Dollar, Yen Soar on Risk Aversion as Chinese Data Sinks Stocks in Asian Trade

Key Overnight Developments

• UK House Prices See First Drop in a Year, Retail Sales Disappoint
• Australian Business Confidence Down to 14-Month Low, Says NAB
• Bank of Japan Holds Monetary Policy Unchanged as Expected
• US Dollar, Japanese Yen Rally as Stocks Sell Off in Asian Trade

Critical Levels

The Euro and the British Pound fell 0.6 percent against the US Dollar as stocks sold off in overnight trade, boosting at the safety-linked greenback as well as the Japanese Yen against their major counterparts. The MSCI Asia Pacific regional benchmark index slid 0.8 percent after Chinese Housing Prices rose the least in six months while Exports slowed for the second consecutive month in July, spurring fears about the continuity of the global recovery as one of its key engines begins to falter. We remain flat EURUSD and GBPUSD.

Asia Session Highlights

UK House Prices fell in July according to a report from the Royal Institute of Chartered Surveyors (RICS), with the share of real estate agents polled for the survey reporting declining values outnumber those reporting rising ones by 8 percent, marking the first negative reading in a year. RICS spokesman Ian Perry said “forward-looking price expectations numbers suggest that this softer trend will continue through the second half of the year” as buyers fret about the economic growth implications of the government’s austerity budget, a scheme aiming to shave a whopping 6.3 percent of GDP off the fiscal deficit by 2014-15 with a mix of spending cuts and tax hikes.

Separately, UK Retail Sales added 0.5 percent in July – marking the smallest increase in three months – according to a report from the British Retail Consortium. BRC Director GeneralStephen Robertson said that while seasonal factors weighed on the outcome as “the benefit from sunny weather receded…while the World Cup boost ended, [the] overriding factor is consumer confidence.”Stevens added that “Talk of public spending cuts is unsettling customers and they are concentrating on essentials.It's clear the recovery continues to need support. The Bank of England must resist pressure to increase interest rates too soon.”

Australian Business Confidence dropped to the lowest level in 14 months in July, reinforcing the likelihood that the central bank will hold off on resuming rate hikes series of increases beginning last October (amounting to 150bps by May) continues to filter into the overall economy, pushing up borrowing costs and weighing on growth expectations. NAB chief economist Alan Oster said “The prospects for domestic demand in the second half of 2010 have weakened significantly,” adding that “The July survey points to construction coming underpressure as the fiscal stimulus fades, while retail has weakenedfurther from already poor levels.”

The Bank of Japan kept interest rates unchanged at 0.10 percent and maintained government bond purchases at 1.8 trillion yen as expected. The accompanying statement proved all too familiar, with the bank saying the economy is showing signs of moderate recovery but restating its intent to maintain a “very accommodative” financial environment as beating deflation remains a “critical challenge”. Policymakers identified global financial developments – specifically the EU’s fiscal condition – as a downside risk, while faster growth in emerging economies was seen as an upside risk.

Euro Session: What to Expect

Currency markets are likely to look past a light European economic calendar to focus on the Federal Reserve interest rate decision due in US hours. As we discussed in our weekly Fundamental Trends Monitor, the outcome is being closely watched as traders look to get their bearings on where risk sentiment goes from here after last Friday’s US jobs report produced mixed results.

Turning to sentiment, US equity index futures are tracking 0.4 percent lower in late Asian trade, hinting risk aversion will carry over into European hours to continue offering a supportive environment for the US Dollar and Japanese Yen against the spectrum of major currencies.

The UK Visible Trade Balance deficit is expected to narrow to -7.8 billion pounds in June while the final revision of July’s German Consumer Price Index is set to confirm the annual inflation rate at 1.1 percent in the Euro Zone’s largest economy.

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