Watch for US Data today

The US dollar gave up some of yesterday's gains overnight in Asia, trading in a 1.3142-1.3180 range against the EUR and 116.04-116.56 range against the JPY. The dollar initially benefited from steady profit taking on short positions, and from a moderate uptick in US yields. Right before the Europe open, however, BoJ's board member Noda noted at press interview that expectations of a year-end hike were rising, even if core CPI stays at current low levels.

We continue to highlight the risk on carry trades continues to weigh on the dollar and the market should closely monitor BoJ comments before their December board meeting, as governor Fukui has already pledged to condition the market in advance. Currently the carry trade environment has remained stable, with AUDJPY and NZDJPY recovering from Asia session lows made in the wake of strong Japan IP data.

US data yesterday was mixed; while Q3 GDP was revised up to a 2.2% annualized rate from 1.6% originally reported (a good deal better than the +1.8% consensus), the core PCE price deflator included in the report was revised slightly lower and new home sales were reported down sharply for October.

Still, with Tuesday's Fed commentary having continued to put a heavy emphasis on inflation risk and the Wall Street Journal's Greg Ip noting in Wednesday's paper that Bernanke's Tuesday speech makes rate cuts unlikely "in the months to come", US yields remained better supported throughout most of the session.

Equity markets also staged a rally, with the S&P 500 continuing to retrace Monday's sell off despite a rebound in NYMEX crude prices through $62.

With the USD having been pushed lower by spec selling in recent sessions, longer term accounts continue to look for a fundamental trigger before joining the move, either in the form of elevated expectations for Fed easing or deterioration in the broader environment for carry trades.

We continue to expect softening US data to boost Fed easing expectations further in the weeks ahead and look for the environment for carry trades to weaken as exchange rate volatility rises and risk appetite normalizes.

Ahead today, the US data calendar remains heavy, with weekly jobless claims, October personal income/spending, the OFHEO house price indicator for Q3, and the Chicago PMI all released. We expect claims to moderate back to 315k after last week's surprise jump up to 321k, but the USD would be particularly sensitive to a weaker number here. Meanwhile, we project that Chicago PMI will be stable after last month's big decline, while the core PCE deflator embedded in the personal spending report should remain benign with a +0.2% m/m rise. The OFHEO measure is likely to show house prices continuing to rise in Q3, albeit at a slowing rate, though our economists note this report likely understates the extent of decline in house prices.