What a couple of weeks it has been in the forex market. We have had a lot of volatility on the run upto Christmas. Historically, December has often produced many surprises in the market as many of the big players are out so volumes are lower. We have seen many central banks cut interest rates to in an attempt to prevent a major economic slowdown brought on by many factors including high oil prices and credit losses. The Canadian Central bank, The Bank of England and Federal Reserve all elected to cut rates this month. As I have written previously I think many economy’s are going to have inflationary pressures in 2008 if oil prices stay high, which is certainly a possibility. The inflation figures released are always lagged, changes in commodity prices can take several months to be factored into the CPI inflation numbers.
The December Non-Farm Payroll or NFP was weaker than expected, this made the rate cut inevitable. With the US Dollar Fundamentals looking so weak, a USD Carry trade really is growing in appeal. There are now many countries with benchmark rates considerably higher than the US including United Kingdom, Austrailia, New Zealand, Turkey, Brazil, South Africa and Indonesia. Certainly something worth considering. Historically, many currency pairs move in line with interest rate differentials.
