There hasn’t been much in the way of consistency in the forex market this week. The dollar continued to perform well against the commodity currencies but is struggling to hold onto its gains versus the euro, British pound and Japanese Yen. Whenever there is such a wide divergence, it indicates that investors are more sensitive to relative growth than the outlook for dollar. So far this week’s U.S. economic reports have not clarified the outlook for monetary policy. The housing market is recovering but consumer confidence remains weak. According to the Conference Board, consumer sentiment dropped for the third consecutive month to its lowest level since April. In other words, the last minute deal in Washington to end the shutdown and avoid default failed to bolster consumer confidence. This is a problem for the central bank because the sharp rise in non-farm payrolls has not been validated by other reports. Even if there are more jobs, consumers need to be confident to spend. Retailers are worried that this holiday shopping season could be the weakest since 2009 and if they are right, it will be very difficult for the Fed to justify tapering this year. We continue to believe that the central bank will wait until 2014 to reduce asset purchases and based on the drop in U.S. yields today, the market shares our views. Of course, the decline in yields is small and sentiment could turn on a dime but we do not have any economic reports that are significant enough this week to materially alter monetary policy expectations.

At the last FOMC meeting, the Federal Reserve expressed concerns about the housing market but according to this morning’s reports, the sector isn’t performing as poorly as they feared. In fact, the rise in building permits is indicative of stronger economic activity. Building permits rose 5.2% in the month of September and another 6.2% in October. Housing starts are usually released alongside permits but the reports have been delayed to December 18th because of the government shutdown. Nonetheless with building permits on the rise, housing starts should follow. The rise in permits was caused largely by a sharp increase in multi-family rental units as the absolute number of permits issued hit its highest level since June 2008. This is good news for the U.S. economy because building permits are a leading indicator of economic growth as builders would only apply for more permits if they were optimistic about demand. House prices also rose 1% in the month of September according the S&P/Caseshiller and 0.3% according to the Federal Housing Finance Agency’s House Price report – a sign that the recovery in the housing market continues.

Looking ahead, we expect continued divergence in the dollar’s performance along with quiet trading ahead of the Thanksgiving Day holiday in the U.S.

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