Are Speculators Still Buying Carry Trades? (page 2 of 2)

All three of the commodity currencies are down sharply due to the combination of weaker economic data and continued flight to safety out of high yielding currencies back into the greenback.

The big surprise was in New Zealand, where retail sales dropped for the second month in a row. Consumer spending is the backbone of any economy which makes the recent weakness extremely concerning. There are reports that over $3bn of New Zealand bonds are set to mature this month. Most New Zealand bonds are owned by foreigners which suggest that the losses in the kiwi could exacerbate when the bond investors repatriate their funds.

Australian business confidence was also weaker than expected in July. Australian companies are also being hit by the sub-prime debacle with Rams Home Loans Group warning that profits would be weaker.

Meanwhile over in Canada, the combination of a weaker trade balance and news that Coventree, the largest non-bank issuer of commercial paper in Canada was forced to seek emergency funding when it failed to refinance debt that matured yesterday.

Euro drops to one month low, ECB continues to add liquidity

The European Central Bank (ECB) appears to be the only one still injecting liquidity into the banking system and that too may becoming to an end after ECB President Jean-Claude Trichet said that conditions are returning back to normal.

The ECB has done a fantastic job of acting swiftly and aggressively to the money market crisis. If liquidity injections do come to an end, everyone will be asking whether rate cuts are next. Eurozone economic data released this morning was all weaker than expected with German GDP, French GDP, Eurozone GDP, and French consumer prices all falling short of expectations.

We continue to believe that the ECB will raise interest rates in September but that rate hike will be the central bank's last. For all euro traders, it will be important to continue to keep an eye on Trichet for any signs of reluctance towards a September rate hike.

Will the Bank of England still raise interest rates now that rates are below target?

Like the euro, the British pound dropped to a one month low against the US dollar on the combination of broad dollar strength as well as weaker UK economic data.

Consumer prices dropped by 0.6 per cent in July, pushing the British pound back below 2.0 for the first time in seven weeks. Given the weakness in producer prices for the same month, the market was already looking for a decrease in consumer prices, but not one by this magnitude.

However it seems that the drop in food prices pushed the annualised pace of inflation growth below the Bank of England's (BoE)two per cent target for the first time since March 2006. The Bank did not have this information at its last meeting which means that it would not have had an impact on their hawkish inflation bias.

However the BoE has long been a very dynamic central bank and we believe that the drop in inflation will make the most recent interest rate hike the last.