Bank of England Minutes Could Save the British Pound (page 2 of 2)

Since the middle of January, the Australian dollar has rallied over 600 pips because Australia is the only developed country that is raising interest in an environment where everyone is else is lowering them. Today's announcement is icing on the cake for Australian dollar bulls. With a booming economy and rising inflation pressures, the RBA only opted to raise rates by 25bp because the financial markets are still unstable and they can always tighten further in March. Central bank Assistant Governor Edey expects inflation to continue to rise, which means that another 11 year high in interest rates is practically a given next month. The Canadian dollar on the other hand fell sharply today disappointing CPI and wholesale sales numbers. Despite the fact that oil futures touched $100 a barrel intraday, the Canadian economy is getting progressively worse while the strength of the Australian economy continues to catch everyone by surprise. For that reason, on a percentage basis, AUD/CAD was the day's best performing currency pair.

Euro Strengthens Ahead of Inflation Report

One of the main reasons why the European Central Bank refuses to cut interest rates is inflation. Tomorrow, their hawkish stance may be validated by the German producer price report, which should have increased materially last month. Like the rest of the world, the Eurozone will be affected by the recent rise in food and energy prices. The futures market currently expects the European Central Bank to cut interest rates by 50 to 75bp this year. German PPI will help to determine whether those expectations are overly aggressive. Meanwhile, the Swiss franc is stronger across the board thanks to the rise in gold prices and the optimistic tone of the Swiss National Bank. According to their annual report, the SNB believes that the private consumption will remain strong, leaving a favorable outlook for the Swiss economy.

Carry Trades Still Struggling

Since the beginning of the month, the Yen crosses have been trapped within a wide trading range, making it frustrating and difficult for anyone still long carry. In fact, the only carry trade currency that is trading at a level higher than it began this month is AUD/JPY. Volatility in the financial markets continues to be very high, which has made it very difficult for carry trades to recover. We believe that this will remain true until we see some stability in the US economy.