Is It Time for the ECB to Start Buying Dollars? (page 2 of 2)

We would not be surprised if they made a similar move over the next few days, but the fact that they avoided doing so indicates that they are not willing to solve someone's else's problems at the risk of their own.

Carry Trades Will Continue to Suffer

USD/JPY fell to the lowest level since September 1995 and we expect the currency pair to continue to weaken. Risk aversion and volatility is the main theme across the financial markets and for that reason carry trades should continue to suffer. We have often said that three conditions need to be met for carry trades to thrive (low volatility, strong risk appetite and global monetary tightening) and unfortunately, the current market environment is veering further and further away from that description. Like the ECB, it is unlikely that the BoJ will step in to stop the USD/JPY's slide before it falls below 95. The Japanese have expressed concerns about disorderly movements, but since their last intervention in 2004, their top priority has been to convince China to revalue their currency. They are not likely to be willing to risk the past 4 year's efforts 3 weeks before the finance minister's meeting in Washington DC and 4 months before the G7 meeting in Japan.

Drop in Oil Prices Drive Canadian, Australian and New Zealand Dollars Lower

The Canadian, Australian and New Zealand dollars have fallen under the weight of lower oil prices, steady gold prices and risk aversion. New Zealand and Canadian economic data were actually stronger than expected with service sector PMI in New Zealand rising from 51.9 to 55.5 and Canadian new motor vehicle sales and manufacturing shipments both increasing strongly. Tomorrow we have Canadian consumer prices. We expect CPI to be hot given the rise in industrial product prices and raw material prices. However where the commodity currencies go is really a matter of whether risk aversion exacerbates over the next 24 hours.

British Pound Hits Record Low

The British pound fell to a record low against the Euro as the market punishes the currency for being a measure of risk. The sterling actually sold off against everything in sight including the US dollar, Japanese Yen and Swiss franc. There was no UK economic data released last night, but consumer prices are due for release tomorrow. They are expected to be strong given the rise in BRC shop prices and producer prices. However that will not matter for the pound if risk aversion dominates the currency market once again.