US Dollar Hits Four Week Lows - More to Come?

US Dollar

The bad news for US continues to pour in as growth in the third quarter was reported to have been the weakest since March 2003. Even if inflation is still really a problem, economic growth is a bigger one. Over the past few weeks, any good news on the US economy was concealed in the details of the data reports.

This week, it was good news that concealed weakness and the bad news that was unarguably bad. This was the case with the GDP report which not only had a disappointing headline print, but also reported a drop in the price index and core PCE. The lower inflation readings validate the Fed's decision to avoid notching up their concerns about inflation earlier this week and keeps intact speculation for a rate cut early next year.

With growth expected to slow in the fourth quarter, the 1.6 percent acceleration in economic activity the last quarter indicates that the economy has not done as well as the market may have anticipated. Therefore even though the University of Michigan consumer confidence survey was revised higher for the month of August, the dollar shrugged off the report as it still remains a question whether this happiness will extend to big ticket purchases. Judging from yesterday's durable goods orders, this is unlikely as we look forward to more difficult times ahead for the US economy. After 3 days of powerful gains, we caution that the EUR/USD move is looking exhausted.

A pullback is possible, but for the most part, the currency pair should hold above 1.2600. The economic calendar next week is just as busy as the past week with Consumer confidence, Chicago PMI, ISM and non-farm payrolls due for release. For the most part, the market is expecting stronger numbers, particularly in confidence and payrolls. Although this may be possible, the economy is more likely to show further weakness than strength.

Euro and Swiss Franc

Stronger inflation numbers (M3) continue to support the case for another interest rate hike by the European Central bank this year. There is only a tiny chance that this hike could come at next week's monetary policy meeting, but previous comments from ECB officials suggest that the central bank may be looking to deliver the hike in December instead of November.

Although the EUR/USD staged a strong rally today, the true newsmaker was EUR/JPY, which managed to hit an all time high late last night. The gains have since been all reversed and then some which signifies that 150 is truly a problem level for EUR/JPY. Like the US, there are a ton of important economic releases due out next week including French and German unemployment, German and Eurozone retail sales, Eurozone consumer confidence, along with manufacturing sentiment indices for region as a whole.

Meanwhile even though Switzerland reported a larger drop in the KoF leading indicator report, the Franc rallied against both the Euro and US dollar. The reading was actually the weakest in 6 months, but the central bank's prior optimism as well as the government's concern for further losses in the value of the Swiss franc against the Euro outweighed the weaker KoF report. Next week, we are expecting the country's manufacturing PMI report and CPI. Both are actually expected to print stronger, which could extend the Franc's recent strength.

British Pound

Momentum continues to be on the side of the British pound as the currency charges higher despite the lack of economic data. The only two pieces of noteworthy news were pound positive acquisition flow and speculation by a UK think tank that the Bank of England may actually opt for a 50bp over a 25bp rate hike.

We have heard very hawkish comments from government officials throughout the past week, which has led the market to be very bullish on the British pound. Although there are a handful of UK data due for release next week, not much will be particularly market moving. Housing sector indicators should show strength, just like they have been for the past few weeks. Manufacturing PMI data should also remain steady in the month of October.

These improvements could also help to boost consumer confidence. It is worth noting though that the GBP/USD is knocking on the 1.90 door, which is not far from where it has topped out three times over the last three months.

Japanese Yen

Disappointing retail sales sent the Japanese Yen tumbling last night, but yen positive comments from the Ministry of Finance's Watanabe saved the day. The 150 level has once again proved to be rock solid resistance in EUR/JPY as government officials jawbone the currency whenever it reaches those levels. Watanabe's comments were simple, but it was also all that the market needed. He said that he does not expect further yen weakness given current economic conditions in Japan.

Inflation data was closely watched last night, but they came out pretty much in line with expectations. The lack of any significant rise gives the BoJ no reason to change interest rates in the near future. In the week ahead we are expecting a number of important Japanese economic releases including industrial production, unemployment, income as well as the central bank's semi-annual outlook for inflation and economic activity. The busy week worldwide should give us much interesting volatility.

Commodity Currencies (CAD, AUD, NZD)

The Canadian, Australian and New Zealand dollars all rallied against the US dollar today as commodity prices continued to rebound. The Australian dollar, which has had a very good week, hit another monthly high as the market prices in a 25bp rate hike next week. The country is doing very well economically and we expect next week's building approvals, retail sales and trade balance reports to reflect that.

The New Zealand dollar also rebounded on the back of a smaller deficit, but the RBNZ's cautionary comments on inflation should keep the kiwi under pressure. Building permits, money supply and business confidence are due for release - none of which should be particularly market moving.

Even though the Canadian dollar has firmed significantly against the US dollar, it continues to weaken against the Japanese Yen and Euro. Economic data has been far from impressive and next week's inflation, GDP and employment data should reflect that.