Despite a stronger labor market report for the month of December, retail sales for the same period fell the most since January 2007. With the housing market deteriorating and consumer spending contracting, the Bank of England will have no choice but to cut interest rates in February. We still believe that they passed up a golden opportunity to cut interest rates earlier this month and rebuild their credibility but there is no point dwelling on missed opportunities. Now that oil prices have retreated and the economy has worsened, another quarter point easing is inevitable. There are only two things that can help the British pound at this point; a wave of risk appetite that takes all carry trades including the pound crosses higher or less dovish BoE minutes (due on Wednesday).
What's in Store for the Australian, New Zealand and Canadian Dollars
The Australian, New Zealand and Canadian dollars weakened significantly this week despite stronger Australian and New Zealand economic data. This is partially due to the overall drop in commodity prices and largely due to the massive liquidation out of carry trades. In the week ahead, the Australian, New Zealand and Canadian dollars will be in play with the central banks of Canada (BoC) and New Zealand (RBNZ) making interest rate decisions. The BoC is expected to cut interest rates by 25bp on the back of weak economic data, but strong inflation and retail sales numbers out of New Zealand will encourage the RBNZ to leave interest rates unchanged. Although there is no interest rate decision in Australia, they will be releasing inflation reports.
Dow Drops 500 Points this Week, Making it Difficult for Carry to Trades
US stocks performed horribly this week, making it extremely difficult for carry trades to rally. Whether we will see a recovery in carry trades in the coming week will continue to depend on the performance of the Dow. The sharp intraday recovery makes it difficult to accurately gage how stocks will open on Tuesday. The Bank of Japan will be meeting to decide on monetary policy next week. They have no flexibility to alter interest rates which means that the announcement should be a non-event.
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Euro: Analysts Turning Bearish? (page 2 of 2)
- Saturday, January 19 - 2008 at 02:39
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Kathy Lien, Chief Strategist, Daily FXSaturday, January 19 - 2008 at 02:39 UAE local time (GMT+4)
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