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Bernanke Speech Solidifies December Rate Cut, US$ Lower

The US$ diverged in direction overnight, falling against the euro and pound, while pushing modestly higher against the yen. The market remains focused on the recent trend of overall US$ weakness and the prospect of lower US interest rates. Overnight, Fed Chief Bernanke delivered a speech in Charlotte, North Carolina signaling that rates are all but certain to push lower at the December 11th meeting. Bernanke stated that “renewed turbulence” in markets might have shifted the risks between inflation and growth. He further stated “uncertainty surrounding the outlook” is “even greater than usual” and that the Fed must be “alert and flexible.” The market interpreted these comments as a clear indication that the US Central Bank will push rates lower at their next meeting. Further supporting this view about lower US rates was commentary earlier this week from Fed Vice Chairman Kohn, who acknowledged that the recent tightening of credit markets posed a serious risk to economic expansion. Kohn further stated that the Fed should act to lower rates to ease these credit conditions. The US released Personal Income and Spending this morning at lower than forecast levels registering 0.2% for both indicators vs. expectations of a 0.4% and 0.3% reading. At 9:45 Chicago PMI is to be released expected to register 50.5 and at 10:00 a.m. Construction Spending will be released expected to register a decline of 0.3%. While these indicators could have some affect on the overall direction of the US$, it is likely that the overriding environment of lower rates will continue to push the greenback lower.

The euro pushed modestly higher overnight, as the market remains focused on the comments from Fed Chief Bernanke. With the US Fed Chief signaling lower rates at their meeting in early December, the market will look to the ECB meeting next week. Speculation continues to swirl about the prospect of the ECB pushing rates higher as soon as next week as inflation pressures continue to mount within the Eurozone. With the prospect of higher Eurozone rates contrasted with the position of the Fed, the euro will likely soon push to new all-time highs.

The yen fell overnight as global equity markets surged following comments from the US Fed Chief. With the US all but guaranteeing a rate cut in the next several weeks, investors aggressively shifted capital into equities. This surge has led investors to resume the “carry trade” as a preferred mechanism to finance many of these equity purchases. As the yen remains tightly correlated to equity markets and appears to have adopted the role as a proxy for market risk, its direction continues to gyrate within wide ranges. Despite the “carry trade” remerging in markets it is likely that significant further yen losses will be limited as Japanese exporters will continue to repatriate profits at these more appealing levels.

The pound gained modestly overnight as US$ weakness took hold in markets again. With the reality of lower US rates next month permeating the market, trader’s attention has turned squarely to the Bank of England meeting next week. Uncertainty surrounds the policy action the UK Central Bank could take as some analsysts are beginning to speculate that a rate cut could be forthcoming. A slowing housing market has UK policy makers concerned that the overall economy could soon begin to decline. This could prompt some policy action next week. Until that time, it is likely that sterling will remain in ranges, with the overall direction determined by the US$’s trend.

US$ Slightly Firm Ahead of Bernanke Comments

The US$ surged overnight as some limited investor confidence appears to be returning to US markets and the greenback. Earlier this week the Abu Dhabi Investment Authority announced that it would purchase a stake in Citigroup for a $7.5 billion cash infusion. This action helped stabilize equity markets which had previously been in a seeming freefall. Overnight, the China Investment Corp. stated that it would also look to invest in US finance companies recently hard hit by the surge in mortgage defaults. The Chairman of the $200 billion China Investment Corp., Lou Jiwei, stated that they would act as a market ”stabilizing force.” With large foreign investors moving aggressively into US markets, some stability has seemingly emerged allowing investors to cautiously shift back into the US$. However, these US$ gains could be ultimately short-lived following comments from Federal Reserve Vice Chairman Kohn yesterday. Kohn suggested that policy makers would look to support economic growth and “calm market turbulence” by cutting rates at the December 11th meeting. With this rate cut already priced in, analysts are looking to the Fed’s next policy action, which some are forecasting to be at least 50 basis points in additional cuts in the first quarter of 2008. In the interim, however, the markets seem focused on some signs of improvement in the US economy. Overnight ShopperTrak RCT reported that holiday spending at retailers rose 6.5% over the Thanksgiving weekend. This data suggests that the US consumer could be a vibrant force during the all important holiday retail season. The markets focus will shift to US economic data slated for release today. GDP, to be released at 8:30 a.m. is expected to surge to 4.9% from the 3.9% previously reported. This data points to a huge economic expansion in the 3rd quarter of this year. In addition, weekly claims will be released expected to register 330,000. At 10:00 a.m. New Home Sales are to be released expected to decline to 750,000, showing further weakness in the housing sector. The US$ should remain well supported today, with equity markets seemingly stable and investors squaring short US$ positions. However, if trade over the past several days is any indication volatility will likely persist.

