Dollar, Yen Decline as Germany Tipped to Lead Effort to Aid Troubled EU Countries

Key Overnight Developments

• Australian Home Loans, Consumer Confidence Drop on Higher Interest Rates
• Japanese Capital Investment Rebounds From Record Low, Adds Most in 9 Years
• Germany to Lead Effort on Loan Guarantees for Troubled EU Members, Says WSJ

Critical Levels



The Euro and the British Pound traded higher, adding 0.3% and 0.4% respectively against the US Dollar as firming risk appetite weighed on the greenback. We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.

Asia Session Highlights



Australian Consumer Confidence fell -2.6% in February after surging 5.6% in the previous month according to a report from Westpac Banking Corp. An index tracking consumers’ willingness to make major purchases dropped -4.1%, the most in at least five months. Meanwhile, Home Loans fell more than economists expected, slipping -5.5% from the previous month in December, and the total Value of Loans dropped -4.7%, the biggest monthly loss in nearly two years. The outcomes likely owe to the rise in market borrowing costs as lenders reacted to the central bank’s withdrawal of monetary stimulus with three consecutive interest rate hikes beginning in October. Indeed, RBA governor Glenn Stevens explicitly said that “lenders have generally raised rates a little more than [benchmark borrowing costs] over recent months,” as policymakers opted to hold off on further tightening in February, apparent concerned about doing too much, too soon.

Japanese Machine Orders surged 20.1% in December, the biggest increase in nine years. In value terms, orders amounted to 751.2 billion yen, the most in 12 months, after setting a 22-year record low at 625.3 billion in November. The surge suggests that Japanese companies feel confident enough to meaningfully expand production capacity, pointing to expectations of robust overseas demand even as global stimulus measures begin to wane. Still, orders remain 35.8% below their long-run average, hinting that a robust recovery in output and, by extension, in employment and consumption is far from assured for the time being.

The Wall Street Journal reported that Germany is at the forefront of a European Union plan to offer Greece and other debt-ridden Euro Zone economies loan guarantees to help them raise capital and calm jittery markets fearful of a sovereign default within the currency bloc if some of its shakier members are unable to meaningfully reduce their fiscal burden. The Journal further claimed that German Finance Minister Wolfgang Shauble has discussed the scheme with ECB President Jean-Claude Trichet and will present it to a summit of EU leaders in Brussels on Thursday. The newspaper cited “people familiar with the matter” as the source of the information. Risky assets corrected higher as the markets digested the possibility of an imminent resolution to the Greece fiasco, with European equity index futures higher by about 1% and the safety-linked US Dollar and Japanese Yen lower against most major currencies.


Euro Session: What to Expect



The release of the Bank of England’s Quarterly Inflation Report headlines the calendar in European trading hours, with markets looking to size up the likely direction of monetary policy after the central bank paused quantitative easing last week. Mervyn King and company had said that although the annual pace of inflation has approached 3% recently and is likely to remain elevated in January, this largely owes to oil prices and see CPI growth decline to meet the 2% target level over the medium term. Traders will be keen to see the reasoning behind this projection as they decide if, as the BOE suggested, the existing stock of asset purchases and the record-low benchmark lending rate are sufficient to secure “a gradual recovery”. Against this backdrop, London-based think tank NIESR will release their estimate for the pace of UK Gross Domestic Product growth in the three months to January.

Risk sentiment is also likely to remain a significant factor driving currency markets, with rising European equity index futures suggesting confidence will see continued boost from firming prospects for an EU bailout of debt-stricken southern European economies that may continue to weigh on the US Dollar and the Japanese Yen.

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