Could the Reserve Bank of Australia Really Raise Interest Rates? (page 2 of 2)

Meanwhile the Canadian dollar also strengthened while the New Zealand dollar lost ground. No economic data was released from either country.

Euro: Inside Day Signals a Potential Break

The recent price action of the EURUSD suggests that we will see a breakout in the currency pair in the very future. ECB President Trichet shares the limelight with three other central bankers this week and the press is already talking about whether the central bank governor will back off his threat of higher interest rates. According to this morning's producer price index, inflationary pressures remain a big problem as PPI rose from an annualized pace of 4.2 percent to 4.3 percent. Eurozone retail sales and service sector PMI are due for release tomorrow. Strong spending in France suggests that spending in the overall region may not slow as much as the German numbers suggest. Like manufacturing PMI, we expect service sector activity in the Eurozone to hold steady in the month of January.

British Pound Rebounds but Don't Expect the Rally to Last

The British pound rebounded today but we do not expect the rally to last. The move is likely to just be corrective because UK economic data remains weak while the Bank of England is expected to lower interest rates on Thursday. The housing market remains the most vulnerable part of the UK economy and today's drop in construction sector PMI and HBOS prices confirm that conditions in the sector remain difficult. Service sector PMI is due for release tomorrow and troubles in financial sector should limit any acceleration in activity. The UK times reports that the shadow monetary policy committee (MPC) which meets under the auspices of the Institute of Economic Affairs voted 5 to 4 for a rate cut. Their voting record has been a good leading indicator of actual MPC decisions.

Carry Trades Up, Dow Down

Once again carry trades and the Dow moved in opposite directions. For most of the US trading session, carry trades lingered near their highs whereas the Dow Jones Industrial Average weakened with every passing hour. The correlation between carry trades and US equities continue to break down as buying one no longer means buying the other. Risk aversion is still a problem and traders may simply be recycling money that is parked in local currencies. Meanwhile there is no Japanese economic data due for release until tomorrow night. If the Reserve Bank of Australia raises interest rates tonight, we expect a nice rally in carry trades.