Euro fundamentals turning sour (page 2 of 2)

The last time this happened was seven years ago and at that time, GDP growth slowed to 0.1%, the weakest level since the second quarter of 1992.

This morning, UK industrial production fell 0.8%, eight times more than the market's forecast. The entire UK economy is slowing and the country is now at risk of falling into a recession.

This has become such a serious problem that there is even speculation the Bank of England could cut interest rates on Thursday.

Given current inflationary conditions, we do not think that this is possible, but we do believe that the British pound will continue to trend lower ahead of the meeting.

GDP growth should continue to deteriorate in the coming quarters, making the Bank of England's job even more difficult. The report on house prices that is due for release tomorrow should also be pound bearish.

Canadian Dollar gains strength, Australian and New Zealand Dollars retrace

Oil prices have retraced today, but that has not prevented the Canadian dollar from strengthening against the greenback.

This is partially due to the fact that business confidence improved modestly in the second quarter.

Up until now, the Canadian dollar has had a hard time rallying because of fears that the slowdown in the US economy would spillover to the Canadian economy.

However the summer Business Outlook Survey from the Bank of Canada indicates that this concern is not shared by Canadian businesses which coincide with Friday's sharp rise in the IVEY PMI number.

Building permits were also better than expected, reflecting continued strength in the Canadian housing market. Good news also came out of Australia with construction sector PMI improving, but that has failed to prevent the Australian or New Zealand dollars from being hit by US dollar strength.

More trouble ahead for the Japanese economy?

The rollercoaster ride in the Dow has triggered significant volatility in the Japanese Yen crosses.

With the exception of NZD/JPY and AUD/JPY, all of the other carry trades have recuperated their intraday losses to end the higher.

Japan's economy is crumbling under the weight on higher oil prices because they import nearly all of their oil needs. According to BoJ Governor Shirakawa, the surge in commodity prices could lead to lower profit and weaker growth and because of that they will remain on hold for the foreseeable future.