Reserve Bank of Australia and Bank of Canada Both Expected to Remain Hawkish (page 2 of 2)

Although they too are expected to keep rates unchanged at 4.5 per cent, firm GDP growth and continued inflationary pressures could keep the BoC hawkish.

The Bank will have to decide whether that is more important or the risk of slower US growth taking its toll on the Canadian economy. Meanwhile the New Zealand dollar has seriously underperformed today despite the lack of any economic data.

British Pound Rally Comes to an End Despite Strong UK Economic Data

After rallying against the euro for four days straight, the British pound finally gave back some of its gains despite continued strength in economic data.

Not only did retail sales pick up last month, but construction spending also hit a nine year high. For the time being, the UK economy seems to be relatively immune to the problems in the US.

Strong consumer spending as well as a stable housing market justifies the Bank of England's lack of concern about the recent volatility in the financial markets.

The central bank can continue to remain hawkish as long as there is no major pullback in the UK economy. Service sector PMI is due for release tomorrow. Given that activity in the construction sector is at a nine year high and activity in the manufacturing sector is at a three year high, there is a good chance that service sector activity could be strong as well.

Euro: Stuck in a Range Until European Central Bank Rate Decision

Although the euro weakened slightly against the US dollar today, we expect the currency pair to remain mostly range bound ahead of the European Central Bank (ECB) interest rate decision.

Producer prices were slightly stronger than expected in July, but since the annualised pace of growth is still below two per cent, it should not cause that much concern for the ECB.

Instead, ECB president Jean-Claude Trichet and company will have to consider how widespread the problems in the financial sector are at the moment. There is talk that more German banks will report large subprime related losses.

Meanwhile second quarter Swiss GDP growth was stronger than expected. This is the first time in a while that we have seen firmer Swiss reports. We expect the central bank to follow in the footsteps of the ECB, meaning that if the ECB stays on rates, the Swiss National Bank will too.

Carry Trades Rally, but Move is Unconvincing

All of the Japanese yen crosses are higher today with the exception of NZD/JPY which tells us that risk aversion could still be a dominant factor in the financial markets.

As the poster child of carry trades, the move in the New Zealand dollar should not be ignored.

Furthermore the lack of a cohesive move in bond yields and the price action in the New Zealand dollar tells us that even though carry trades could move higher overnight, the rallies today are unconvincing, so watch out for a return to weakness.