British Pound Takes Center Stage Ahead of Revised Q3 GDP Results

Key Overnight Developments

• RBA’s Battellino Says Economy in ‘New Upswing’, Boosts Calls for Rate Hike
• Japan’s Trade Surplus Swells as Record Unemployment Weighs on Imports

Critical Levels



The Euro gained as much as 0.2% while the British Pound added 0.3% against the US Dollar as stocks advanced in overnight trading, sapping demand for the safety-linked greenback. The MSCI Asia Pacific regional equity benchmark rose 0.8%. We remain short GBPUSD at 1.6648.

Asia Session Highlights



Japan’s Merchandise Trade Balance surplus swelled to 807.1 billion yen in October, nearly doubling economists’ forecasts as the drop in imports (-35.6% from a year before) overwhelmed the decline in exports (-23.3%) as the jobless rate hit 5.5% in the third quarter, the highest in over five decades. Economists expect the unemployment rate will hit 6% in the first half of next year. Weakness in consumer spending looks all the more pronounced considering the Japanese Yen gained 5.3% in trade-weighted terms over the same period, which would have typically be expected to have supported imports by boosting domestic purchasing power of foreign-made goods. Separately, the Corporate Service Price index fell -2.2% in the year to October, the least in six months, playing into the hands of the Bank of Japan as the central bank seeks to unwind its asset-buying programs against shrill calls about deflation from the government.

Reserve Bank of Australia Deputy Governor Ric Battellino struck a positive tone in a speech in Melbourne, saying the economy has entered a “new upswing [that] will see this growth extended for a few years yet.” The remarks boosted expectations that the central bank with raise interest rates for the third consecutive month, with a Credit Suisse gauge of priced-in rate hike expectations showing traders now see a 76% chance of a rate increase in December versus 69% yesterday.


Euro Session: What to Expect



A revision of UK Gross Domestic Product is expected to show that the economy shrank a bit less than was originally reported in the third quarter, down -0.3% from the three months to March. Perhaps the most encouraging part of the release lies in an upward revision to private consumption (-0.2% vs. -0.6%) and a downward correction in government spending (0.5% vs. 0.6%), although the public sector is still the only place where positive growth is taking place. This bodes ill for Europe’s third-largest economy, which is unlikely to offer any more fiscal stimulus after the boost from the previous round of spending dissipates with the budget deficit nearing a G10 record of 12% of GDP and threatening the country’s credit rating, leaving investors to wonder where growth is expected to come from next. A survey of economists polled by Bloomberg expects UK GDP will shrink for the fifth consecutive quarter in the three months to December.

In Germany, the GfK Consumer Confidence gauge is expected to remain unchanged in December after falling for the first time in 13 months in November. The metric is stalling as consumers’ relief that the worst of the global economic downturn has passed is being overwhelmed forecasts for higher unemployment. Although the jobless rate has been inching lower since July, the unwinding of the government’s scheme to pay companies to retain employees on shortened schedules rather than fire them may see unemployment rise again. Publicly listed German companies have announced 1,545 in layoffs so far this month and a median forecasts call for the jobless rate to top 9% in the second quarter in the second half of next year.

Looking at risk trends, the UK is in focus with earnings releases from the London Stock Exchange, WS Atkins Plc (the country’s largest engineering design company) and Compass Group Plc (the world’s largest caterer). US equity index futures are slightly higher ahead of the opening bell in Europe, suggesting risky assets remain supported after the advance in Asia and hinting at continued selling pressure on the US Dollar. US Durable Goods, Jobless Claims and New Home Sales data will be important to watch late into the session.

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