US Dollar
With no major US data on tap today, the dollar rebounded after two days of back to back losses against the Euro.  Economic surprises have been to the upside lately with retail sales and the trade deficit improving last week while producer prices grew by extremely impressive rates in the month of November.  Therefore today’s move in the dollar suggests that traders may be pricing in the possibility of a strong leading indicators and Philly Fed report tomorrow.  The consensus forecast is for weakness in both, but the recent rally in the stock market and the prior positive industrial production print suggests that there is still a possibility for dollar positive news.  Equities hit another fresh all-time high thanks to strong earnings and a new round of merger and acquisition news.  Geopolitical risks still pose a problem though.  Even though the six party talks with North Korea seem to be going well after the talks were extended, Iran just declared that they have nuclear power and Bush / Blair have been talking all morning about the tough stance that they need to take on Iran going forward.  This may explain why oil prices have ticked higher.  With the official start of winter right around the corner, the outlook for oil is extremely important.  Oil has long played a key role in inflation, which is one of the key things that central banks around the world watch.  Therefore should oil continue to trend higher, most major central banks, including the Federal Reserve will continue to favor tighter rather than looser monetary policies. 

Euro and Swiss Franc
The Euro gave back some of its recent gains today despite hawkish comments from both the European Central Bank and the European Union.  ECB President Trichet said today that inflation runs the risk of accelerating again in early 2007 and conditions remain in place for the euro-area economy to grow solidly.  EU Almunia sent out a similar message later in the day when he said that rates remain very low and Europe’s growth is very strong.  This suggests that Trichet will favor another interest rate hike early next year and for the time being, no one is particularly worried about the level of the Euro.  Therefore should US data actually disappoint tomorrow, the sheer contrast between Euro positive and dollar bearish fundamentals should help to fuel further gains in EUR/USD.  There was minimal Eurozone data released today.  Italian unemployment dipped from 6.9 percent to 6.8 percent while the tiny Belgian manufacturing survey dropped from 4.1 to 2.4.  There is only Italian data due for release tomorrow, which will leave US data as the primary driver of market movements.  Over in Switzerland, the Swiss Franc is weaker across the board.  Producer prices were flat in the month of November.  Although this is slightly better than the Oct print, it still gives the Swiss National Bank little reason to move quickly with plans to raise interest rates. 

British Pound
After rallying over 200 points through yesterday’s trade, the Pound set fresh three-week highs before a broad dollar retrace sent the GBPUSD back to earth. The big news for the currency occurred halfway through the London trade session, with the Bank of England’s release of the minutes from its most recent policy meeting. As was broadly expected, officials voted 9-0 to keep rates unchanged through December, leaving the GBP almost unchanged in the moments to follow. In fact, the minutes were perhaps viewed as slightly anticlimactic, citing little new information on the outlook for future of monetary policy. Much as they did in their past meeting, the Monetary Policy Committee cited relatively few risks to mounting inflation. Of the few risks, officials said that the potential of higher wages through year-end negotiations were low with evident slack in the domestic labor market. Given unemployment rates steadily on the rise, this argument seems plausible. Regardless, markets will watch the outcome of key Retail Price inflation (RPI) to gauge the likelihood of strong wage gains. If RPI surprises to the downside, we could easily see the Pound decline on decreased rate-hike expectations through the first quarter of 2007.

Japanese Yen
The Japanese Yen continued to weaken across the board today with EUR/JPY hitting yet another record high while GBP/JPY surged to a fresh eight year high.  The market is still absorbing the Bank of Japan’s softer tone yesterday but we believe that the primary catalyst for today’s slide is the jump in oil prices.  As a nation that imports over 90 percent of its oil, the higher oil prices rise, the more of a strain it puts on Japan’s economy.  We already know from recent economic data as well as Fukui’s comments yesterday that consumer consumption has been one of Japan’s biggest problems.  Stronger oil prices will only tempt consumers to be even more frugal with their spending. 

Commodity Currencies (CAD, AUD, NZD)
Despite some mixed economic data, the Canadian dollar was the only winner among the most liquid commodity currencies. The USD/CAD fell from 1.1531 to as low as 1.1430. Canadian wholesales sales expectedly fell 0.2 percent in October mainly due to falling exports to the United States. Wholesale sales disappointed for the second straight month with the September number revised down to 1.8 from 1.6 in the previous report. Sales of automotive products fell to their lowest level since July 2005 and excluding these volatile components Canadian wholesales would have risen by 0.4 percent. New Zealand GDP was also released today and showed a 0.3 percent expansion in the third quarter, which eased pressure on the RBNZ to keep increasing rates.

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