Carry Trade Liquidation Hits the US Dollar (page 2 of 2)

Switzerland's labor market has been very tight and tomorrow's third quarter employment level is expected to confirm that.

British Pound - The British pound scored big gains today despite a surprise voting record for the central bank's latest interest rate hike. The hike was originally expected to be supported by 8 of the 9 monetary policy members but only 7 actually voted in favor of it. Rachel Lomax joined David Blanchflower in voting to hold interest rates steady at 4.75 percent. They were both afraid that the previous rise in inflation was only temporary. The British pound sold off on the release, but quickly recovered its gains as the details of the minutes revealed a tinge of hawkishness that was not expected after the round of disappointing inflation reports.

The monetary policy committee remained optimistic about growth, which we expected after the Quarterly Inflation report, but on the inflation front, they talked mostly about the upside risks and how the tight labor market, high money supply and strong housing market could push inflation even higher. The fact that the British pound is quickly closing its yield differential with the US dollar has helped the pair stage today's impressive rally.

Japanese Yen - Carry trade liquidation was the main driver of today's rally in the Japanese Yen. No meaningful economic data was released last night and the market completely shrugged off the Japanese Cabinet's first downgrade of their economic assessment since December 2004. The government is worried about consumer spending which has long been one of Japan's major economic problems. The prior weakness in the Yen should help to keep demand domestic while also boosting the export sector. We still believe that Japan is on the road to recovery and expect incoming economic data to reflect that. Japanese markets are closed tonight for the country's Labor Thanksgiving Day.

Commodity Currencies (CAD, AUD, NZD) - The commodity currencies continued to strengthen today thanks to the broad based weakness in the US dollar. Canada was the commodity dependent country that had economic data released today, which was slightly worse than expected. Consumer prices fell for the second month in a row with the annualized pace of growth increasing from 0.7 percent to a less than expected 0.9 percent. The core rate hit a 3.5 year high however, offsetting a bit of the bearishness by indicating that inflationary pressures are still prevalent. There was no economic data released from Australia or New Zealand. Firmer gold prices and bids for Qantas Airways are helping to extend gains in the Australian dollar.