ECB Stands Ready To Raise Rates (page 2 of 2)

Yet, the British pound failed to extend Thursdays losses because the statement made by the BoE did not suggest that they will ease monetary policy further. With the interest rate curve still pricing in 75bp of easing next year, the central banks neutral tone has scared traders from continuing to sell pounds. As we mentioned in yesterdays Daily Fundamentals, the BoE had good reasons to cut interest rates. Growth is weakening, the housing market is deteriorating and LIBOR rates have increased sharply in recent weeks. Going forward however, inflation is still a big concern which means that if it remains high, the central bank may sit on their hands next month. The minutes from the meeting will be extremely important in determining the timing of the next rate cut. The British pounds lack of follow through weakness has led some traders to believe that we have seen a spike bottom in the GBP/USD. If that is true, it will be because of US and not UK fundamentals.

Canadian, Australian and New Zealand Dollars Strengthen

The Canadian, Australian and New Zealand dollars strengthened today as oil prices rallied back above $90 a barrel and gold prices held steady above $800 an ounce. There was no Australian or New Zealand data released overnight but Canadian building permits and IVEY PMI were stronger than expected. After selling off for five days straight, the latest data has helped the Canadian dollar recover. In fact, this turn is beginning to look real and we believe that USDCAD could now move back below parity and at least test 99 cents. The employment component of the IVEY PMI also accelerated last month which suggests that Canadian employment numbers could be firm tomorrow. The forecasts are very low indicating that it will not take much to surprise to the upside.

Carry Trades Trail Stocks Higher After Bush Unveils Plan to Save Home Owners

Another strong day in the Dow has helped to take carry trades higher. Risk appetite has returned to the market following the Bush Administrations plan to give relief to subprime homeowners. According to President Bush close to 2 million homeowners will be able to take advantage of a five year mortgage rate freeze. Risk appetite however can turn on a dime so watch out for payrolls tomorrow because if it is bad, stocks may reverse quickly, taking carry trades lower as well. Japanese GDP is due for release this evening, but these are final numbers which means that they will not be market moving.