Stocks Continue Higher but Carry Trades Fail to Follow (page 2 of 2)

British Pound weakens as Bank of England is Forced into Action

Growing evidence that the Bank of England (BoE) may eventually need to ease monetary policy has pushed the British pound lower against both the euro and the US dollar. In fact the pound has been driven to the weakest level against the euro since May 2006.

Although Northern Rock tipped the otherwise steady boat, we learned this morning that the Bank of England was already cautious about the economic and inflation outlook at the beginning of this month. Northern Rock will only make them even more concerned.

Consumer prices last month dropped only modestly, but the BoE who may or may not have had this information on September 5th felt that the upside balance of risk to inflation has receded. Coupled with the $4.4bn liquidation injection yesterday and the announcement that UK banks will be allowed to borrow from the BoE using mortgages as collateral, raises the risk of a surprise interest rate cut.

The BoE has always been a very dynamic central bank that pays close attention to the changes in economic data. Therefore should the financial markets in the UK fail to stabilise or there is a run on another bank, they will not be hesitant to lower interest rates.

Euro: Struggling to Make a New High

The euro is trading at a very important contention point against the US dollar. It is struggling to make a new all-time high which suggests that there are a lot of option barriers at 1.40. This means there are just as many traders preventing a break as there are ones hoping for one.

Given the continued deterioration in US fundamentals and the stability of Eurozone economic data, we still believe that a break of 1.40 is inevitable. US Federal Reserve Chairman Ben Bernanke and ECB President are scheduled to speak tomorrow.

Unexpected comments by either of these central bank heads could trigger a sharp rally higher. German producer prices were the only piece of meaningful economic data on the Eurozone calendar this morning and that was right in line with expectations.

There is no Eurozone data due for release, but there are quite a number of Swiss data. We are expecting the Swiss trade balance, producer prices, and the ZEW survey. All of these numbers are expected to be softer despite the hawkishness of the Swiss National Bank last week.

Canadian, Australian and New Zealand Dollars All See Strong Gains

The Australian, New Zealand and Canadian dollars performed extremely well today. The Canadian dollar hit a new 30 year high before giving back some of those intraday gains.

Oil and gold prices continue to press higher with the liquid commodity hitting another record high as US supplies drop more than expected. At this point, $100 oil may not even be needed to take USD/CAD down to parity.