Euro: Headed for 1.50? Revisited (page 2 of 2)

What Kind of Impact Will the BoE Rate Decision Have on the British Pound?

Even though the British pound ended the US trading session unchanged against the US dollar, it is still one of the weakest currencies in the FX market because it gave back nearly all of its intraday gains. Economic data was mixed with service sector PMI increasing but consumer credit and mortgage approvals decreasing. The Bank of England will be announcing their interest rate decision next week. They are not expected to lower interest rates, but that does not mean that their interest rate cut on December 6 will be their last. The BoE could ease by as much as 75bp this year if economic growth continues to deteriorate. Since the threat to inflation is not as strong in the UK compared to the Eurozone and the US, the central bank has the luxury of focusing on the problems in the housing and credit markets. Aside from the BoE rate decision, we are also expecting the UK trade balance, leading indicators and industrial production next week.

Australian New Zealand and Canadian Dollars Hit by Softer Commodity Prices and Carry Trade Liquidation

Despite very weak US economic data, the greenback actually strengthened against the Australian, New Zealand and Canadian dollars. Softer oil and gold prices can be partially blamed for the underperformance, but the primary reason why the commodity currencies are lower is because they have been hit by another wave of carry trade liquidation. Australian service sector PMI actually increased last month, so if anything, economic data should favor AUD/USD strength. The Canadian dollar on the other hand is suffering from the weakest Canadian IVEY PMI since December 2001. We only expect Canadian economic data to get worse. The employment component dropped significantly last month, which suggests that we could see a similar deterioration in the CAD employment numbers next Friday.

Dow Ends Worst Week of Trading in Over 100 Years

The Dow dropped another 256 points today, making it the worst first week of trading in over 100 years. Traders across the markets have become extremely risk averse as weak US economic data suggests that the outlook for the US economy could get materially worse before it gets better. Given that the Dow ended the day at session lows and Asian traders have not had an opportunity to react to the NFP number, carry trades could be headed for more losses in the beginning of the new trading week.