Euro, British Pound Rise as Risk Appetite Firms to Start Trading Week

Key Overnight Developments

• Australian Vehicle Sales Fall Most in Six Months as Tax Break Expires
• Euro, British Pound Rise with Firming Risk Appetite in Asian Trade


Critical Levels



The Euro edged up slightly higher against the US Dollar, adding 0.2%. The British Pound also drifted higher to test the 1.55 level against the greenback. The US unit traded lower against most of the majors (with the usual exception of the Japanese Yen) as Asian stock exchanges pushed higher amid fading US Fed rate hike expectations after Friday’s disappointing CPI result. We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.


Asia Session Highlights



Australian New Motor Vehicle Sales fell 3.4 percent from the previous month in January, marking the first decline since July 2009. Sales of “other” vehicles (a category that includes vans, trucks, buses and government-owned vehicles) led the decline, dropping 17.4 percent. The outcome may have been linked to the end of a tax break for businesses making new vehicle purchases, which expired in December 2009. A more hopeful sign was seen in sales of passenger cars, which gained 4 percent to register the largest monthly increase in six months. While it is tempting to conclude that this points consumers’ resilience to the rise in borrowing costs over recent months, this seems premature considering February’s disappointing consumer confidence report. Indeed, those figures saw an index tracking Australians’ willingness to make major purchases (such as cars) decline by the most in at least five months, hinting that the strength in today’s passenger car sales figures may not prove lasting.


Euro Session: What to Expect



The economic calendar is decidedly lackluster in European trading, with risk trends likely to overtake currency markets. Last week began with a broad upward correction in risk appetite as the debt problems in southern Europe faded into the background after the EU gave Athens until mid-March to show serious efforts in tackling its fiscal shortfall. The advance seemed quite orderly and would have likely carrier through the week, but markets were abruptly interrupted by the US Federal Reserve: Ben Bernanke and company revealed a relatively hawkish posture in the minutes from the late-January monetary policy meeting, following up on the very next day with a surprise increase in the discount lending rate. This sent the US Dollar broadly higher against the spectrum of major currencies and put the retracement in risky assets on hold. The surge in the US interest rate outlook did not prove lasting however as Friday brought another about-face after January’s consumer price index figures broadly disappointed, with core inflation (excluding energy and food prices) issuing the first monthly decline in at least 13 years. With the prospects of an imminent Fed rate increase thereby subdued, the rebound in risk appetite is likely to resume. Indeed, US equity index futures are trading firmly higher, arguing for gains across most major currencies at the expense of funding ones (US Dollar, Japanese Yen) as carry trades follow stock exchanges higher.


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