Japanese Yen Slumps as Prime Minister Resigns, British Pound Rallies

Key Overnight Developments

• Japanese Yen Slumps as Prime Minister Resigns
• Australian Economy Slows in the First Quarter
• Pound Rallies as AIG Turns Down Prudential Bid

Critical Levels



The Euro tracked lower in overnight trade, down 0.2 percent against the US Dollar, while the British Pound soared 0.4 against the greenback amid a broad-based rally fueled news that AIG turned down a $35.5 billion bid from the UK’s Prudential for its AIA unit. We remain short EURUSD at 1.4881.

Asia Session Highlights



The Japanese Yen tracked sharply lower against all of its major counterparts amid acute political uncertainty after Prime Minister Yukio Hatoyama announced his resignation amid a slump in popularity underscored by a poll published earlier this week that showed 63 percent of voters favored his departure. The ruling Democratic Party of Japan’s top campaign strategist and former chief Ichiro Ozawa also resigned. The party is expected to select a new leader who would then take up the premiership on June 4. The shakeup comes just six weeks before mid-term elections that are expected to hand over large portion of seats in the upper house of parliament to the opposition LDP party that had dominated Japan until the DPJ swept into power in a landslide victory just nine months ago.

Australia’s Gross Domestic Product added 0.5 percent as expected in the first quarter, down from a revised 1.1 percent expansion in the three months through December 2009. The annual economic growth rate ticked lower to 2.7 percent, marking the first decline in a year. Currency markets were conspicuously disinterested in the outcome after the central bank kept interest rates on hold and signaled an end to its monetary tightening campaign at yesterday’s policy meeting. Indeed, as far as traders are concerned, economic growth figures are primarily significant in that they shape interest rate expectations, a task which the RBA thoroughly accomplished before today’s outcome crossed the wires. As it stands, a Credit Suisse gauge of priced-in policy expectations shows markets are betting the RBA will maintain borrowing costs at current levels for the foreseeable future, with no further hikes expected over the next 12 months.

Euro Session: What to Expect



The economic calendar is largely uneventful in European hours, with April’s UK Mortgage Approvals and Consumer Credit figures lining up as the only items of note on the docket. Mortgage Approvals are expected to tick higher for the second consecutive month but the outcome is unlikely to prove market-moving having been telegraphed by an analogous report from the British Bankers Association last week. Meanwhile, Consumer Credit is expected to remain unchanged at 0.3 billion pounds.

On balance, risk sentiment may prove to overshadow fundamental factors as the dominant driver of currency market price action, although the bias seems neutral at the moment with equity index futures essentially flat ahead of the opening bell across European exchanges.

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