US Dollar - 100 Percent Chance of a Rate Cut by October? (page 2 of 2)

Economic data released this morning was mixed with a sharp rise in manufacturing PMI and an increase in mortgage approvals offset by a drop in the CBI distributive trades survey and a drop in net lending securities on dwellings. Money supply growth came out right in line with expectations. Inflation risks still remain to the upside, but for the time being, the Bank of England has no reason to stray away from their plans to leave monetary policy and interest rates on hold for the time being. UK Construction sector PMI is the only piece of UK data on the calendar tomorrow. The stability of the housing market should keep the index well in expansionary territory.

Japanese Yen - After a brief pause, the Japanese Yen resumed its rally as traders continued to liquidate out of their carry trades. This week's big moves have made investors in the global markets much more risk averse which means that they will be reluctant to jump back into their long positions. With the Fed Fund futures pricing in a 100 percent chance of a rate cut, the market is clearly looking for slower US growth, which will make the US dollar (against the Yen) a far less attractive carry investment. At the same time, Japanese corporations will continue to repatriate yen back into their home country ahead of their fiscal year end. Whether or not the Yen will continue to rally will be contingent about how Japanese data fares this evening. The economic calendar is extremely busy with consumer prices, unemployment data, labor cash earnings and the PCE-Overall household spending reports due for release. Given the significance of spending and inflation data, any surprises will trigger a sharp move in the Yen.

Commodity Currencies (CAD, AUD, NZD) - The Commodity Currencies are all weaker against the US dollar today as carry trade liquidation takes a hit at the high yielders. The New Zealand dollar has suffered the most with the currency slipping over one percent against the dollar. Commodity prices are mixed with crude prices unchanged and gold prices slightly lower. Overnight, New Zealand reported weaker visitor arrivals while Australia reported the strongest manufacturing PMI index in 4 years. Unfortunately that strength gave way to a disappointing fourth quarter expenditures data. Looking ahead, we have Australian retail sales, current account and PCE reports due for release along with Canadian GDP and consumer spending tomorrow morning. Australian consumer depend is expected to be strong thanks to the stability of the overall economy. Canadian GDP is also expected to reflect the upside surprises in fourth quarter data that we saw throughout the month of January.