Carry Versus Growth Will be the US Dollar's Next Battle (page 2 of 2)

Economic data continues to print strongly which is fueling the recent strength in the currency pair. Housing market indicators such as consumer credit and mortgage approvals highlighted further growth in the sector while faster money supply growth indicated inflationary pressures.

Collectively, this suggests that the Bank of England will soon be delivering another interest rate hike, which is actually quite possible given last week's hawkish comments from BoE officials. The central bank will be meeting next week and the odds are already in favor of bringing rates up from 4.75 percent to 5 percent. Even though there are a number of economic releases scheduled between now and then, none are expected to shift the outlook.

Japanese Yen - The Japanese Yen is firmer today against the US dollar and Euro thanks to a smaller than expected drop in industrial production in the month September. Although a drop in IP is certainly nothing to write home about, the underlying rebound in exports is encouraging. We continue to believe that the weak Yen will have broad sweeping benefits for the country and the economic data is beginning to show that. In fact, traders are closely anticipating this evening's monthly report from the Bank of Japan.

Even though interest rates are not expected to be changed, the central bank could express more optimism about economic activity and inflation which would be very positive for the currency. In addition to that, unemployment, personal income, PMI, PCE, housing and construction starts are also due for release. The market is also looking for improvements in all of the reports.

Commodity Currencies (CAD, AUD, NZD) - Oil prices are back below $60 a barrel and that has hit the Canadian dollar along with a larger than expected drop in raw material and industrial product prices. For a country that is heavily dependent on oil exports, the drop in price of their most valuable commodity will eventually hit the economy as well. It is only a matter of time. New Zealand data also helped the currency rebound with building permits hitting an 18 month high and business confidence improving. Even though Australia did not have any economic data released, the combination of a rise in gold prices and the prospect of another rate hike by the central bank have the market bidding up the currency.

This morning's Sydney Morning Herald had an article suggesting that the Australian government would be very unhappy if the Reserve Bank of Australia did not raise interest rates. The recent improvements in Australian economic data support the latest strength in the currency.