Euro strength may continue (page 2 of 2)

British Pound Struggles to Hold Onto Gains

The British pound struggled to hold onto its gains today despite stronger than expected growth in producer prices and an improvement in the trade balance.

Producer prices rose by the fastest pace on annualized basis in 22 years as the cost of raw materials surged. However the move in producer prices and consumer prices are not always correlated, especially if weak demand prevents producers from passing on their costs to consumers.

Nonetheless, the rise in PPI will probably keep the tone of Wednesday's Bank of England Quarterly Inflation report hawkish. As for the trade balance, the improvement was very marginal with exports rising by less than £100m and imports falling by approximately the same amount.

Commodity Currencies Strengthen on Weak Dollar

The Australian, New Zealand, Canadian dollars have strengthened against the greenback despite a drop in gold and oil prices.

The rally in the Dow today and the move lower in the US dollar against everything except for the Japanese Yen indicates that the price action of the commodity currencies is primarily a reflection of the market's risk appetite.

Despite the Reserve Bank of Australia's recent hawkishness, home loans fell to the lowest level in 3 years while business confidence dropped from -4 to -8.

Canadian housing starts were right in line with expectations, rising by 0.2% in March. There will be no major data from any of the commodity producing countries until Wednesday when New Zealand retail sales will be released.

This means that risk appetite and commodity prices will continue to drive the price action of these three currencies.

Rally in Dow Leads Carry Trades Higher

The 130 point rally in the Dow has driven the Japanese Yen higher against all of the major currency pairs.

Risk appetite is the predominant theme in the markets right now, but weaker Japanese economic data also weighed on the Yen. The Eco Watchers survey which measures the sentiment of the man on the street dropped from 36.9 to 35.5 with the outlook component falling from 38.2 to 36.1.

Japan imports practically all of their oil needs which mean that the higher price of gasoline will make life more difficult for the average Japanese citizen. It will also reduce the chances of the Japanese economy resuming its recovery.