Euro Benefits from ECB President Trichet's Continual Stubbornness (page 2 of 2)

This week however, we face a lot of housing market numbers that could bring the vulnerability of the UK economy back to the forefront. In a speech this morning, BoE member Blanchflower said that interest rates are too restrictive, but if you recall, Blanchflower was the one MPC member that voted in favor of cutting interest rates this month. Therefore his dovish comment is in line with his usual stance on monetary policy and nothing new. Tomorrow we have the CBI Distributive trades survey due for release; weak numbers could tip the pound over. An article in today's Wall Street Journal questions whether Bank of England Governor King will be able to keep his job in June (Listen to the podcast). He received a lot of criticism for his delayed respond to the credit crunch in August and now he is struggling to restore his credibility. His reappointment could not come at a worse time with the economy slowing and inflation pressures mounting.

Record Gold Prices Drive Australian, New Zealand and Canadian Dollars Higher

With gold and platinum prices hitting a record high of $929.20 an ounce today, it would be surprising if we did not see similar strength in the Australian, New Zealand and Canadian dollars. These three currencies have already performed extremely well last week despite mixed economic data. The drivers remain the same this week with the New Zealand dollar rallying despite a sharp drop in the country's service sector PMI report which fell from 62.6 to 53.9 in the month of December. Although there is no way that we will be fading New Zealand dollar's strength, the combination of weak economic data and RBNZ Governor Bollard's warning that the currency is overvalued leads us to believe that if the market becomes suddenly risk averse once again, the New Zealand dollar may fall the hardest. Meanwhile traders of the commodity bloc should keep an eye out for Australian business confidence and Canadian business orders, which are due out tomorrow.

Is the Correlation Between Carry Trades and Interest Rates Going to Break Down?

In the Financial Times today, there was an interesting article that talked about whether the correlation between carry trades and interest rates will break down. The main argument is that the countries cutting interest rates are taking active measures to boost growth while those keeping rates steady or raising them could face a sharp contraction in the coming months. We do not believe that the correlation between carry and interest rates will collapse, but we do believe that the correlation between carry trades and equities are at risk.