Weak GBP the strongest theme at the moment after dovish BOE inflation report.

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• New Zealand Sep Retail Sales out at 1.0% vs. 0.5% expected
• New Zealand Oct Business PMI out at 56.9 vs. 55.1 prior
• Australia Nov Consumer Inflation Expectations out at 13.4 vs. 14.3% prior
• New Zealand Oct Non-resident Bond Holdings out at 74.9% vs. 74.3% prior
• China October Industrial Production out at 17.9% vs. 18.5% expected

THEMES TO WATCH – UPCOMING SESSION
Key event risks today (all times GMT):

• Sweden Oct Unemployment Rate (0830)
• Norway Oct Trade Balance (0900)
• ECB Monthly Report (0900)
• UK Oct Retail Sales (0930)
• EuroZone Oct CPI (1000)
• US Oct CPI (1330)
• US Nov Empire Manufacturing (1330)
• Canada Sep Manufacturing Shipments (1330)
• US Weekly Crude OIl and Product Inventories (1530)
• US Philly Fed (1700)
• Japan BoJ Minutes (2350)
• US Fed's Hoenig to Speak on Economic Outlook (0030)
• China Fixed Asset Investment (0200)

Market Comments

The very dovish BOE quarterly inflation report yesterday finally gave the market what it wanted as King and company signalled a loosening of monetary policy in 2008, something the market has been pricing in for some time. Previously, however, the BOE rhetoric seemed reluctant to cooperate with the  market's expectations and this held the weak GBP story back for a time until the floodgates were released yesterday as the market's views and the BOE's views came into alignment.  GBP weakened sharply across the board, and GBPUSD was challenging the key 2.0500 area yesterday that, if broken, could quickly open up for a run at 2.0000 and even beyond. EURGBP is trading at 4-year highs and it's next resistance level is up at the 2003 highs around 0.7255. Odds are now much higher that we see a 25 bp cut already in Dec.

Yesterday saw the carry trades rallying as strength in equities continued in the early session, but then things turned ugly late in the US session. This firmly put a cap on the carry trades and we wonder how much longer they can find support in this environment. We still like getting long the JPY, though recent volatility shows how dangerous this can be for the short term.

The US Fed announced yesterday that it would now publish more frequent (4 times yearly rather than twice yearly) and more detailed economic forecasts. In addition, these forecasts will stretch to cover the next three years rather than the next two. Hmmm - not much we can use this for - especially the 3-year forecasts! Perhaps it helps that the Fed reveals its expectations in a bit more "black and white" sense a bit more often than before.

US Retail Sales data was anemic as expected yesterday, but considering the rise in gasoline and food prices of the last year, one has to consider them much weaker than the headlines reveal. For discretionary items, we are probably seeing an outright recession in consumer spending right now and the jury is out on whether we will see GDP growth at all in Q4 in the US. But again, negative US data isn't necessarily bad for the USD due to the reasons we've outlined previously, so we might bear that in mind with today's US data. EURUSD was back making a feint at recent highs yesterday. In general, we're looking for a consolidatory move back to a bit of USD strength, so there may not be much further upside for EURUSD right here, especially if carry trades come under pressure again.

Before we switched into risk aversion mode recently, the Canadian dollar was the biggest beneficiary among the G10 currencies of the global growth theme then prevalent. We wonder if USDCAD is at a crossroads here - will we get another dose of optimism, higher commodity prices and a stronger CAD here short term, or does this move in risk aversion have further to extend? The December US oil future is rolling off today and the market has shown a lot of volatility on expiry for several months. Any big sell-off in crude crude could put further pressure on CAD.

Chart: USDCAD is trading halfway between flatline support at yesterday's 0.9510 area low and the recent top at 0.9725. The break of either of these levels could lead to significant short term follow through in the direction of the break. Watch oil markets for interesting developments over the next two days.