Euro Leads Most Currencies Lower Against US Dollar on Merkel Resignation Rumor

Key Overnight Developments

• Euro Leads Majors Lower Against USD on Merkel Resignation Rumor
• BOJ Chief Economist Sees Little of Double-Dip Recession in Japan

Critical Levels



The Euro slipped sharply lower in overnight trading, losing as much as 0.7% against the US Dollar (see below). The British Pound held up meaningfully better than its continental counterpart, briefly slipping below 1.63 but promptly rebounding to trade essentially unchanged ahead of the opening bell in London. We remain short EURUSD at 1.4881.

Asia Session Highlights



The Euro led most major currencies lower against the US Dollar in Asian trading amid rumors that German Chancellor Angela Merkel may resign as traders digested a Time Magazine article detailing the mounting political opposition to the leader of the Euro Zone’s largest economy. The article painted Merkel as increasingly at odds with Foreign Minister and Vice Chancellor Guido Westerwelle, the leader of Free Democratic Party (FDP) that is the principal partner of Merkel’s Christian Democratic Union (CDU) in the ruling coalition. Westerwelle has been increasingly outspoken about his opposition to the Chancellor’s position on issues ranging from tax cuts planned for 2011 (which Merkel wants to defer), increased troop levels in Afghanistan (which Westerwelle opposes), and Turkey’s membership in the European Union (which Merkel has joined France in stonewalling). The article also described Merkel as having taken shots from within her own party, with four regional CDU parliamentary leaders writing an open letter in a major newspaper openly airing out their displeasure with the Chancellor’s apparent drift toward the political center and away from the party’s conservative and economic-liberal core following.

Bank of Japan Chief Economist Kazuo Momma said Japan said he saw little risk of a double-dip recession, with the world’s second-largest economy likely to continue to recovery albeit at a slower pace as the impact of global fiscal stimulus fades and governments turn to reducing their public deficits. On inflation, Momma said that price declines will begin to ease, with positive CPI readings likely to emerge over the next two years.


Euro Session: What to Expect



Switzerland’s Producer and Import Prices are set to shrink -2.5% in the year to December, the smallest decline since February 2009, as higher wholesale inflation likely owing the rebound in commodity prices over recent months. The outcome hints that consumer prices (the headline inflation gauge) may continue to rise after posting the first positive reading in 9 months in December. The Swiss Franc may see a bit of near-term strength following the announcement as fading deflationary pressure allows the Swiss National Bank (SNB) to step back from its promise to intervene against the currency as a bulwark against falling prices, with the central bank’s recent comments reinforcing their commitment to the controversial policy seen as jawboning, especially considering the decision to allow EURCHF to slip below the previously protected 1.50 level.

December’s final Euro Zone Consumer Price Index outcome is set to confirm flash estimates putting the annual inflation rate at 0.9%, the highest in 10 months. Barring a wild deviation from expectations, the data is unlikely to have much market-moving potential considering its implications for near-term monetary policy are probably very limited considering the relatively dovish posture taken by the European Central Bank with yesterday’s interest rate announcement.

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