Euro: More Reason to Believe Trichet Could Raise Interest Rates (page 2 of 2)

However there are often retracements within a broad downtrend and we expect to see one at the beginning of next week. Before Tuesday's FOMC meeting, we are expecting producer prices and the trade balance. The UK trade deficit should improve because the export component of manufacturing PMI accelerated last month. We already know that inflation is a problem because the latest monetary policy statement talked up the risks to short term inflation. However anything goes after the FOMC meeting because the US rate decision could shift the near term outlook for many currency pairs. On Wednesday we also have UK employment data which we expect to be pound bearish.

Strong Employment Numbers Drive Canadian Dollar Higher

USDCAD sold off for the second day in a row following much better than expected Canadian employment data. If you read yesterday's Daily Fundamentals, the upside surprise should not much of a surprise because we said that the employment component of the IVEY PMI already forecasted stronger employment growth. The market was looking for only a 15k rise, but instead employment grew by 42k. Although the unemployment rate edged higher from 5.8 to 5.9 percent, the participation rate hit a record high of 63.8 percent which means that more people are encouraged to join the workforce. The Australian and New Zealand dollars did not fare as well however following the drop in Australian construction PMI. Although there isn't a lot of data from the commodity producing countries next week, the data that we do have can be very market moving. This includes the Canadian trade balance, Australian employment and New Zealand retail sales.

Carry Trades Rebound as Dow Holds Onto Gains

With the Dow holding onto its recent gains and Japanese third quarter GDP revised downwards, the Yen crosses are up across the board. Weak capital expenditures and domestic demand is preventing the Japanese economy from recovering and unless the government finds a way to boost spending, growth will remain soft. For that reason, we do not expect any remarkable strength in the fourth quarter Tankan report which measures business activity and sentiment. The outlook of the Yen crosses continued to be tied to the outlook of the Dow. If the US stock market extends its gains, so will carry trades but if it begins to top out, watch out for another wave of carry liquidation.