Dollar Sells Off Ahead of Election Results (page 2 of 2)

British Pound - Stronger retail sales has helped the British pound rally against both the US dollar and Euro. According to the BRC, October sales increased from 2.4 percent to 2.6 percent, which is quite encouraging given the same month drop in the CBI index. The market is primarily focusing on the Bank of England monetary policy announcement this Thursday. The prospect of another interest rate hike by the central bank is keeping the currency bid and will continue to should we get a positive political surprise for the US dollar.

Japanese Yen - Short yen carry trades are beginning to be reversed after Bank of Japan Governor Fukui said last night that they would not "hesitate to lift rates if needed." Fukui has fallen victim to the political disease called flip flopping and is confusing the markets along the way. Just last week, Fukui said that the central bank is in no rush to raise interest rates and now he is saying that they will adopt a forward looking approach. Either way, Fukui is talking about the inevitable and we have been warning for weeks that short yen carry trades are becoming dangerously risky investments. We also want to point out that whenever we cross the 150 mark in EUR/JPY, politicians from either Japan or another country steps in to talk down the currency. Last time it was the Russians and this time it is the Japanese themselves.

Commodity Currencies (CAD, AUD, NZD) - Commodity currencies continued to strengthen today despite the lack of economic data overnight as the US dollar took the driver seat for all of the currency pairs. At the end of the US trading session, the Reserve Bank of Australia announced a decision to raise interest rates by a quarter point to 6.25 percent. This decision was widely expected by the market, but the exceptionally hawkish comments from the central bank were not. The RBA said that there is evidence of higher inflationary pressures and therefore also a very strong risk that inflation will exceed their 2 to 3 percent target.

They also feel that the labor market remains tight and the economy has limited spare capacity with wages growing at faster than average pace. Overall, these comments suggest that the RBA remains hawkish and is on track to continue increasing interest rates in the months ahead. Interestingly enough, the Australian dollar did not respond positively to this decision. This appears to be completely priced into the market and traders are instead looking forward to the release of the quarterly Statement on Monetary Policy next week.