Euro Could Replace the Dollar as World's Largest Reserve Currency Within 10 Years (page 2 of 2)

The only piece of economic data released from the UK was a report on house prices. According to Rightmove, the annualized pace of growth in house prices slowed from 5.8 to 5.0 percent. The online property search company called for UK homeowners to "get smart" about the values of their homes and to price them more realistically before house prices fall even further. This clearly indicates that the UK housing market is expected to deteriorate further which leaves the door open for a rate cut by the Bank of England next month. There is no UK economic data due for release until Thursday, which means that the value British pound will largely be driven by the movements of the other major currencies.

Why the USDJPY Rally Could be Limited

All of the Japanese Yen crosses have rebounded significantly on the back of the rally in the US stock market. Although we believe that the move in USD/JPY could extend for another 100 to 150 pips, the recovery should be short lived. According to a special report written by our Currency Analyst David Rodriguez, extremely one-sided demand for Yen options is a clear signal that traders expect the pair to fall even further over the next 3 months. Risk reversals indicate that the market currently has a 5 percentage point premium for USD/JPY puts. The last time we saw risk reversals this extreme was back in August 2007. Even though there was a 430 pip recovery after risk reversals hit current levels, the currency pair went on to drop more than 1000 pips.

Falling Commodity Prices Do Not Stop the Comm Dollars from Rallying

The Canadian, Australian and New Zealand dollars extended their recovery despite a drop in commodity prices. This move was due entirely to the improvement in risk appetite because these currencies did not take off until after the release of the stronger than expected US existing home sales report. The New Zealand and Canadian dollars will come back into focus this evening with New Zealand credit card spending and consumer confidence reports due for release. This will be followed up by the Canadian retail sales report which is expected to reflect a sharp increase in consumer spending. With the unemployment rate dipping to 33 year lows, consumer spending should remain firm.