One Party Win Should be Positive for the US Dollar (page 2 of 2)

Like the US, the service sector in the UK is performing fairly well, but the manufacturing sector is languishing. However this will not prevent the central bank from lifting interest rates to 5.00 percent on Thursday although it may have an impact though on whether the central bank will continue to lift rates after that. If other parts of the economy fail to accelerate like the housing market and money supply, traders may have to pare back expectations for 5.25 percent rates. Currently, the market is pricing in a 90 percent chance that interest rates will reach 5.25 percent by February 2007.

Japanese Yen - Over the past few weeks, the Japanese Yen has been one of most underperforming currencies. It has now weakened for the fourth consecutive trading day against the Euro and US dollar. There has been no economic data released last night and Bank of Japan Governor Fukui is not set to speak until later this evening. However, his comments last week continue to reverberate in the markets. If you recall, he said that the central bank is in no rush to raise interest rates. This steady monetary policy amidst a low volatility environment provides the perfect backdrop for the revival of the short yen carry trade and this is exactly what we continue to see in the currency market.

Commodity Currencies (CAD, AUD, NZD) - The commodity currencies are mostly stronger today and have held up well amid moderate dollar strength. The Australian dollar is benefiting from the prospects of an RBA rate hike tomorrow night, which would be their first in three months. The economy is continuing to perform well, led by the housing and labor markets. The ANZ job advertisement index increased by 5.8 percent in the month of October, which was the strongest pace of growth in four months. 6.25 percent rates has been completely priced into the market, which means that traders will be looking to RBA Governor Stevens for a signal on whether more rate hikes are needed.

It seems that the government may want to see higher rates after comments from Prime Minister Howard today that interest rates are at "historically low" levels. The New Zealand dollar is basically unchanged despite stronger labor costs data. For the most part, the RBNZ is in no rush to raise interest rates. Meanwhile the bounce in oil prices along with the stronger IVEY PMI and building permits data has helped the Canadian dollar recuperate earlier losses. The manufacturing sector remains very strong and the jump in the prices paid index suggests that inflationary pressures may still be prevalent despite the pullback in energy prices. The Bank of Canada should keep interest rates unchanged for the remainder of the year.