The euro fell overnight as investors squared short US$ positions amidst signs of stability returning to US markets. Further weighing on the euro was the release of a report overnight showing that consumer spending is slowing in the Eurozone as evidence by a drop in retail sales. This data follows the release of a report earlier this week showing a drop in German consumer confidence. With slowing spending and declining confidence, the market remains squarely focused on the ECB and any policy action the Bank chooses to take when it meets next week. The street seems fairly divided as to whether the ECB will push rates higher, given the high levels of inflation present in the Eurozone economies contrasted with slowing growth. These conflicting factors will likely lead investors to hedge some bets before next Thursday’s meeting putting some downward pressure on the euro.

The yen traded in rather flat ranges overnight after yesterday’s aggressive push lower. The yen remains tightly correlated to the direction of equity markets and after yesterday’s surge on Wall Street, many investors opted to reenter the “carry trade.” With yen still the favored financing vehicle for higher yielding assets the currency dropped significantly yesterday. However, these gains could be tempered as Japanese exporters look to repatriate profits and pay month end obligations at these more attractive levels. These offsetting factors should keep the yen tied to fairly tight ranges over the next several weeks.

The pound fell overnight as a recovery in the US$, coupled with a steep drop in the UK housing market helped lead investors to liquidate long sterling positions. UK housing prices fell at the quickest pace in over 12 years as mortgage approvals dropped to the lowest levels since February of 2005. This data provides further evidence that tightening credit is leading to an end to the decade long UK property boom. This slowdown could prompt the Bank of England to cut rates as early as next week to offset worries that the UK consumer will ease spending habits, leading to a significant economic slowdown. An additional factor weighing on the pound, was the announcement overnight by the UK Chancellor of the Exchequer Alistair Darling that the BOE is prepared to inject liquidity into money markets to keep borrowing costs low as year end funding requirements surface. Credit concerns, a weakening housing market and the prospect of lower UK rates will likely continue to exert downward pressure on the pound.

US$ Rebounds Against Euro and Yen

The US$ gained overnight as traders adjusted positions following the rebound in US equities yesterday following the decision by the Abu Dhabi Investment Authority to purchase a large stake in Citigroup. This stake, purchased with cash, helped sure up the balance sheet of Citigroup, under serious duress as the subprime mortgage crisis continue to rattle the US banking sector. This action also seems to have injected some stability into US markets and the US$, as it revealed that there are several global entities still willing to support the greenback and their interests within America. However, this bout of US$ strength could ultimately be short-lived. The market has priced in a 98.0% chance that the Fed will cut rates when it meets on December 11th. This environment of lower interest rate expectations will certainly continue to weigh on the US$. However, it the expectation of additional rate cuts in 2008 that continue to drive the US$ lower. The market has priced in at least five rate cuts next year from the US Fed, which will likely continue to present a significant drag on the US$. In addition to a weak interest rate environment the flow of US economic data continues to remain weak. Durable Goods were released at a much lower than expected decline 0.4% vs. 0.1%, however excluding transports the decline was much worse dropping 0.7% vs. expectations of a 0.3% gain. At 10:00 a.m. Existing Home Sales are to be released expected to register a modest decline to 5.0 million. Finally, the day winds down with the release of the fed’s Beige Book at 2:00, which is unlikely to paint a rosy scenario for the economy. Ultimately the soft US interest rate environment coupled with weak economic data will continue to weigh on the US$.

