US Dollar Extends Gains on Safety Demand as Stocks Retreat in Asian Trade

Key Overnight Developments

• Bank of Japan Maintains Dovish Posture, Hinting USDJPY Gains Ahead
• NZ Consumer Confidence Fell the Most in a Year in February, Says ANZ
• US Dollar Gains on Euro, Pound on Safety Demand as Stocks Retreat


Critical Levels



The Euro slipped as much as 0.4% while the British Pound lost as much as 0.2% against the US Dollar as stock markets declined in Asian trade, boosting demand for the safety-linked greenback. The MSCI Asia Pacific regional benchmark tracked 0.4% lower after a disappointing round of Australian earnings reports as well as comments from Horst Seehofer, head of the Germany’s CSU party (which is a part of the current ruling coalition), who said that “not a single euro” should go to bail out Greece. We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.


Asia Session Highlights



The Bank of Japan voted unanimously to keep interest rates and government bond purchases unchanged at 0.10% and 1.8 trillion yen respectively, as expected. Policymakers said the economy was picking up but reiterated that downside risks remain and warned that the economy has not achieved self-sustained growth, with the pace of improvement to moderate by the middle of the 2010 fiscal year. The bank further added that beating deflation is the “critical challenge” for monetary policy at present and promised to maintain an “extremely accommodative” financial environment.

The outcome came on the heels of relatively hawkish minutes from the US Federal Reserve’s January policy meeting, helping to narrow Japan’s 3-month yield advantage over that of the US to the lowest in nearly 6 months. A good deal of Dollar weakness through 2009 was linked to the fact that US short-term borrowing costs fell below those of Japan for the first time since 1995, making the greenback a more attractive carry trade funding currency amid a widespread rebound in risk appetite. A narrowing spread in 3-month yields suggests a forthcoming rebalancing of FX carry trade portfolios away from a short-USD and towards a short-JPY bias, an outcome that is likely to prove bullish for USDJPY.

New Zealand Consumer Confidence fell 5.9% from the previous month in February, marking the largest decline in a year, according to a report from ANZ National Bank. A statement accompanying the release said that rising unemployment and falling house prices have meant that “consumers remain cautious in regard to spending…[suggesting the] recovery process will be gradual and guarded.”


Euro Session: What to Expect



Preliminary figures on UK Mortgage Approvals from six top lenders surveyed by the Bank of England are expected to show an advance to 63,000 in January, reversing the decline from the previous month. However, it is questionable whether the outcome is actually representative of the trends in overall mortgage lending considering the firms polled for the report have greatly expanded their market share after much of their competition evaporated in the credit crunch. This means that an increase in their loan books may not necessarily point to an improvement in consumers’ willingness to take on debt (which is ultimately a statement of confidence about future employment and economic growth).

Separately, Public Sector Net Borrowing is expected to drop -2.6 billion pounds in January, while the Public Sector Net Cash Requirement (PSNCR) – a measure of the government’s net monthly shortfall – is set to show the first surplus in a year at 20 billion pounds. A survey of economists polled by Bloomberg calls for the UK budget deficit to average at 11.1% of gross domestic product through 2011, the highest in the G10. This suggests that a positive outcome this time around may help underpin the British Pound, particularly now that sovereign default risk is in the spotlight, amid hopes that the fiscal imbalance in Europe’s third-largest economy may begin to moderate from here.

Switzerland’s ZEW Survey of investor sentiment may show that confidence declined in February after snapping a two-month losing streak in the previous month amid growing concerns about the health of the European Union, the mountain nation’s largest trading partner. Overseas sales account for a hefty 53% of the economy’s total output, so softer demand in Switzerland’s main export market does not bode well for the pace of recovery. Alternatively, the turmoil in the Common Market may offer a near-term boost to confidence in the mountain nation as a sort of safe-haven that is relatively insulated from inter-EU turmoil linked to southern Europe’s budget deficit fiasco.


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