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Pound Tumbles on UK Credit Outlook, Euro Exposed with ZEW to fall for Second Month

The British Pound tumbled late into the overnight session after Fitch said the UK was the most likely country in the G10 to lose its AAA sovereign credit rating. The Euro may see selling pressure ahead as Germany’s ZEW survey shows investor confidence fell for the second month in November.

Key Overnight Developments

• Japan: Merchant Sentiment Hits 6-Month Low, Deputy PM Talks Down Stimulus
• Pound Tumbles After Fitch Says UK Most Likely to Lose ‘AAA’ Credit Rating

Critical Levels



The Euro edged slightly lower in overnight trading, losing its grip on the 1.50 figure to shed as much as 0.3% against the US Dollar. It was the British Pound, however, that saw the biggest losses: sterling fell sharply late into Asian trading after ratings giant Fitch said the UK was the most likely country in the G10 to lose its AAA sovereign credit rating on the swelling budget deficit (expected to average over 12% this year and in 2010). GBPUSD tested as low as 1.6602.

Asia Session Highlights



Japan’s Current Account surplus widened more than forecast in September, registering at 1.57 trillion yen versus expectations of a 1.51 trillion result as the annualized decline in imports (-37.7%) outpaced the drop in exports (-32.1%). Outbound shipments have seen a steady since bottoming in January as the world’s governments collectively spent close to $2 trillion on fiscal stimulus, boosting demand for Japanese cars and electronics. While imports have also rebounded over recent months, they have done so at a slower pace as the unemployment rate surged to a record 5.5% in the third quarter, trimming incomes and weighing on demand (including on that of foreign-made goods). More of the same is likely with a survey of economists polled by Bloomberg calling for the jobless rate to hit 6% in the first half of 2010, keeping a firm lid on domestic demand.

Bolstering expectations of a weak consumer, the forward-looking Outlook component of the Eco Watchers survey of merchant sentiment fell a six-month low in October, registering the biggest one-month drop since December 2008 amid sharp declines in gauges tracking retail spending, manufacturing and (appropriately enough) employment. Separately, Japan’s Deputy Prime Minister Naoto Kan said that the government will unveil a new economic growth strategy by the end of this year, sooner than the expected emergence of such a plan at the end of March ahead of the new fiscal year starting in April 2010, and stressed that the plan would not rely excessively on fiscal stimulus, hinting that the flow of government cash that has underpinned growth in recent months may soon be withdrawn.

Euro Session: What to Expect



Germany’s ZEW Survey of investor confidence is expected to show slip for the second consecutive month in November, with most of the factors behind October’s surprise decline still on the table. Indeed, the new German ruling coalition is far more averse to deficit spending and much more concerned about the growing budget deficit, suggesting the government will allow current programs to be absorbed into the economy without adding additional support. The public sector has played a key role in supporting Europe’s largest economy over recent months and a shift of burden back to private industry may see a slowdown with spending set to be constrained by rising unemployment while businesses suffer from a loss of foreign demand as the Euro continues to push higher, making German goods comparatively more expensive to overseas buyers.

In the UK, the visible Trade Balance deficit is set to narrow to -6.1 billion pounds in September from -6.24 billion in the previous month, registering the smallest shortfall in over three years, as the decline in imports continues to outpace the drop in exports. A weaker Pound has weighed on purchases of foreign-made goods, trimming UK consumers’ purchasing power in terms of the currencies of the country’s top trading partners. Indeed, a trade-weighted index of the UK unit has fallen -24.5% to date since topping out in July 2007, the same month that the trade gap peaked and began to gradually narrow.


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