The euro fell the most in over two weeks overnight as the market continued its position adjustment following yesterday’s rally in US equities and after the release of some disappointing data within the Eurozone. The euro fell overnight, as the market seems to be within the bounds of a modest correction from the currency’s recent highs. Despite yesterday’s data revealing a surge in German Business Confidence, other data released overnight revealed that German consumer confidence unexpectedly fell to the lowest levels since mid-2005. This drop in confidence has been paced by a seeming slowdown in Eurozone exports as the recent surge in the euro’s exchange rate has weighed on the competitiveness of products. This decline in exports and the seeming drop in confidence seem to have now put the ECB in a difficult position. While many analysts had forecast that the Eurozone Central Bank would hike rates in early December, that view has begun to modestly alter. With declining confidence and a drop in export led growth, the ECB is left to focus on inflation pressures to help steer interest rate policy. And these pressures keep mounting, likely to exceed 3.0% this year, pushing to a six-year high. As the ECB is mandated to maintain price stability, it remains to see what tact the Bank will adopt. Whatever action they choose will ultimately determine the euro’s fate over the next several months.

The yen fell overnight, as a resurgent US equity market has reignited the “carry trade.” With the yen remaining tightly correlated to the direction of equities, the surge in US stocks yesterday coupled with the gain in global equity markets helped push the yen lower overnight. With little other news steering the direction of the Japanese currency, the ultimate fate of the yen will be determined by global demand for higher yielding assets. However, despite these yen losses overnight, further declines will likely continue to be limited as Japanese exporters continue to choose any US$ rallies as an opportunity to repatriate profits. With many of these exporters having budgeted rates above 113.00 for the next fiscal year, they will likely continue to sell any US$ rallies. This duel between exporter selling and “carry trade” positioning will continue to steer the direction of the Japanese currency.

The pound fell modestly overnight after the release of data pointing to the largest drop in UK housing prices in more than two-years. This data reinforces the view that the UK economy is slowing paced by declines in housing. This data sets the Bank of England up for a difficult meeting when it meets December 6th. The market has currently forecast that the BOE would hold rates steady; however, some analysts are beginning to speculate that the Bank could cut rates. These dueling factors will keep sterling mandated to ranges tightly correlated to overall US$ direction over the next several weeks.

US$ Wipsawed as Market Focus Changes Daily

The US$ remains under significant pressure as the market remains focused on the weak fundamentals attached to the greenback. With the US credit markets remaining under significant pressure as the fallout from sub prime defaults rattle markets, traders remain focused on this ever-tightening credit environment. This has led to several major US banks reporting severe financial distress as their ability to raise capital has diminished significantly. This backdrop has led traders to speculate that the Fed will be forced to cut rates when it meets on December 11th. The US Central Bank is expected to lower rates 25 basis points as it responds to the worsening credit environment. There was some relief offered to this tightened credit environment overnight when Abu Dhabi Investment Authority announced that it was taking a $7.5 billion position in Citigroup. This large cash infusion will help shore up the balance sheet of this credit-distressed institution. On a negative note however, the news of this bailout reveals the relative weakness of the greenback and the opportunities the distressed US economy is presenting to foreign investors. Look for this trend to continue for some time as the current environment presents ample buying opportunities for foreign investors. This investment in US businesses could provide some short-term lift to the US$, however, expect the market to remain focused on the weak economic environment and declining US interest rates. The market will focus on the release of Consumer Confidence at 10:00 a.m., expected to decline to 91.0. The recent declines in housing markets coupled with an ever-tightening credit environment seem to continue to weigh on the consumer. Expect this figure to have little effect on the overall direction of trade, barring any strong deviation from forecast.

The euro gained overnight after the release of much better than expected data from Germany. The Munich based Ifo research center reported that business confidence rose unexpectedly in October to register 104.2 vs. expectation of a 103.3 reading. In addition, consumer prices increased in two German states, pushing above the 3.0% level for the first time in over six years. With increased business confidence and mounting inflation, many traders who had discounted an ECB rate hike before year-end are now speculating that the Eurozone Central bank will again be forced to push rates higher. This environment of robust growth and increased prices pressures will continue to support the euro as the ECB will all but certainly be pushing rates higher. This position is in stark contrast to the US Fed that is now in a defensive rate cutting posture. Expect this environment to continue to prop the euro as investors flock to the common currency.

