All eyes focused on US mid-term elections

USD – The greenback experienced a rather tumultuous rollercoaster ride throughout last week amid a barrage of key economic data that ultimately culminated with last week’s Non-Farm Payroll (NFP) release.  Disappointing manufacturing ISM (51.2 vs. 53.0 exp.), Chicago PMI (53.5 vs. 58.0 exp.), consumer confidence (105.4 vs. 108.0 exp.), and Q3 Productivity (0.0% vs. 1.6% prior) all conspired to depress the greenback.  However, in stark contrast, Friday’s NFP helped buoy the dollar back to its week’s high.  Even though the headline number fell short of expectations, the prior figure for September was revised from 51K to 148K, making the 2-month average a respectable 120K.  With all eyes now focused on tomorrow’s US mid-term elections, financial markets are expected to be in a bit of a holding pattern for the balance of today.  The outcome of tomorrow’s elections is expected to have significant repercussions throughout all US financial markets (ref. FX Weekly from 10/31/06).

EUR – Europe’s single currency adopted a largely passive role last week in the absence of any key domestic data, benefiting largely from its US counterpart’s loss of steam.  Last Thursday’s ECB rate announcement came as no surprise as interest rates remained steady at 3.25%; however, the accompanying hawkish rhetoric intimating future rate hikes boded well for the EUR, exacerbating its gains relative to the USD, as well as the JPY.  Another light data week ahead, with the exception of tomorrow’s Sep. German Industrial Production (1.9% prior; -0.1% exp.), will guarantee that the EUR will once again take its directional cues from developments in the US and its currency.

JPY – A few numbers that should enlighten us on the state of Japanese industry and investments are on the horizon this week.  Most economic indicators are pointing south at present, including the OECD’s leading indicator, the Japanese Cabinet’s own index and the PMI. In contrast, Japanese industrial output is still rising nicely, underpinned by strong export growth, despite US industry heading down for many months.

GBP – Cable worked its way lower over the course of the past couple trading sessions, bottoming out at 1.8950 relative to the USD.  The primary catalyst for this downward move was the September UK industrial production data, which rose a meager 0.2% from 0.4% expected.  Meanwhile, manufacturing production—a large component of industrial production—stagnated in September (0.0%) after jumping 0.4% in August.  Though the headline report improved from last month, the figures were well below expectations, and highlighted the fragile recovery of the industrial sector in the UK, which could be endangered by rising interest rates as the BoE is widely expected to tighten monetary policy to 5.00% this Thursday.

CAD – The CAD underperformed last week as Finance Minister Flaherty’s announcement late Tuesday afternoon on planned legislation that will make income trusts less attractive both as a corporate structure and a portfolio choice for foreign investors walloped the Canadian equity market and shaved close to 1% from the CAD’s value against the USD on Wednesday. However, the markets absorbed the news and the CAD has settled back into familiar ranges.

CNY – The People’s Bank of China has just raised the reserve requirement once again by 0.5%, effective November 15. This move surprised the markets somewhat, as authorities have recently signaled that they were satisfied with the effects of the tightening measures that have been enacted so far.

MXN - Mexican economists have raised their 2006 inflation forecast according to a central bank survey to3.97% this year per the average forecasts. 2006 economic growth rose in the survey to 4.54% from 4.46%. The MXN should end the year at 10.99 according to the average forecast in the survey.