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Risk currencies opened higher this morning following strong PMI numbers from Europe and comments from Fed President Bullard. Last week, Bullard suggested that the Fed may not raise interest rates until 2012 and overnight, he called on the Fed to extend its authority to buy Mortgage Backed Securities and Agency bonds beyond March. Although this represents a departure from his typically more hawkish stance, it is important to remember that Bullard is a non voting member of the FOMC. Yet, there is no question that most FOMC members are still very cautious. Evans for example warned that the unemployment rate may not peak until 10.5 percent and not decline until the summer. The more cautious the Fed is, the less likely they are to implement an exit strategy. As a result, traders are selling dollars and buying higher yielding currencies. The dollar carry may be an overused term but certainly not an overplayed trade. We continue to believe that 1.50 will only be a temporary barrier in the EUR/USD and that the U .S. dollar could fall another 5 to 7 percent before it stages a full blown recovery .

Existing Home Sales Jumps 10 Percent

This morning's existing home sales report was very strong with the number of units sold rising by the most since Feb 2007. The 10.1 percent rise is glaring evidence that despite a drop in builder confidence, permits and housing starts, the market for previously owned homes remains hot. The only wrinkle is that units are still being sold at lower prices but that is expected given the current state of the economy and tightness of credit. The average price of a home sold dropped from $221.9k to $218.1k in October.

Canadian Dollar Takes Off After Solid Retail Sales

Meanwhile the Canadian dollar strengthened dramatically following the much better than expected retail sales figures. USD/CAD dropped more than 150 pips and appears poised to test 1.05. The loonie is staging such a strong rally because not only did consumer spending jump 1.0 percent in September but the August data was also revised up from 0.8 to 1.0 percent. This is a testament to the resilience of the Canadian economy that retail sales increased 4 out of the last 5 months and 7 out of the last 9 months. Spending outside of automobiles was also very strong. Retail sales ex autos rose 1.1 percent thanks to a sharp increase in demand for furniture, electronics, food and beverages. Over the past few weeks, we have seen more evidence that the Canadian economy is becoming less sensitive to the U.S. economy, first through the trade numbers and now through retail sales. This means that GDP growth may have turned positive in September which could fuel further gains in the Canadian dollar. The U.S. economy could only hope for the same strength in headline and core retail sales as Canada.

About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.