The yen fell overnight as the carry trade remerged amidst an environment of increased investor risk. News released overnight that the Abu Dhabi Investment Authority was taking a large stake in Citigroup, has seemingly reinvigorated investors as they look to position aggressively in higher yielding assets. Also helping push the yen lower was news that several large Japanese investment trusts were looking to raise $6 billion for funds aimed at investing in assets outside of Japan. With the reemergence of the “carry trade” and a seeming shift of capital away from Japan the yen has again come under pressure. However, expect these yen declines to be ultimately limited, as investor aversion to risk will likely prevail through the end of the year keeping the “carry trade” somewhat in check.

The pound traded in mostly flat ranges overnight as dueling factors appear to be steering sterling. High UK rates continue to attract investors as the “carry trade” reemerges. However, with some uncertainty still surrounding the health of UK banks and the overall strength of the housing market, several analysts have begun to speculate that the Bank of England will soon be forced to push rates lower. These diverging factors will keep sterling in wide looping ranges for some time.

US$ Under Pressure As Concerns Over Economy Mount

The US$ continues to remain under pressure following the Thanksgiving holidays as investors remain focused on a slew of negatives lined up against the greenback. With the US economy slowing significantly paced by a sharp drop in the housing sector, the market remains convinced that the Federal reserve will again slash rates 25 basis points when it meets on December 11th. With lower US rates very likely, investors continues to shun the US$ en masse. A lower greenback has led to active discussions in the market about a shift in the global reserve mix of Central banks coupled with active talk about shifting the US$ basis for many long-held trading vehicles. Many Middle Eastern nations continue to debate the possibility of unpegging their currencies to the US$. In addition, OPEC continues to openly debate the prospect of pricing oil in currencies other than the US$. As these negative elements continue to pervade markets there remains an overriding concern about the weakness of credit markets and the overall health of the US banking system. These factors have led many investors to look to prospect of low US interest rates for some time. This environment has prompted a shift away from the yen and Swiss Franc as a preferred vehicle for the “carry trade” and has really begun to weigh on the US$ as it emerges a “carry trade” substitute. This use of the US$ as an emerging preferred vehicle in the “carry trade” was reinforced by the 17.0% return a basket of currencies including the British pound, Brazilian Real and Hungarian forint returned against a “short US$” funded position vs. returns of 9.0% using the yen and 7.0% the Swiss franc. The view of a “free falling” US$ seems to continue to weigh on the greenback and reinforce the many negatives. The market will be looking to US economic data slated for release this week, to help further gauge the level of economic decline in the US economy. There is no data slated for release today, however, Consumer Confidence is slated for Tuesday release and expected to register 91.0. Wednesday sees the release of Durable Goods and Existing Home Sales. Thursday yields releases of GDP and New Home Sales, while the week winds to a close with the releases of personal income and spending as well as construction spending and Chicago PMI. This continual flow of data should help steer trade, with the US$ already being given a boost by better than expected weekend holiday retail sales.

The euro steadied in ranges overnight, despite the announcement last week by the ECB that it is prepared to pump additional liquidity into Eurozone money markets as credit tightens. This announcement by the Central Bank appears to have had little affect on trade, however, could weigh on markets as the week progresses and investors scale back the timing of future policy actions from the ECB. Any money market action by the ECB will certainly prevent the Bank from hiking rates. A rate hike by year-end had been priced modestly into markets and as these expectations unwind we could see the euro come under some modest pressure. In addition, the euro could weaken following the release of the German Ifo survey of business confidence slated for tomorrow. The survey is expected to fall to 22-month lows as rising oil prices worry investors. However, any declines in the euro will likely be limited as investors continue to shift assets into the common currency as an emerging substitute for the US$.

