US Dollar, Japanese Yen Advance as Stocks Retreat in Asian Trade

Key Overnight Developments

• UK Shop Prices Fall, Reinforcing Static Interest Rate Outlook
• Australian Construction Sector Shrinks for First in Six Months
• US Dollar, Japanese Yen Rise as Stocks Fall on Weak US Data

Critical Levels



The Euro and the British Pound tracked lower, down 0.3 and 0.2 percent respectively against the US Dollar as stocks declined in overnight trade, boosting demand for the safety-linked greenback. The Japanese Yen likewise advanced against the spectrum of its major counterparts. The MSCI Asia Pacific regional equity benchmark index fell 0.8 percent after lackluster US service-sector growth spurred concerns about the pace of the global recovery. We remain flat EURUSD and GBPUSD.

Asia Session Highlights



The UK Shop Price Index declined in June, with the pace of retail inflation down to 1.5 percent from 1.8 percent in the previous month according to a report from the British Retail Consortium. BRC director general Stephen Robertson said “low and stable inflation appears likely for the rest of the year [with] the fluctuations in commodity costs and exchange rates over the past 18 months [having] now fed through.” Stevens added that “in the face of weak demand, retailers will continue to use widespread discounts and promotions. But, given their thin margins, there will be little scope to absorb next year’s [value-added tax] increase. This will put significant pressure on inflation from January onwards.” The Bank of England has long justified a static monetary policy despite a sharp upswing in headline inflation since the beginning of the year, saying the increase is driven by temporary factors and will be unwound with time, with today’s release seemingly reinforcing this scenario and hinting the central bank will remain on hold again when rates are announced later this week.

Australia’s Performance of Construction Index fell to 46.4 in June, showing the building sector shrank for the first time in six months according to figures released by the Australian Industry Group (AiG). The slowdown came from on the back of a sharp drop in private house construction along with significant declines on gauges tracking new orders, employment and deliveries. The outcome likely reflects continued fallout from the RBA’s aggressive round of interest rate hikes that saw policymakers tack on 1.5 percentage points to benchmark borrowing costs between September 2009 and May of this year, hinting the central bank is likely to remain on the sidelines after opting to hold rates unchanged for the second consecutive month in July. The markets agree, with a Credit Suisse gauge of policy expectations showing traders price in no changes over the next 12 months.

Euro Session: What to Expect



The European set of economic data releases looks broadly uneventful, with the final revision of first-quarter Euro Zone Gross Domestic Product figures headlining the calendar. Markets will focus on any notable changes to initially reported Household Consumption and Gross Fixed Capital components of the outcome as traders gauge the region’s ability to remain on a path toward self-sustained recovery in the face of considerable headwinds from budget-cutting measures including rising borrowing costs, tax hikes and government spending reductions.

Turning to sentiment, US stock index futures are trading down 0.3 percent, pointing to continued risk aversion in European hours that promises to continue boosting the safety-linked US Dollar and Japanese Yen against their major currency counterparts.

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