ECB's Only Option is to Be Hawkish (page 2 of 2)

Over the past few weeks, banks have reported far larger than anticipated write downs, CEOs have been ousted and seasoned fund managers like Bill Gross warned that things are only expected to get worse. However as much as we know that a part of the Fed's responsibility is to ensure stability in the banking sector, the rise in bond yields across the curve suggests that bond traders who are often the most accurate predictors of Fed activity do believe that a rate cut next month is a done deal. The only hope would be for Fed Chairman Ben Bernanke to clear the air on Thursday when he testifies before the Joint Economic Committee. Being a central banker in the current market environment isn't easy. Global growth could turn on a dime while inflationary pressures increase on a near daily basis.

British Pound Advances Towards 2.10

In yesterday's Daily Fundamentals, we said the biggest driver of British pound strength and weakness is US fundamentals and not UK fundamentals and today is a perfect example of that dynamic unfolding once again. Both the GDP estimate and the BRC retail sales monitor were weaker than the prior month but neither was a surprise given the overall trend of weaker economic data. When compared to the upside surprises in Eurozone data, it is not hard to understand why EURGBP has been rallying three days in a row. Bank of England Governor King was also on the wires warning that it could be several months before banks return to normal. In the meantime, there is no UK economic data due for release tomorrow but the BoE will begin their 2 day monetary policy meeting.

Dow Up 117 Points, Taking Carry Trades Higher in the Process

With the Dow up 117 points today, it would be surprising if carry trades or the Japanese Yen crosses did not rally. The biggest strength was in NZD/JPY, AUD/JPY and CAD/JPY all of which benefitted from the sharp rise in commodity prices. Leading indicators were flat which was right in line with expectations. This represents a deterioration from the prior month's data. The Bank of Japan has zero room to alter interest rates even though Fukui hinted of a rate hike yesterday. As a country that imports nearly all of its oil, Japanese consumer spending stands to suffer greatly from the rise in oil prices which means that the rebound in the Japanese economy last quarter could be short lived.