ECB: Still Keeping the Market Guessing (page 2 of 2)

The futures market is pricing in a 40 per cent chance of an interest rate hike, but 70 per cent of analysts polled expect rates to remain unchanged. We expect the ECB to leave rates unchanged, but remain hawkish to avoid triggering another dramatic move in the financial markets.

British pound: Are UK banks in trouble?

The Bank of England announced that they loaned $3.2bn to an undisclosed bank at their penalty rate of 6.75 per cent. The emergency loan facility is usually tapped only when banks have funding problems, but earlier this month, Barclays borrowed $630m because a loan from HSBC was delayed.

Therefore the market is taking this in stride because it could once again be related to a settlement issue instead rather than a major liquidity problem. The British pound is still lower however partly because of the loan but also because the CBI industrial trends survey fell to a nine month low in August. This suggests that retail sales in general may be weakening.

Question marks over Bank of Japan rate hike

Today's sell-off in the yen crosses is nothing more than a correction of yesterday's rally. Carry trades are stuck in range as the recent recoveries have been rather baseless.

Japanese economic data remains weak as retail sales continued to drop in July. Tonight, we have additional data including consumer prices, unemployment, overall household spending, PMI, and industrial production.

Although the labour market will remain tight, it will be some time before Japan is able to escape deflation. Last week, Bank of Japan (BoJ) Governor Toshihiko Fukui said that the central bank still plans on increasing interest rates. But comments from BoJ member Atsushi Mizuno this morning suggest that a rate hike may not come until the end of the year at the earliest, because a Fed rate cut could change his stance.

The newly installed cabinet also appears against a hike. Finance Minister Fukushiro Nukaga said that Japan has yet to overcome deflation and as a result, he wants the BoJ to make policy consistent with the current economy.

Canadian dollar traders cautious ahead of GDP

The Australian and New Zealand dollars have pulled back today after weaker than expected economic data and renewed flight to safety into US dollars.

The Canadian dollar on the other hand rebounded on stronger current account numbers and a sharp increase in raw material prices. Its rally however has been limited by the possibility of softer GDP numbers tomorrow.

Australia has retail sales and trade balance due for release tonight. Spending could remain positive as the trade deficit improves.