Euro: Becoming Overbought? (page 2 of 2)

Consumer spending dropped for the first time in six months during the month of October because of weaker food and clothing sales. Overall, the report highlights the Bank of England's concerns that downside risks for growth loom large, especially after the central bank aggressively raised interest rates this year and as oil continues to trade near record highs. Furthermore, with the Bank of England's inflation report suggesting that price pressures would rise in coming months, signs of an economic slowdown will only help build the case for a rate cut in Q1 2008. The Bank of England is notorious for shifting their monetary policy bias on a dime should data warrant it. Therefore a first quarter rate cut is becoming a realistic possibility.

Australian, New Zealand and Canadian Dollars Hit by Weaker Commodity Prices

The Australian, New Zealand and Canadian dollars are all significantly weaker today due to softer economic data and a sharp sell-off in gold prices. Other than the yellow metal becoming extremely overbought, there was no major behind today's big move. Consumers are expecting less inflationary pressures in the month of November and even though weekly wages grew at a slower monthly rate in August, the annualized pace of growth increased. Meanwhile Canada is beginning to feel the strain of a stronger currency. Yesterday they reported weaker leading indicators and today they reported weaker manufacturing shipments. Only New Zealand has been reporting upside surprises in their economic data with business PMI increasing from 55.1 to 56.9.

Correlation between Equities and Carry Trades Remain Intact

The correlation between the global equities and EURJPY is estimated to be as high as 93 percent. The price action this week confirms that the correlation is very much intact with Dow strength on Monday leading to sharp gains and the corresponding weakness over the past 2 days leading to meaningful corrections. Even though Japan reported weaker a tertiary activity index, the market has stopped caring about Japanese economic data and comments from the central bank. This comes in stark contrast to the importance they give to US and UK data for example. The problem for Japan is that regardless of how much the central bank wants to lift interest rates, the economy is vulnerable to a significant slowdown because growth is concentrated in Tokyo while other regions of the country are still struggling. Therefore a rate hike in the near future is not a realistic possibility.