US Dollar Rises as European Stock Index Futures Signal Weakness

Key Overnight Developments

• New Zealand House Prices Rose Most in 18 Months in November, Says QV
• Australian Construction Sector Shrinks, Job Advertisements Gain Most in 2 Years

Critical Levels



The Euro mustered a shallow recovery in overnight trading, rising from Friday’s low to re-test 1.49 to the US Dollar. The British Pound followed suit, rebounding to re-test the 1.65 level. We have entered short EURUSD at 1.4881 and remain short GBPUSD at 1.6648.

Asia Session Highlights



New Zealand’s House Prices surged 1.0% in November according to Quotable Value (QV), the government’s valuation agency, the second consecutive month of positive growth and the largest gain since May 2008. However, QV valuation manager Glenda Whitehead has previously argued that thin supply rather than strong demand has driven prices higher; she added in today’s report that the recent gains are likely to boost listings of for-sale properties, which “will help to ease some of the upward pressure on prices [and lead to] more balanced market conditions” in January and February.

Australian economic data returned mixed results. The AiG Performance of Construction Index fell to 47.6 in November, revealing that activity in the home-building industry shrank for the first time in two months. Metrics tracking employment and deliveries for the sector fell for the first time since July, while a gauge of new orders declined for the second consecutive month. Meanwhile, ANZ Job Advertisements surged 5.2%, the largest gain in over two years, pointing to improving labor conditions and reinforcing expectations that the Reserve Bank of Australia will continue to raise interest rates. Indeed, a Credit Suisse measure of priced-in rate hike expectations showed traders now see a 57% chance of a 25 basis point increase in February versus 47% on Friday.


Euro Session: What to Expect



The economic calendar is fairly uneventful in European hours. Switzerland’s Retail Sales are on tap, with an uptick likely after consumer confidence outperformed in the three months through October. Indeed, the report revealed that a gauge of 1-year household finances expectations ceasing to decline for the first time since the quarter April 2008 while a separate index tracking job security advanced to the highest in nearly a year. The annualized pace of contraction in German Factory Orders is expected to moderate to -6.2%, the smallest drop in 13 months, as global fiscal stimulus efforts continue to boost overseas demand for the country’s manufactured goods.

On balance, risk appetite may prove to be of greatest significance once again. European equity index futures are trading lower ahead of the opening bell on the region’s top stock exchanges, which seems to be boosting the US Dollar for the time being. However, the greenback notably diverged from the inverse relationship with risky assets that had held since mid-2008 as November’s US Nonfarm Payrolls report unexpectedly revealed a meager 11,000 drop in employment and a lower jobless rate. As we discuss in detail in our weekly forecast report, USD may now move away from being seen as a funding currency in favor of a return to the more traditional short-Yen carry trade, spurring decoupling of the Dollar’s inverse relationship with equities. However, it remains to be seen how this transition will play out in the short term.

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