Euro, British Pound May Continue to Diverge on German ZEW, UK Inflation Data

Key Overnight Developments

• China Extends Move to Restrict Loan Growth as Yields Rise For Second Week
• British Pound Outperforms as Cadbury Accepts £12Bil Kraft Buyout Offer
• Japanese Consumer Confidence Drops for Second Month on Employment Outlook

Critical Levels



The Euro was little changed through Asian trading, consolidating at familiar levels near 1.44 to the US Dollar. Meanwhile, the British Pound outperformed the spectrum of major currencies to add as much as 0.5% against the greenback on news that UK confectioner Cadbury Plc accepted a 12 billion pound buyout offer from US food giant Kraft. We remain short EURUSD at 1.4881.

Asia Session Highlights



The interest rate on China’s 1-year central bank bill advanced for the second time this year, gaining 8 basis points to rise to 1.93%. Last week, policymakers allowed 1-year borrowing costs to edge up for the first time in 20 weeks and raised bank reserve requirements in a bid to tighten monetary conditions amid worries the Chinese economy may overheat after economists at the Chinese Academy of Social Sciences said GDP may grow as much as 16% this year, threatening to set off rapid inflation and a property bubble. The news may see Chinese equities lead Asian markets lower on fears the ample credit that fueled a rapid stock rally in 2009 will now be withdrawn, boosting the safety-linked US Dollar and Japanese Yen.

Japanese Consumer Confidence fell for the second consecutive month in December. Declines were noted across all of the metric’s sub-indexes, the component measuring employment expectations leading the way lower to drop 4.2 points from the previous month. Indeed, a survey of economists conducted by Bloomberg expect the jobless rate to average at 5.6% this year, the highest in at least 53 years. The figures underscore yesterday’s comments from Bank of Japan chief Maasaki Shirakawa who said that although the economy is picking up, the momentum for sustained recovery is insufficient, alluding to the dismal state of the private sector and its likely inability to support growth in the absence of fiscal stimulus and robust overseas demand.


Euro Session: What to Expect



December’s UK Consumer Price Index figures are set to show that the annual pace of inflation jumped to 2.6%, marking the largest increase in over 18 years and the highest overall reading since March 2009. The Core CPI gauge that excludes the price of volatile items like food and energy is set to gain 2.3% over the period. The data may boost the British Pound, reinforcing last week’s comments from Bank of England policymaker Andrew Sentence who warned in an interview with The Guardian newspaper that the central bank may need to raise interest rates this year to curb inflation amid economic recovery. Those comments set off a sharp upswing in the UK currency, helping it soundly outperform its top European counterparts (Euro, Swiss Franc) to close the week above the 1.62 level to the US Dollar, which technical studies suggest may open the door for a rise to 1.6750.

Germany’s ZEW Survey of investor confidence is set to print at 50 in January, marking the fourth consecutive monthly decline, after year-end economic growth figures released last week suggested that the economy shrank in the fourth quarter after expanding in the six months through September. Growth may remain sluggish as some of the programs in the government’s 85 billion euro stimulus plan begin to expire with unemployment expected to top 9% by the second quarter, hinting the private demand will be too weak to maintain momentum behind the recovery. Political turmoil may add further downward pressure to the confidence gauge. Indeed, the Euro came under attack last week on rumors that German Chancellor Angela Merkel would resign amid rising tensions with her ruling coalition partners and even members of her own party. The broader Euro Zone ZEW reading is expected to remain unchanged at 48.0 in January after falling in the previous three months, but a downward surprise is not out of the question amid concern that the deepening debt crisis in Greece may spread and drive investors away from the region’s assets.


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