Dow Drops 226 Points, Dollar Tanks: Bloodbath Not Likely to be Over (page 2 of 2)

The return of risk aversion makes the latest move more like liquidation than mere profit taking. It will be interesting to see if Mrs Watanabe, who has stepped in to buy the yen crosses on any major dip, will come back again to save the carry trades this time around.

If we have significant follow through in the Asian stock markets tonight, traders will need to be careful of further USD/JPY weakness. The June corporate service price index and trade balance are due for release. These numbers will give us clues on how Thursday's consumer price index will fare.

Is the British pound headed to 2.10?

The CBI Industrial trends survey dropped back into negative territory in July, yet the British pound continued to rally. Many people have argued that rate hike expectations have been behind the 1,000 pip rally in the currency pair over the past month. But if that was truly the case, then the less hawkish voting record from the most recent monetary policy meeting and the weakness of recent economic data should have put a dent into the currency pair's rally.

Instead, the GBP/USD pressed forward, hitting a new 26 year high on a near daily basis. The interest rate curve has been mostly unchanged since the beginning of the year. If anything, the front end of the curve has become flatter. Even though six per cent is still baked into the markets, the "real" driver of the latest wave of pound strength is merger and acquisition flow.

Flush with cash, foreign governments are on a buying spree and the UK has its doors wide open. Both Chinese and Middle Eastern governments remember the blocked Dubai ports deal and CNOOC's bid for Unocal, leaving the UK as their preferred investment destination.

Canadian dollar hits new 30 year high on strong retail sales

The Canadian dollar hit a new 30 year high today after the release of May retail sales, which jumped by 2.8 per cent, or five times more than market consensus. Such a result came on a jump in Building Supplies and Clothing, which rose six and 4.6 per cent respectively.

The only negative component of the breakdown came from a mild drop in Furniture and Electronics sales, but this was hardly a cause for concern after last month's 1.4 per cent growth. This drove both Canadian bond yields and the Canadian dollar higher.

The market is now pricing in a 100 per cent chance of a rate hike by the end of the year. There is no Canadian data due for release tomorrow, but Australia will be reporting consumer prices. It is expected to be firm like producer prices.