More Reason to be Worried about the US Dollar (page 2 of 2)

Most of these numbers are expected to be strong, but the drop in Eurozone retail sales makes us cautious about the strength of German retail sales. We still expect the EUR/USD to continue to strengthen in the medium term as the stark divergences in monetary policy, labor market stability and economic outlook for the Eurozone and the US make the single currency a far more attractive investment opportunity.

Rebound in British Pound Unconvincing

The rebound in the British pound today is unconvincing since the currency failed to hold onto its intraday gains against the US dollar. According to HBOS PLC, house prices increased unexpectedly in the month of December. Although it may be tempting to call this a recovery, it most likely represents nothing more than a corrective bounce within an overall downtrend. Also, the BRC retail sales monitor reported the weakest sales growth in 21 months. Over the next 24 hours, we are expecting the BRC shop price index and leading indicators. For the time being, there is no reason to buy the British pound. The market is still pricing in a 40 percent probability for a 25bp rate cut on Thursday. Even though we do not expect the central bank to lower interest rates, leaving them unchanged may be enough to trigger a short term bounce in the British pound since those traders who have positioned for a rate cut would need to adjust their exposure accordingly.

Australian Dollar Rallies on Record Gold Prices and Strong Economic Data

The Australian dollar rallied strongly today thanks to solid economic data and record high in gold prices. In the month of December, Australia reported the strongest construction activity in nearly 2 years. This says a lot given that the Reserve Bank of Australia raised interest rates twice in 2007. The market was originally looking for building approvals to remain unchanged, but instead, they increased by 8.9 percent in the month of November. Tonight we are expecting Australian retail sales. The health of the labor market in November and strength of the housing market suggests firm consumer spending, which should lead to further appreciation in the Australian dollar. The New Zealand and Canadian dollars on the other hand had no economic data to offset the liquidation out of high yielding currencies. The Canadian dollar suffered the most despite a rise in oil prices because BoC Deputy Governor Kennedy warned that downside are growing.