigan survey was revised up to 91.5 from 89.0 for the month of December, but what is worrisome is that new home sales fell 11.3 percent to 1.245 million last month. As another sign of a top in the housing market, the situation could worsen. The stronger housing starts and building permits released on Tuesday indicate that more supply should be coming onto the market.

If the supply is not met with sufficient demand, which as suggested by the new home sales report could very well be the case, then the possibility of a meaningful drop in house prices becomes even more likely. The fate of the housing market is a very important theme that could easily set the tone for trading in the year ahead.

Meanwhile also weighing on the dollar and a development worth watching is the possible inversion in the 2 year and 10 year bond yield spread, which if happens would be perceived as a recessionary signal. Lastly, the market is closed on Monday December 26 and will resume trading on Tuesday.

Euro

The range of trading in the EUR/USD continues to contract as prices remain unchanged ahead of the Christmas Holiday. Economic data was mostly bearish for the Euro.

Contrary to regional state data, consumer prices for Germany as a whole actually was not as optimistic as initially thought. Inflation on an annualized basis slowed from 2.3 percent to 2.1 percent. French producer prices also slipped 0.4 percent on a monthly basis, which brings the annualized rate down to 2.8 percent from 3.0 percent.

The business confidence and production outlook indicators for France also ticked lower. As for the Eurozone, the current account deficit increased from 3.5 billion to 9.0 billion. As we go into 2006, one of the most important themes for Euro traders to watch is how much longer the Euro can remain weak against the dollar.

Even though Dutch Central Banker Wellink who is also a member of the ECB stated the obvious today when he said that if growth picks up, the ECB would be ready to act, there is an important point that he is making.

Growth is indeed very important and to date, most of the growth in the region has been from the stimulative effect that the weaker Euro has had for the export sector. If the Euro begins to shoot higher rapidly, this stimulus could easily evaporate and the rallying Euro could restrict the central bank from raising rates too aggressive next year because it would be similar to a quasi dose of tightening.

British Pound

The British pound suffered its longest period of weakness in over a month as the currency pair traded lower for the fifth consecutive day. The outlook for the UK economy is pretty bleak at this point with an increasing trend of weaker data. Productivity slowed in the third quarter from 0.6 percent to 0.4 percent, the lowest reading in 15 years.