Euro Recovery Halted by Weaker Industrial Production (page 2 of 2)

Despite a slowdown in the housing market and the financial sector, the UK labor market remains strong, offsetting a decline in average earnings growth. The Quarterly Inflation Report was equally bullish for the British pound. Even though BoE Governor King recognized the downside risks to growth, he raised the bank's inflation forecast and warned that near term inflation will continue to breach their 2 percent goal and runs the risk of breaching the government's 3 percent limit as well. If inflation rises beyond 3 percent, King would be obligated to write a letter of explanation to Alistair Darling, the Chancellor of the Exchequer and in doing so, it will be difficult for him to justify another rate cut.

Twist of Fate as Canadian Dollar Rallies While Australian and New Zealand Dollars Retrace

The Australian and New Zealand dollars failed to participate in today's Japanese carry trade rally. This was partly due to Kiwi bearish news and the expectations for tonight's Australian employment numbers. Starting with New Zealand, Finance Minister Cullen warned that the slowdown in the housing market was sharper than expected. Combined with the recent drought, he projects a slowdown in growth. Home sales, food price and manufacturing PMI were all weaker than expected, adding to the Kiwi's slide. In Australia, employment numbers are due for release in a few hours. The recent decline in business confidence suggests that the Australian labor market will continue weaken. Meanwhile, the Canadian dollar rebounded despite the lack of economic data. The trade balance is due for release tomorrow and we expect the recent slowdown in US growth to hurt Canadian exports.

Japanese Yen Crosses Extend Gains

The Japanese Yen crosses continued to gain ground as the Dow rallied another 178 points. Risk appetite is returning to the markets but we caution traders against becoming overly excited because the strong volatility and global easing will make it difficult for carry trades to return their glory days. Japanese economic data released last night was mixed. CGPI increased more than expected, reflecting strong inflationary pressures, but the trade surplus and consumer confidence deteriorated. Fourth quarter GDP is expected to remain unchanged.