Another Week of Pain for the Dollar?

The U.S. dollar started the new trading week heavy against all of the major currencies. With no U.S. economic reports scheduled for release and bond markets closed for Columbus Day, the liquidation of long dollar positions continued. More investors are starting to believe that the Federal Reserve could delay liftoff until 2016 and this view is weighing heavily on the currency. The limited movement in U.S. equities today failed to help the greenback and while we are long term dollar bulls who believe that the Fed has delayed and not canceled their plans for liftoff, this could be another painful week for the greenback. Technically, the dollar has fallen too far too fast against commodity currencies and is trading near key support levels versus EUR, GBP and JPY. In other words the charts tell us the downside for the dollar is limited but fundamentally, this week's U.S. retail sales and consumer price reports pose a big risk to the greenback. Slower job growth and stagnant wages is a dangerous combination for consumer spending. According to an earlier survey by Redbook, national chain store sales fell 1.6% in September from August.

Even the voting members of the FOMC can't agree on when the central bank should raise interest rates. Uber dove Evans believes that the U.S. labor market has met the Fed's liftoff conditions, but consumer demand and inflation is still not as strong as he would like so he sees mid 2016 as the best choice for Fed liftoff. However Lockhart who is also a voting dove feels that rates should increase this year. He agrees that the labor market is strong enough to withstand a rate hike and acknowledges that inflation risk is to the downside. With that and what he views as the mispricing of market expectations, October remains a live meeting. This weekend's comments from Fed Vice Chairman Fischer also sounded upbeat. He sees the U.S. economy growing at a moderate pace and believes that the slowdown in job growth is still enough to erode slack. Overall he feels that the outlook for the labor market is good and consumer spending is "rising solidly of late." In a nutshell, there's still a lot of eagerness within the central bank's ranks to raise interest rates this year. As such, while this could be another painful week for the greenback, bargain hunters will swoop in soon.

ECB officials are also downplaying the recent slowdown in Germany. Despite lower growth and inflation forecasts, over the weekend ECB President Mario Draghi said the impact of asset purchases surpassed expectations. He believes that the risks are to the downside but expressed no urgency to ease. Instead he warned that monetary policy can't do everything. The tone of Bundesbank President Weidmann's speech was similar - while he agreed that the downside risks to economic growth increased, he felt that the horizon was not as bleak as many say. EUR/USD hit 1.14 today at the start of the European session on the back of these comments but failed to end the day above this key resistance level. This week's Eurozone economic reports including tomorrow's German ZEW should highlight the ongoing challenges in the region's economy.

The Swiss Franc shrugged off central bank President Jordan's view that the currency should be trading lower based on the deposit rate and the central bank's readiness to intervene. However while rates "could go lower" they are appropriate for now and this comment suggests that they have no immediate plans to act.

After a one-day respite, the turn in GBP/USD continued. No economic reports were released from the U.K. but comments from Bank of England monetary policy committee member Weale was optimistic. He believed that Europe could avoid a secular stagnation and pointed to the pickup in U.K. productivity as a contributing factor to regional growth. Sterling will be in play this week with a number of important economic reports scheduled for release. At this week's BoE meeting, low price pressures were cited as one of the central bank's main areas for concern but the labor market is one of the country's main areas of strength. This week's economic reports will shed more light on how these 2 key areas of the U.K. economy are performing.

Oil prices fell sharply today and the move triggered a strong intraday reversal in USD/CAD that drove the pair from 1.29 to 1.30. The drop in oil was triggered by a report from OPEC that said oil output increased last month. With no major Canadian economic reports scheduled for release this week, USD/CAD will take its cue from the market's appetite for U.S. dollars and oil. If oil falls, it would bring commodity prices inline with Canadian fundamentals. Last week we saw a sharp slowdown in manufacturing activity, a jump in the country's trade deficit and a rise in the unemployment rate. Canada is hobbling along and it should only be a matter of time before the currency reflects the performance of the economy.

The Australian and New Zealand dollars were the best performers today, rising strongly against the USD ahead of China's trade balance report. Stronger copper prices, the healthy rally in the Shanghai Composite and broad based USD weakness contributed to the gains in these currencies. 10 days have now past without a down day for AUD/USD. In October 2013, the currency pair experienced a similarly lengthy move that topped out in 11 days but there was one more push before a full blown reversal. Whether that will be the case this time around hinges largely on tonight's Chinese economic report. It is no secret that China's economy is slowing and chances are exports and imports continued to fall. Weaker numbers from Asia largest economy and one of Australia / New Zealand's most important trade partners could be the trigger that halts their rally.