The yen consolidated in recent ranges overnight as the “carry trade” continues to dominate capital flows with the Japanese currency. As global equity markets stabilize, investors use the Japanese currency to finance positions in higher yielding asset classes. The converse applies when volatility ensues in these markets and investors quickly vacate these positions financed with yen, helping bolster the currency. The yen was helped higher overnight was after the announcement by the China Investment Corp. of its intent to begin buying Japanese equities. The Japanese news agency Nikkei reported that the China Investment Corp. was advertising for a portfolio manager to invest some $67 billion of the country’s reserves in Japanese equities. This apparent shift into Japanese equities, coupled with an increase in global portfolio risk should continue to help bolster the yen as the “carry trade” eases significantly in the market.

The pound also consolidated overnight as investors jockey positions around interest rate expectations. With the US Fed all but certain to cut rates in two weeks, the pound continues to emerge as a higher yielding alternative. However, with the prospect of an increased fallout from sub prime losses at UK banks and the possibility of a slowdown in UK housing market, the market has begun to speculate about the timing of any interest rate shift by the Bank of England. Investors will certainly continue to parse comments from BOE officials, but will also certainly look to the flow of economic data to help verify this policy action. This uncertainty will continue to steer sterling in wide looping ranges.

Yen Gains Significantly as Risk Aversion Remains Predominant

The US$ continues to remain under intense pressure, falling to new all-time lows against the euro and Swiss franc, while plunging to two-year lows against the yen. The greenback continues to weaken as a slew of negative factors continue to push the US$ lower. Yesterday, US mortgage giant FNMA reported that it would report a massive loss as a result of rising defaults. This news adds to an already edgy market following reports over the past several weeks from many US banks citing similar woes and write-offs in their sub-prime lending portfolios. With the US housing market in disarray, the market is looking to the US Fed to cut rates when they meet again on December 11th. Following the release yesterday of minutes from the Fed’s meeting on October 31st, there was little to deflect the market from this view of lower US interest rates. Rather, the Fed helped reinforce the view of lower rates when it reduced its US growth forecast for 2008 to levels below 2.0%. Adding to the markets woes about a declining housing market and slowing economic growth, the price of crude oil continues to spiral to levels near $100 per barrel. With the US$ ever weakening, crude oil prices continue to skyrocket. This overriding mix of negative news continues to propel the US$ lower as the Thanksgiving holiday approaches. There is some limited US economic data scheduled for release today that is unlikely to have any significant affect on the overall US$ trend. At 10:00 a.m. U. of Michigan Confidence expected to register 75.0 and Leading Indicators expected to decline 0.3% are slated for release. Earlier this morning, Weekly Claims were released in line with expectations at 330,000.

The euro continues to drive higher paced by several varying factors. News in the market yesterday suggested that various Middle Eastern Central Banks are looking to remove their local currency pegs to the US$, in addition, OPEC has discussed selling oil contracts in euros rather than the US$. These factors coupled with the prospect that the ECB will soon resume hiking interest rates all support the common currency. With growth continuing to surge throughout the Eurozone, coupled with mounting inflation pressures, ECB officials continue to posture towards higher rates. This hawkish rhetoric continues to drive the euro higher.

The yen surged overnight, pushing the US$ to two-year lows, as weakness in global equity markets continue to force investors to remove risk from their portfolios. The yen has adopted a proxy role for investor sentiment as it continues to be used as a favored financing vehicle in the “carry trade.” As investor risk ebbs in the market and traders liquidate equity positions, the yen has gained. There is currently a 0.9 correlation between the direction of the yen and the course of global equity markets. With significant investor unwinding of equity positions still likely, we could see the yen continue to firm over the next several months.

The pound fell modestly overnight as investor unwinding of carry trades prompted sterling selling. With the market trying to determine the direction of UK interest rates over the next several months, traders looked to the release of minutes from the last Bank of England policy meeting. The BOE voted 7-2 to hold rates steady, suggesting that the Bank’s bias could be shifting towards a rate cut early next year. Expectations of lower UK rates should drive sterling lower over the next several months. However, in the interim sterling’s fortunes will likely be tied to the course of the “carry trade” unwind and the overall trend of US$ weakness.

