Euro, Pound Gain as Greek Spending Cut Rumors Stoke Risky Assets

Key Overnight Developments

• Australian GDP Grows as Expected But Markets Left Disappointed
• UK Consumer Confidence Rises, Impact on Growth Seen Limited
• Euro, Pound Gain as Greek Spending Cut Rumors Stoke Risky Assets

The Euro and the British Pound advanced in Asian trade, adding 0.2 and 0.5 percent respectively against the US Dollar as stocks rose on expectations that Greece will announce an additional 4.8 billion euros in spending cuts to trim its budget deficit. We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.




Australia’s Gross Domestic Product expanded 0.9 percent as expected in the fourth quarter, while the outcome for the three months through September 2009 was revised higher to 0.3 percent. Private-sector investment stood out as the most encouraging item in the figures, rising by a hefty 3.5 percent to register the largest increase since the second quarter of 2008 on the back of a sharp increase in purchases of new machinery and equipment. Household consumption held steady, matching the previous quarter’s 0.7 percent increase but falling short of the 0.9 percent gain recorded in the three months to June 2009.

The outcome was not all rosy however. Indeed, the jump in government expenditure was disappointing as public spending added 1.8 percent – the most in three and half years – hinting that the economy remains reliant on stimulus as a significant driver of expansion and will likely slow down as fiscal support is withdrawn. Indeed, Australian Treasurer Wayne Swan acknowledged as much in a press conference following the release while Prime Minister Kevin Rudd said it was the government that “kept the economy growing strongly”. Further, the jump in machinery investment likely owed to continued expansion in the mining sector, and industry that is intimately tied to Chinese demand and now seems acutely vulnerable with Beijing intent on cooling economic growth.

Currency markets were clearly disappointed with the outcome, with the Australian Dollar trading slightly lower following the release. More worrisome still, a Credit Suisse gauge of priced-in expectations shows that traders see a mere 21 percent probability of another further monetary tightening in April after yesterday’s interest rate increase from the Reserve Bank of Australia, down from 100 percent before the GDP report crossed the wires.

Elsewhere on the calendar, UK Consumer Confidence rose to the highest level in two years according to a report from the Nationwide Building Society. The outcome was not as robust as the headline figure would suggest however: the details of the report showed that a gauge of spending intentions declined to the lowest in a year, meaning apparently firming confidence both the current and future economic environment may not translate into any meaningful gains for consumption and thereby for economic growth.



German Retail Sales are expected to decline 0.6 percent from the previous month in January while those in the Euro Zone as a whole give back 0.3 percent after yielding a flat result in December. The more timely Bloomberg Retail PMI report foreshadowed a negative outcome, showing the sector shrank at the fastest pace in 10 months in January and continued to contract in the following month. The readings will add to building evidence that economic recovery in the currency bloc is stalling after German GDP disappointed in the fourth quarter and Euro Zone flash CPI retreated for the first in five months in February.

On balance, the developing situation in Greece is likely to remain the dominant driver of currency market price action after rumors that it will commit to as much as 4.8 billion euros in additional spending cuts to trim its gaping budget deficit – the highest in the Euro Zone. The outcome will be a pivotal moment for near-term risk sentiment, with anything that the market sees as insufficient likely to send stock markets and risk-correlated currencies lower while boosting the US Dollar and Japanese Yen. Alternatively, a meaningful step to trim the fiscal shortfall will likely have the opposite effect, fostering buying interest in the Euro as well as the spectrum of risky assets (stocks, commodities, high-yielding currencies). Asian shares rose in anticipation of the release, with the MSCI Asia Pacific Index adding 0.6 percent.


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