·          US Dollar - No More Rate Hike this Year According to Fed Fund Futures

·          Euro - Eurozone Data Confirms More Optimistic Outlook from ECB

·          Swiss Franc - Swiss PMI Hits 10 Year High


US Dollar

Despite an extremely busy data week, theUS dollar did not budge one iota from its 1.2750 to 1.2925 trading range against the Euro.  In fact, even the combination of non-farm payrolls and ISM on the same day failed to result in any meaningful price action for the US dollar.  The number of jobs created in the month of August was indicative of decent growth in the labor market, but as we mentioned yesterday, traders are in the habit of questioning the sustainability of every good number which has led to only a limited rally in the dollar.  Furthermore, looking beyond the headlines, we see signs of easing growth and inflation.  Average hourly earnings rose a meager 0.1 percent while average weekly hours contracted from 33.9 to 33.8.  The manufacturing sector also continued to lose jobs which confirm the recent deterioration in the sector.  Later in the morning, the US dollar lost all of its earlier gains after a sharp drop in construction spending and pending homes sales.  The drop in construction spending in the month of July was the biggest in five years.  There is no doubt that the housing market is slowing, which is one the Federal Reserve’s major concerns.  In addition, even though the ISM manufacturing index only moderated slightly, the prices paid component experienced the biggest drop since the beginning of the year confirming other indications of easing inflationary pressures.  On balance, today’s reports do little to shift the Fed's game plan to continue pausing.  Fed fund futures are pricing in a less than 20 percent chance of another rate hike this year.  Nothing in the reports had what it takes to push us out of the 1.2750-1.2925 trading range that we have been trapped in since the beginning of the month.  Looking at next week’s calendar, aside from non-manufacturing ISM and the Beige Book report, there is little US data.  However the beginning of a new quarter and the return of traders from their summer holidays could still lead to some new positioning that could drive market activity.  



The Euro is holding on strong and it has good reason to.  Not only was ECB President Trichet exceptionally hawkish yesterday, but this morning’s economic data also indicates that the Eurozone economy is performing very well.  GDP was revised upwards from 0.6 percent to 0.9 percent for the second quarter, with the annualized pace of growth increasing from 2.0 percent to 2.6 percent.  Even though the Eurozone’s manufacturing sector PMI moderated from 57.4 to 56.5, it still remains in expansionary territory.  This had led the Kiel economic research institute to join the ECB in revising up their growth forecasts for Germany.   They expect 2006 growth to reach 2.4 percent compared to an earlier forecast of 2.1 percent.  In contrast to the ECB however, they expect growth to moderate in 2006 to 1.0 percent due to an increase in the VAT tax.  In the week ahead, we expect more Euro bullish sentiment as divergences in monetary policy and economic growth between the US and Eurozone become clearer.  As for economic data, the two most important economic releases that we are expecting are Eurozone retail sales and producer prices.  With the ECB so concerned about taming inflation, PPI should have been very strong in the month of July.  Meanwhile over in Switzerland, data continues to be exceptionally good.  The purchasing manager’s index hit a 10 year high in the month of August.  This suggests that we could see a 50bp instead of a 25bp rate hike by the Swiss National Bank at their next monetary policy meeting. 


British Pound

A softer PMI report has pushed the British pound lower against the Euro.  A decline in new orders and export orders drove the index down from 53.6 to 53.1.  The prices component of the report also moderated, which should relieve fears about inflation.  Against the US dollar, the pound rallied, but primarily due to the dollar’s reversal. Looking ahead, unlike the US, the UK has a busy economic calendar.   We are expecting more reports on the state of the housing market, in addition to retail sales and industrial production.  The Bank of England has a monetary policy meeting scheduled, but after last month’s surprise rate hike, they are expected to keep rates unchanged this month.  As the Bank of England continues to stand firm on leaving interest rates at its current level, the divergence of its own monetary policy with the ECB’s policy should come to the benefit of EUR/GBP. 


Japanese Yen

The only piece of economic released overnight from Japan was vehicle sales.  Unsurprisingly, the lack of growth in wages and the rise in energy prices has resulted in negative demand for automobiles.  The Japanese economy has not been fairing well lately and we expect this to be validated by more cautionary and possibly even pessimistic outlook in next week’s monthly report from the Bank of Japan.  The central bank will also be holding a monetary policy meeting, but given the recent trend of economic data (both in terms of growth and inflation), there is little reason for them to consider raising rates again anytime soon.  Looking ahead, politics will soon dominate headlines in Japan.  Prime Minister Koizumi is scheduled to step down from office on September 20th.  Shinzo Abe, the current cabinet secretary is set to take over his post temporarily.  Abe announced yesterday that he will also be running for the job.  He is the most popular candidate as he wants to make spending his top priority.