Many currencies were affected overnight as traders unwound “carry trade” positions aggressively ahead of the Thanksgiving holiday as a global equity market rout ensued. The Swiss Franc long a substitute in the “carry trade” due to the low carry costs of the currency surged to all time highs against the greenback as the unwind of riskier positions ensued and the euro set new all-time highs. The high yielding Aussie and Kiwi also fell dramatically against the US$ overnight, each falling over 1.0%, as investors shed positions in these higher yielding currencies amidst reductions in the “carry trade.”

US$ Falls to Historic Lows Against Euro, Swiss Franc as Concerns Continue to Weigh

The US$ fell overnight as the recent combination of factors weighing on the greenback seem to relentlessly drive the currency. Lower. With the news in the market yesterday that OPEC is considering pricing oil contracts in currencies other than the US$ and that several Middle Eastern nations are considering abandoning their long held peg to the greenback, the US$ continues to come under pressure. With this news spurring portfolio diversification away from the US$, the market remains strongly focused on the weak US economic landscape and the likelihood of further rate cuts from the Fed. Despite the release of better than expected Housing Starts this morning, gaining to 1.229 million vs. 1.170 million, the market remains focused on the anemic condition of the US housing market. (This data did show however, an inconsistent mix of gains, with condominium construction expanding, while single-family home construction dropping.) Adding to the woes in housing, was the announcement overnight that large US lender FNMA was reporting a massive $2.0 billion loss last quarter as it was forced to write down an ever growing portfolio of mortgage defaults. With the US housing market in disarray and the possibility of recession an ever-greater weight on the US economy, it is expected that the Fed will be forced to lower rates when it meets on December 11th. The market will look for verification of this view when the Fed releases the minutes from its October 31st meeting at 2:00 p.m. At this meeting rates were cut 25 basis points. Any indication that concerns remain about the possibility of recession and declines in housing will certainly prompt the market to anticipate further Fed rate cuts.

The euro traded to new all-time highs against the US$ as investors favor the common currency en masse as opposed to the greenback. Grumbling from both OPEC and the Middle East about moving away from the US$ as the dominant currency for pricing oil and pegging their individual currencies has had the effect of bolstering the euro. These euro gains were supported by news from the Eurozone overnight. ECB policy maker Guy Quaden said the US currency’s drop was “normal,” given the “slowdown in US markets” suggesting that Eurozone policy makers will likely be unwilling to intervene in markets to halt the euro’s advance. These comments added to remarks issued by the IMF overnight stating that the US currency remains “overvalued.” With these comments as a backdrop, the euro was further bolstered by the release of data from Germany. German producer prices rose more than expected in October, prompting some analysts to believe that a rate hike will be forthcoming. With the prospect of higher Eurozone rates contrasted with the US interest rate position, a global diversification away from the US$, and an apparent disregard for euro strength from Eurozone policy makers, it seems almost certain that the euro will continue to plod to new highs.

The yen fell modestly overnight as the Japanese currency remains a proxy for global risk and is traded in tandem with the direction of global equity markets. The rout in US equity markets yesterday, led many investors to buy yen as the “carry trade” unwinds, however, with stability seemingly returning to markets today, the yen has weakened slightly as risk cautiously renters portfolios. Expect the yen to have its fortunes closely tied to the direction of global equity markets as the Japanese currency remains a strong indicator of global risk.

The pound gained overnight as higher UK interest rates have again led investors to seek higher yields. With the likelihood of an interest rate cut from the US Fed next month overhanging the market, the market remains focused on the direction of UK rates. Recent comments from the Bank of England suggest that rates could be moving lower, albeit early next year. However, until some certainty overtakes the market signaling a schedule for BOE policy cuts, the pound will be bolstered by high UK rates; leading investors to buy the pound. This trend will steer sterling over the next few weeks.

