All eyes focused on US mid-term elections

USD – The greenback trudged along an uneven path of peaks and valleys as it struggled to find firm footing amidst a barrage of mixed economic data that mostly seem to suggest a slowdown in the world’s largest economy.  Even though the US Fed remains ostensibly hawkish concerning its stance on monetary policy, the trade picture was worse than expected (TIC Flows: $65.1B in Sep. vs. $116.8B prior), inflationary pressures are falling (CPI: -0.5% in Oct. vs. -0.3% exp.), the housing market remains fragile (Housing Starts fell to a 6-year low in October—1,486K vs. 1,772K in Sep.), and consumer spending is showing some nascent signs of veritable weakness (Retail Sales: -0.4% in Oct. vs. -0.2% exp.).  With the US Thanksgiving holiday looming on the horizon, markets should remain relatively quiet, though the thinner trading conditions could potentially result in exaggerated volatility.

EUR – Europe’s single currency also experienced a bit of a rollercoaster ride throughout last week as it mirrored, in inverse fashion, the movements of its US counterpart.  The Eurozone, like the US, reported mostly softer inflation data (CPI EU: 0.4% in Oct. vs. 0.5% exp.), as well as a slightly weaker GDP release (2.6% in Q3 vs. 2.7% exp.).  The German ZEW survey also dropped to a 13-year low (-28.5 in Nov. vs. -24.5 exp.), illustrating the gradual deterioration in the E-12 economy.  Nevertheless, as could be evidenced by the hawkish rhetoric emanating from Eurozone finance officials last week, the ECB remains committed to their game plan of raising interest rates again in December (+25-bps to 3.5%). 

GBP – The British pound saw a reversal of fortunes last week from the year-and-a-half high of 1.9179 on November 10th. Several key pieces of data, primarily the BoE inflation report, were the major influence. The report showed that the Bank has made changes to its inflationary outlook. Currently, the BoE expects inflation to rise in the near term and then fall back to 2% by mid-2007; this decrease back to the target level is now six months earlier than previously estimated. Accordingly, some market participants were forced to pare back their outlook for the number of rate hikes still to come from the BoE. The next meeting will be on December 7th and the BoE is expected to remain on hold at 5%.

JPY – The week began surprisingly strong for Japan’s currency with a seemingly robust GDP release. However, further scrutiny revealed less actual growth than the number implied with 0.3% of the 0.5% increase due to inventories. Overall, the releases from Japan have been disappointing and point to at least some deceleration in the economy. On Wednesday, the BoJ left rates at 0.25% (as expected). Throughout the week, JPY continued to hug the 118-level versus USD. Many traders are expected to scale back their positions due to weekend risk from the G20 meeting, and the short week for both American and Japanese traders next week.

CAD – The currency extended its losses against the greenback this morning, following a descent in commodity prices (energy and base metals, which are key Canadian exports).  The monetary unit fell decisively through the key 1.14 level versus USD last week, and its failure to move back above suggests it is now firmly in a lower range.

MXN – Recent activity suggests a weakening peso, as the fall in crude oil prices, coupled with marked profit-taking, has sapped the currency's strength.  Traders also sold off pesos last week awaiting the outcome of a ceremony today—Mexico's Revolution Day holiday—where leftist leader Andres Manuel Lopez Obrador plans to declare himself president despite having lost the July election to conservative Felipe Calderon.  Calderon is due to take office on Dec. 1.

CNY – Data in the past week has suggested that the tightening of monetary/credit policy in China and the slowdown in global industrial activity have begun to feed into Chinese industry. This slowdown however, is expected to be marginal in the coming months.