The U.S. dollar initially fell against the yen and euro after a CPI reading of -0.5%, a smaller-than-expected gain, but edged back to overnight levels on $53.7 billion of net capital inflows despite not being able to cover the September U.S. trade deficit of $64.3 billion. The CPI reading offers relief for inflationary hawks like the Federal Reserve policy-makers who are expected to leave interest rates unchanged when they meet next month. Expect the dollar to weaken as the economy continues to slow and inflation becoming contained.
The euro traded range bound against the dollar. Despite inflation slowing in the eurozone to 1.6%, down from 1.7% from the previous month, the European Central Bank is still expected to raise rates to 3.5% at their meeting next month. Look for the euro to trade range bound as traders have already priced in a rate hike.
The Japanese yen continued its slide against the euro and dollar after Bank of Japan left rates unchanged at 0.25%. Governor Fukui’s comments did not give clear timing on a rate increase however market participants still expect an increase in the beginning of 2007. Faster than expected growth figures in the third quarter have traders speculating the BOJ may raise rates as early as December. Look for further weakness in the yen as the carry trade effect and lack of clarity from the BOJ continue to weigh against the currency.
Sterling bounced off recent lows against the euro and greenback after UK retail sales data came in much stronger than expected, suggesting consumer resilience in the face of higher interest rates. October sales grew 0.9%, three times expectations. Also, UK house prices rose at its quickest pace in more than four years raising debate for further rates increases in 2007. Look for further strength in the pound as the economy continues grow at a brisk pace.
The Canadian dollar continued is decline against the greenback after weaker than expected CPI in the U.S. and foreign investors reduced their holdings of Canadian securities by $3.08 billion. Look for the loonie to remain under pressure on the back of lower commodity prices.
The Mexican peso strengthened slightly against the dollar on the heels of a weaker than expected US CPI. Look for a stronger peso as the Mexican economy continues to expand at a brisk pace as shown by the Mexican stock market hitting a record close for the sixth straight session.
The Chinese yuan weakened against the dollar for the third straight day. Market participants see the price pattern in line with a general upward trend. The yuan has appreciated 3.03% against the dollar since the revaluation in July 2005. Traders expect the yuan to rise to the 7.800 level before the end of the year.