US$ Remains Under Pressure as Futures Price in Another Fed Cut

The US$ continues to remain under pressure as the greenback continues to lose its luster to foreign investors. Comments last week from US Treasury Secretary Paulson and US President George Bush altering the official US$ language, suggesting that they now “very much support” a strong US$, appear to have had little affect on the direction of markets, as the greenback remains weak. Overnight talk reemerged in markets that many Gulf nations could alter the long-standing pegs to the US$ that their currencies have maintained. Members of the Gulf Cooperation Council, which includes Saudi Arabia, the UAE, and Qatar, have stated that they will address the subject of changing the peg at a meeting to be held next month. Over the past several years, these nations have been aggressive US$ sellers and euro buyers as they diversify their reserve mix. Also weighing on the US$, is a proposal put forth by OPEC nations Venezuela and Iran, that the price of all oil contracts be shifted to euros or other currencies, rather than the US$. While this idea was rejected flat out by the Saudis, the prospect that such an idea could come to a vote could have a dramatic negative psychological impact on the greenback. The US$ did receive some relief however, when Chinese officials suggested that they “support a strong dollar” and could refrain from further reserve diversification in the short-term. However, the main factor driving the US$ is the divergence in interest rates between the US and other G8 nations. With the US housing market continuing to slump, the market has priced in a 90.0% probability that the Fed will lower interest rates an additional 25 basis points when they meet on December 11th. The market will remain focused on the flow of US economic data this week, albeit limited by the Thanksgiving holiday. Tomorrow sees the release of housing starts and building permits, both of which should help affirm the dismal position of the US housing market. In addition, the Fed releases its minutes from the October 31st meeting, which should verify the Fed’s expected rate cut next month. Later this week, we see Michigan Confidence and Leading indicators both slated for release on Wednesday.

The euro continues to consolidate in recent ranges, as the market appears to be moving towards locking in profits as the year winds to a close. As interest rates remain the focus of the market comments from both the Fed and the ECB will closely monitored over the coming weeks. While the Fed is widely expected to cut rates next month, some uncertainty still surrounds the policy position the ECB will adopt. As ECB Chief Trichet reiterates his Bank’s position about their desire to remain vigilant towards inflation pressures, the continued fallout from sub prime lending woes could keep the Bank sidelined until next year. As this reemergence of uncertainty surrounding the direction of Eurozone rates arises, the market failed to sell the common currency as the reserve diversification comments from the Middle East and OPEC rattled the market. Look for ranges to be fairly tight this week as limited data and the Thanksgiving holidays steer trade.

The yen surged overnight as traders continue to unwind carry positions funded with the Japanese currency. As uncertainty continues to rattle global markets as highlighted by the drop in equity prices overnight, the yen firmed. As the US economy shrinks and concerns mount that growth in China is beginning to ease, traders continue to unwind equity positions funded with a “cheap” yen. As traders continue to remove risk from their portfolios, the yen will continue to gain. Expect this trend to continue for some time as traders square portfolios and remove risk ahead of year-end.

The pound fell to a one-month low against the US$ overnight following the release of weak housing data in the UK. UK housing prices fell in October, echoing comments from Bank of England Chief Mervyn King last week, stating that the UK housing market looks “particularly weak.” With this data as a backdrop, the market is lending further credence to the Bank of England economic outlook report released last week that suggested another rate cut would have a limited inflationary effect on the UK economy. As the market seems to be now positioning for a rate cut from the BOE, it is only the timing of such an action that will ultimately steer the direction of the pound.

U.S. Inflation Expected to Move Higher from Interest Rate Cuts

The US$ continues to benefit against the euro and sterling from risk aversion, while losing against the yen as “carry trades” continue to unwind. More reporting overnight showed higher writedowns from subprime mortgages, helping to underpin anxiety in the market. Barclays announced an initial loss of $2.7 billion overnight, significantly less than the rumors that pervaded the market of a $21 billion loss. This brings the total of current losses from large banks to over $45 billion. Today, the consumer price index for October will be released at 8:30 a.m. This number is expected to show an annualized increase in October of 3.5%, up from 2.8% in September. Excluding food and energy, the number is expected to rise to 2.2%, up from 2.1% the previous month. Elevated readings of inflation should be expected moving forward as the interest rate cuts take hold in the market. In addition, the falling value of the US$ adds to inflation, causing import prices to rise proportionally. Producer prices, released yesterday, showed that inflation increased significantly over the previous month, though not as high as economists had forecasted. Higher inflation should benefit the US$ in the near term as expectations for further interest rate cuts diminish.

