British Pound: Possible Rate Cut in 2008 (page 2 of 2)

Growth in Germany and France both improved highlighting the region's ability to handle a strong currency. According to the comments from ECB officials today, the inflation risks are still skewed to upside due to high food and energy prices. ECB member Hurley also warned that the risk is for further dollar weakness versus the Euro. However stronger economic data and hawkish comments have not helped the Euro hold onto its gains in the US trading session. The single currency sold off from its intraday high of 1.4721 down to 1.4637. Eurozone consumer prices are due for release tomorrow. The annualized rate of inflation is expected to remain above the ECB's 2 percent target well into the New Year.

Australian and New Zealand Dollars Strengthen but Canadian Dollar Continues to Weaken

The best performing commodity currency today was the New Zealand dollar which staged a strong rally on the back of a sharp rise in producer prices last quarter. Retail sales were weaker but not very market moving. The Australian dollar also gained ground but the rise was limited because of consumer sentiment which fell to an 11 month low. Canadian leading indicators and motor vehicle sales were also weaker than expecting causing the Canadian dollar to be the only one of the three currencies to underperform the US dollar. Commodity prices are higher today but their limelight was stolen by the broad volatility in the equity markets.

Dow Reverses in Last Hour of Trading, Will Carry Trades Resume Their Losses?

It is no secret that Carry Trades are moving in lockstep with the Dow which leads us to wonder whether the last hour selloff in the US stock market suggests that carry trades could resume their losses. We believe this may the case especially since the VIX has turned higher once again. The financial markets are becoming extremely volatile which makes it difficult for carry trades to do well. The Yen came under pressure last night after Mizhuo announced a 17 percent drop in net income, largely due to subprime related losses. There was no other Japanese data released last night and the tertiary activity index is the only piece of data worth watching tonight which means that the moves in the Nikkei will determine whether or not we see follow through selling in the Yen crosses (read our Special report for more on Will Carry Trades Resume their Losses).