US Dollar's Flight to Safety Status Cracks on the Weight on Weaker Data (page 2 of 2)

Rate cut expectations have increased today.

Tomorrow we have service sector ISM due for release and we will be looking at the employment component of the report for more information on how Friday payrolls will fare.

Australia Looks Ahead to Employment Report, Bank of Canada Moves Policy to Neutral

The Bank of Canada (BoC) left interest rate unchanged at 4.5 per cent and removed their bias to raise interest rates again this year.

More specifically, the BoC indicated that even though growth has been stronger than expected in Canada and domestic demand could remain strong, they fear that the sharp US housing downturn and weaker growth outlook could spillover into the Canadian economy.

This along with news that the Canadian Prime Minister has suspended Parliament sent the Canadian dollar tumbling against the US dollar. IVEY PMI is due for release tomorrow. Canadian economic activity is expected to remain strong. Meanwhile, the New Zealand dollar continued to suffer the biggest loss in the currency market.

The kiwi is down 1.35 per cent against the dollar and 2.16 percent against the Japanese yen, indicating that risk aversion remains high. The Australian dollar on the other hand saw far a milder loss ahead of their employment report. The labour market should remain tight as the pace of job growth accelerates.

Bank of England Not Expected to Change Interest Rates

The Bank of England (BoE) is expected to leave interest rates unchanged at 5.75 per cent and unlike the ECB, when they do not tinker with interest rates, there are no comments made.

Economic data has been hot and this will continue to buy the Bank of England time even though they too are becoming increasingly concerned with the moves in the bond markets.

Three month sterling rates jumped to an 8.5 year high, raising speculation that the Bank of England may have to inject liquidity into the financial markets if borrowing costs continue to rise.

Like the manufacturing and construction sector ISM reports, service sector ISM in August was particularly strong.

Carry Trades Rally, but Move is Unconvincing

Yesterday, we had said that even though carry trades rallied, the move was unconvincing because the New Zealand dollar did not participate in that rally.

Today, we see all of the gains made on Tuesday erased. Carry trades continue to remain vulnerable as stock markets around the world weaken. The Nikkei was down 1.6 per cent overnight. Further weakness tonight will result in additional losses for the yen crosses.

According to MoF official Watanabe, the Japanese are now also worried about US contagion.