Euro Heading Towards All-Time Highs (page 2 of 2)

Part of that strength is certainly a result of dollar weakness since the British pound is down against the Swiss franc, Japanese Yen and Euro, but the pound would not be able to hit the highs that it did today without some optimism about the future outlook for the British pound.

Of all of the central banks meeting this week, the Bank of England is the only one that is expected to raise interest rates. With oil hovering near $70 a barrel, the world's concern for inflationary pressures will not be going away anytime soon. The interest rate curve is already pricing in 6 per cent interest rates by the end of the year.

For more on the outlook for the British pound, see our Special Report 'British Pound Hits 26 Year High: How Much Further Can it Rise?'.

Commodity Currencies Skyrocket: Fresh 18 Year High in Australian Dollar

The commodity currencies skyrocketed today with the Australian dollar hitting a fresh 18 year high, the New Zealand dollar reaching a new 25 year high and the Canadian dollar on its way back to testing its 30 year high. Both gold and oil prices are up strongly as well.

A refinery shutdown in the US caused a sharp intraday reversal in crude and the move was exacerbated by the lack of market liquidity because Canadian markets were closed today. Demand for high yielding currencies continue to be voracious and we do not expect it to be curbed anytime soon.

However, be especially careful of intervention by the Reserve Bank of New Zealand around current levels. In fact, they may even take the opportunity to intervene when US markets are closed on July 4th, so they can get the best bang for their buck. Australia reported softer manufacturing PMI, but that was offset by stronger inflation data. Retail sales are due for release tonight. Low employment should boost spending in the month of May.

Tankan Proves to Be Non-Even for Japanese Yen

Even though the Japanese Yen strengthened against the US dollar and British pound, the carry trade is still alive and kicking.

USD/JPY has not always been the market's preferred carry trade currency and we are seeing that same dynamic now. AUD/JPY and NZD/JPY, the poster child of carry trades continue to rise and that alone is telling us that we are only seeing carry trade profit taking in USD/JPY and not full-fledged liquidation.

The much awaited Japanese Tankan survey proved to be a non-event as the data came out right in line with expectations. However labour cash earnings fell 0.6 per cent in the month of May, which was a sharp disappointment considering the market was looking for earnings to rise by 0.2 per cent. This will keep the BoJ on hold since weak earnings translate into weak spending.