Carry Trades Hold Steady, Japanese Yen Mixed (page 2 of 2)

For more details, see our Special Report (New Zealand Currency Intervention: Is it Enough to Kill the Carry Trade). Interestingly enough, the Australian dollar has held up extremely well which indicates that the market is not expecting a similar move by the RBA. Dollar strength has only had a limited impact on the Canadian dollar which held steady thanks to a sharp rise in housing prices in the month of April.

Carry Trades Hold Steady, Japanese Yen Mixed

Despite the intervention by the central bank of New Zealand, carry trades as a basket are basically unchanged for the day. US stocks were also flat while bonds yields resumed their rise. The annualized pace of GDP growth in the first quarter was slightly stronger than expected, but the deflator was weaker. Even though all eyes are still on New Zealand, Japan could be the story of the night. CGPI, which is an inflationary indicator and consumer confidence are due for release. Stronger inflation is needed for the Bank of Japan to raise interest rates. If inflation continues to remain weak, then rates will continue to remain low, providing a supportive environment for carry trades.

UK Trade Balance and CPI Could Disappoint

Although the British pound is slightly weaker against the dollar, it has strengthened against the Japanese Yen, Euro, and Swiss Franc. Inflation numbers were moderately stronger than expected with input prices jumping 1.2 percent. There was a sharp downward revision the prior month which offset some of the surprise. Output prices were right in line with expectations, but core prices grew less than expected. Going into tomorrow's consumer price release, this does in inject some upside risk, but at the same time, output is more important for CPI than input. We are also looking for a weaker trade balance since the GBP rallied to a high of 2.013 in the month of April.

Euro: Weak Industrial Production Offset By Hawkish ECB Comments

The Euro is also softer against the dollar on the back of a sharp drop in French and Italian industrial production. We have now seen weakness in all of the three big Eurozone countries. There is a very strong chance that we could see a negative Eurozone industrial production number tomorrow morning as well. ECB officials continued to be hawkish with President Trichet and members Wellink and Hurley reminding the markets that the central bank will do what it takes to curb inflation. Therefore even though the words strongly vigilant disappeared from Trichet's testimony last week, interest rates could still be increased this year.