Warnings from the ECB Weigh on Euro (page 2 of 2)

Earlier this month, ECB President Trichet acknowledged that there are downside risks to growth which basically means that the Eurozone will no longer be immune to the US slowdown. ECB member Garganas went one step further today by saying that the credit markets could have a bigger impact on Eurozone growth than initially anticipated which completely offset the fastest pace of growth in German producer prices in 13 months. Germany is facing the same pressure of higher food and energy prices as the rest of the world which is the main reason why the ECB won't cut interest rates until they have no other options. We expect a rate cut to come in the second half the year, which should lead to a reversal in the EUR/USD, but before that we should see a push above 1.48 and a possible test of the all time high. Eurozone consumer prices, the Swiss trade balance and Swiss Producer prices are due for release tomorrow - expect another active trading session.

Australian Dollar Hits 3 Month High, Canadian Dollar Rebounds

While the British pound has been one of the best currencies to sell this week, the Australian dollar has been one of the best currencies to buy. The currency hit a 3 month high against the US dollar today as the market continues to absorb the Reserve Bank of Australia's surprisingly hawkish monetary policy. The Canadian dollar on the other hand rebounded thanks to stronger economic data and higher oil prices. Both leading indicators and Canada's international securities transactions beat expectations while oil futures hit an intraday high above $101 a barrel. We continue to be bullish Australian dollars and expect it to test its year to date highs against the US dollar.

Carry Trades Make a U Turn

Last night, news that private equity firm KKR warned that they will be delaying repayments for a second time, triggered a wave of carry trade selling. That move was reversed in the NY trading session when the Dow went from being down over 100 points to up 90. Although this could lead to some follow through strength in the Yen crosses, we remain bearish because this type of volatility in the financial markets is more negative than positive for carry trades. The Japanese remain concerned about growth which suggests continued weakness in data.