Major Currencies Pare Back Gains

NEW YORK ( BBH FX Strategy) -- The foreign exchange market saw some light profit-taking, which kept the dollar on a supportive footing. However, it remained relatively close to Thursday's lows following the broad move back into risky positions amid the eurozone rescue plan.

Regional stock markets were mostly higher, but gains were limited after Thursday's outsized moves. The market nonetheless remains optimistic that China will invest in the European Financial Stability Facility, though it will come with conditions and reportedly depend on other countries' participation.

As a result, European peripheral yields are relatively unchanged, while credit default swaps are tighter. Meanwhile, Italian yields are higher following this morning's auction. The UK GfK consumer confidence survey, released overnight, was below expectations, printing at its lowest level since February 2009.

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After the European Union summit what is the likely to be the next focus for markets? For sure over the longer-term, many will continue to wonder how much this summit actually resolved the eurozone's core issues, including the sustainability of Greek debt, Italy's ability to boost growth through structural changes and larger global governance issues, such as integration.

Over the next few months we in fact continue to believe implementation risks and economic growth are the likely catalyst that prompts a renewed weakness in the euro as the two-year interest rate spread moves in favor of the USD and the ECB embraces more accommodative monetary policy.

What's more, despite the outcome of the summit Italian bonds sold today for 2014 maturity saw their average yield increase from 4.68% to 4.93%. Nevertheless, with risk appetite likely to gain more ground ahead of next week's key policy and economic events (including the Federal Open Market Committee and European Central Bank meeting and the G20 Summit) we suspect that the dollar is likely to remain under broad selling pressure.

With the euro zone summit behind us though, it is likely that the attention shifts back to the U.S. First and foremost, U.S. data have substantially surprised to the upside. Indeed, relative to all the other countries in the G10, U.S. economic data has outperformed, even though growth is too slow to absorb excessive economic capacity. To us, the improvement, coupled with potential for more policy support from China, indicates that from here those growth sensitive/dollar bloc currencies are likely to extend their recent rallies.

Today markets are likely to focus on U.S. personal income and spending data which are both expected to improve from last month. Indeed, Thursday activity figures suggested that Q3 was driven primarily by consumption which is likely to bode well for the start of Q4. The decent gain in September retail sales suggests in some part that spending show remain strong. The rises in employment, average earnings and hours worked last month suggest that personal income is likely to have increased from the previous month.

Elsewhere, the Swiss October KOF leading indicator fell to just 0.80 from 1.21 in the previous month. Indeed, with Switzerland's currency one of the most overvalued in the G10. Barring its sizeable current account surplus and net international investment position, its economic fundamentals are among the worst in the G10. Its open economy has left it exposed to a slowdown in trade, leading to deterioration in it terms of trade as external growth has slowed. As such, its economic data continues to underperform expectations, highlighting the current weakness in the Swiss economy.

As outlook for the U.S. economy has improved, there have been some notable changes to expectations for monetary policy in emerging markets countries. For example, expectations have been lowered for cuts in Mexico and Korea and official communication from the Brazilian central banks seems a bit less dovish than some had expected.

More notably, Turkey made a U-turn toward tightening policy. Even though the bank has been very confusing, rates have more unambiguously higher. Further down the line, we expect countries with more solid fundamentals, such as Indonesia, to catch up and gradually begin to outperform.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.