The U.S. dollar is trading higher against most of the major currencies this morning with the exception of the Japanese Yen and New Zealand dollar. After breaking briefly above 100 earlier this week, it now appears that USD/JPY has rejected this level once again. Up until today, there has not been any U.S. data, which means USD/JPY weakness is a reflection of skepticism and hesitation ahead of next week’s FOMC rate decision. This morning we learned that jobless claims dropped to 292k from 323k, its lowest level in 7 years. For the first time since March 2006, fewer than 300k people filed for jobless claims benefits, which should have been extremely positive for dollar but unfortunately elicited only a small reaction in the greenback. The problem is the data is abnormally low because the Bureau of Labor Statistics said 2 states upgraded their computer networks and some filings were not reported. In other words, we should take the numbers with a grain of salt because “the decrease in filings probably didn’t signal a change in labor market conditions.” So while a sub 300k print in jobless claims seems very impressive, we should expect upward revisions next week.

Yet the main takeaway from today’s jobless claims report is the trend is still improving which is good news for the Federal Reserve. The less volatile 4-week moving average dropped to 321.k last week its lowest level since October 2007 and continuing claims also declined. Considering that the data is distorted and fewer firings have not translated into stronger hiring, traders have rightfully shrugged off this report. Fed President and FOMC voter Dudley is scheduled is speaking this morning but so far he has not touched on monetary policy. With a week to go before the FOMC announcement, barring a surprise jump in tomorrow’s retail sales report, we are looking for further exit out of long dollar positions ahead of the monetary policy announcement.

Meanwhile the euro is under pressure because of more signs of weakness in the Eurozone economy. Eurozone industrial production dropped 5 times more than expected in the month of July, raising fresh concerns about the region’s underperformance. We believe that the outlook can worsen, putting additional pressure on the currency and potentially driving the EUR/USD below 1.31. However the more consistent and potentially more significant losses will probably be seen in the euro crosses such as EUR/GBP and EUR/NZD.

The biggest movers today are the commodity currencies with the AUD down 0.85% and the NZD up 0.8%. A second consecutive month of job losses in Australia has hit the currency hard and exposes the challenges the new government faces in reinvigorating the recovery. Meanwhile the optimism and hawkish bias of the RBNZ has and should continue to squeeze out NZD shorts.

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