Why the Euro Has Rallied (page 2 of 2)

Eight out of the nine members voted in favour of the decision to keep interest rates un

changed with the dissenter favouring a rate cut. With a strict mandate to focus on inflation and two members already voting to keep rates unchanged at the prior meeting, the near unanimous voting record was not all that surprising.

Although the need to focus on inflation and the problems with price pressures is a sentiment shared by all of the MPC members, the internal outlook for growth varied.

Some members felt that the economy is holding up well, while others believed that a more serious downturn may be right around the corner. Either way, their hands are tied because consumer prices are already at their pain threshold of 3%.

Retail sales and the CBI industrial trends survey are due for release tomorrow. If consumer spending falls for another month, the uptrend in the GBP/USD could come to an end.

Uptrend in the Canadian, Australian, and New Zealand Dollar continues

The rally in the Canadian, Australian and New Zealand dollar has continued thanks to the combination of stronger economic data and US dollar weakness.

The Aussie hit a new 24 year high and we believe that it is on its way to parity. Just 5 months ago, the AUD/USD was trading at 88 cents and now 800 pips or 9% later, parity is within reach.

Consumer confidence jumped 2.7% this month from a 15 year low thanks to the record income tax cuts announced by the Treasury. All this needs to do is translates into stronger consumer spending and parity will be reached.

Meanwhile the Canadian dollar benefitted from hot consumer prices, the new high in oil prices and the first rise in leading indicators in 3 months.

If retail sales also beat expectations, the Canadian dollar could test its year to date high. Although the New Zealand dollar primarily strengthened on its correlation with the other commodity producer currencies, it too benefitted from a sharp increase in credit card spending last month.

USD/JPY: Headed lower

Over the past 2 trading days, US stocks have plunged more than 400 points. The currency pair that has been hurt the most by this move is USD/JPY, which has now broken its 2 month trend line.

Further losses are in store for this pair, particularly if existing home sales fall short of expectations on Friday. The merchandise trade balance and the all-industry activity index are due for release this evening. Higher oil prices should increase the country's import bill, reducing the trade surplus in the process.