The euro was slightly lower against the US$ overnight. Risk aversion in the market continues to help the greenback, causing both technical and fundamental indicators to point to a relief rally for the US$. Such rallies have been infrequent since June and have been correlated to spikes in risk aversion. The yield advantage that the US$ has over the euro has withered away, with expectations that the 50 basis point interest rate advantage will disappear over the next year. For this reason, a possible rally in the US$ is likely to be shallow, perhaps 2.5%, considering the continued negative sentiment toward the currency.

The yen was higher overnight as its correlation with movements in equity markets continues to sit at around 80%. Though the reported loss by Barclays comes in below market rumors, the news of additional subprime writedowns was not welcomed. In additional news overnight, Bank of Japan Governor Fukui issued comments stating that it is more difficult now to determine changes needed in interest rates. The market has already discounted the BOJ’s ability to raise interest rates this year. Instead the focus should point more towards an increase at the end of the first quarter next year. This timetable is likely to be supportive of carry trades over the coming months, suggesting the yen could weaken if investor sentiment improves.

Sterling was lower again overnight after trading violently yesterday. The Bank of England’s quarterly inflation report, which included in its calculations an interest rate cut in the early part of 2008, continues to weigh on the pair. Between this news, unwinding of the carry trade, and a slight move into US$’s as a safe haven, sterling has lost over 3.3% during the past week. This weakness is likely to continue in the near term as sterling’s support wanes. Should economic fundamentals, which have been supportive of the pound, also begin to change, sterling could again fall significantly in a short period of time.

US$ Mixed as PPI, Retail Sales Released

The US$ was mixed overnight, higher against the yen and sterling, while falling lower against the euro. The U.S. received some data this morning that sheds light on the continuing dichotomy between inflation and U.S. growth. Retail sales figures were released alongside producer prices at 8:30 a.m. The numbers pointed to a mixed view of the U.S. economy. Producer prices, which were expected to increase to 6.4% from 4.4%, only increased 6.1%. Excluding food and energy, PPI rose 2.5% versus expectations of 2.6%. Retail sales remained above forecast, showing an increase of 0.2% versus 0.1% expectations. Generally, this data should be mildly supportive of the US$ as recent interest rate cuts by the Federal Reserve allow significant upside risks to inflation. Additionally, the retail sales figures, which are admittedly volatile, suggest that the weakness in the housing sector remains isolated from consumer spending. This should help to pare back expectations of further interest rate cuts in December.

The euro gained versus the US$ overnight, remaining close to the all-time highs. The gains in the US$ thus far have been extremely limited, suggesting that the recent rise is apart of a significant market shift, likely the result of continued central bank diversification. The overnight gains come as European economic growth was shown to increase slightly more than expected, coming in at 0.7% versus 0.6% expectations. This suggests that the strong euro has not hampered economic growth, despite concerns from European finance ministers. There is still a growing scope for US$ gains over the coming weeks as the market continues to anticipate a change in rhetoric coming from the U.S. Treasury Department.

The yen was weaker overnight after gains yesterday in equity markets spurred a slight re-entry into the carry trade. The correlation between the yen and global equity markets remains extremely strong. As equities gain, the yen falls, while the opposite is also true. The Bank of Japan meeting this week showed that the BOJ does not have interest in raising interest rates in the near term, helping to keep interest rate differentials wide. At the same time, the Japanese Prime Minister has issued comments stating that rapid appreciation of the yen is unwanted. These comments are likely to re-emerge should the yen continue to fluctuate wildly.

The pound was extremely volatile in the overnight session. Sterling initially gained after the unemployment rate was shown to fall to the lowest in 2 1/2 years, while U.K. average earnings also rose an above forecast 4.1%. Shortly after these reports were issued, the Bank of England issued its quarterly inflation report. The report showed that inflation will fall within the Bank's 2% target level over the next two years, even if the Bank were to cut interest rates at least once in early 2008. Growth is also seen slowing beyond its long-term average. At the news conference following the report, BOE Governor Mervyn King had to deny considerations that he would or should resign ahead of his term expiring. These projections combined with growing uncertainty have severely diminished sterling's appeal and are likely to continue to weigh on the currency should they remain in the market.