The dollar price action on Friday was intriguing, as we expected following some consolidation, the dollar strengthened on the back of stronger than expected Retail Sales in the US, and further reinforced by improving consumer sentiment as described by the University of Michigan consumer sentiment data which came in at the highest reading since July 2007. Consumer confidence is certainly picking up in the United States. But that was it.. as soon as the data was out the dollar rally ended with EUR/USD and GBP/USD achieving new highs for the day. When I look at weekly charts for these currencies in particular one could argue that we have strayed into oversold territory, however it often looks like this when a very strong trend is in place. For now we can say that the jury is out, and some caution is warranted as the technicals are no longer so clearly on our side.

Overnight 3^rd quarter Japanese GDP growth revealed an unexpected deterioration in the 3^rd largest economy in the world. Japan is now technically in recession. Perhaps now it’s easier to understand Governor Kuroda’s aggressive expansion of their quantitative easing programme now. It’s certainly difficult to see how a further increase in the sales tax can be pushed through in the short term, following the increase in April from 5% to 8%. The odds of an early election grow as Prime Minister Abe will need to reaffirm his mandate to push ahead with his policies to fix the problems that have ailed the Japanese economy for the last few decades.

In Emerging Markets the currencies of Brazil, Russia and Nigeria in particular, remain under pressure as a mixture of politics and lower oil prices have dramatically reduced confidence in these large economies. Things aren’t likely to change anytime soon as the price of Brent is now firmly established below $80. Indeed the current $78 price is at the precise level the Nigerian government has used for their fiscal calculations this year, while obviously their calculation is based on the average for the year, it does illustrate the difficulties the economy will face next year. The estimation used next year should be considerably lower than current levels which implies a substantial decline in government expenditure and a consequent major headwind for growth in 2015. No surprise that forward prices for the naira anticipate a further 15% depreciation of the Nigerian currency.

We expect trade data for some Eurozone economies to come out shortly with an improvement in the net trade numbers. And later on we look forward to Empire Manufacturing Index data in the US, as well as Industrial production and Capacity Utilisation data. The production data might soften a little if expectations are right, but the manufacturing index should post a strong improvement. The general theme remains in force with solid numbers coming out of the US, and data elsewhere likely to be on the disappointing side. This continues to support our view that the dollar will continue to strengthen in the weeks and months ahead, but we will keep a close watch on the technicals, the weekly chart as I mentioned earlier may be warning us that the dollar rally has moved further and quicker than is currently justified. It will take some time for us to determine if this is the case or not. But clearly we shouldn’t be shocked in the near term if we get a more range bound market with opportunities both to buy and sell the greenback.