US Dollar, Japanese Yen to Pare Gains as Stock Index Futures Erase Losses

Key Overnight Developments

• NZ Manufacturing Shrinks for First in 11 Months, Dims Rate Hike Outlook
• Australian Dollar Sinks as Employment Data Disappoints Currency Markets

Critical Levels

The Euro and the British Pound rose in overnight trade, adding 0.4 percent each against the US Dollar, as markets corrected following the greenback’s sharp rally in New York hours. We remain flat EURUSD and GBPUSD.

Asia Session Highlights

New Zealand’s Manufacturing sector shrank for the first in 11 months in July according to a report from BusinessNZ – an industry advocacy group. Most worryingly, a gauge tracking new orders plunged the most in 14 months, pointing to waning demand that is likely to put further downward pressure on employment and overall economic growth, reducing the central bank’s scope to remove monetary stimulus. Indeed, a Credit Suisse gauge of priced-in rate hike expectations for the year ahead fell 10bps to the lowest in 13 months following the outcome.

Australian Employment figures proved disappointing: while the headline figure printed slightly better than expected, showing the economy added 23,500 jobs in July versus forecasts calling for a narrower 20,000 increase, full-time employment fell for the first time in nearly a year, pointing to fading confidence about the prospects for future economic growth. The outcome was likely a reflection of fading demand from China – Australia’s largest trading partner – and rising borrowing costs as the effects of the central bank’s tightening campaign that added 150bps to benchmark interest rates between October 2009 and May of this year filter into the overall economy. The Unemployment Rate jumped to 5.3 percent, the highest since April, as more people entered the labor force. Indeed, the Participation Rate jumped to 65.5 percent, the highest since March 2009. The Australian Dollar spiked lower following the outcome, losing as much as 0.6 percent against its US counterpart.

Euro Session: What to Expect

The economic calendar looks fairly tame, with Euro Zone Industrial Production figures amounting to the only item of note set to cross the wires. Expectations call for output to add 0.6 percent in June, marking the smallest increase in four months, while the annual growth rate slips for the first time since April 2009 to 9.3 percent. The outcome reinforces mounting evidence of a broad-based slowdown in global demand through the second half of the year as stimulus runs dry while the private sector remains anemic. Indeed, a global Purchasing Managers Index compiled by JPMorgan fell for the third consecutive month in July, marking the longest losing streak since the third quarter of 2008.

On balance, risk sentiment is likely to dominate price action once again, with US stock index futures hinting that currency markets are set to correct further after the sharp spike in risk aversion seen in New York trade. Indeed, contracts on the S&P 500 and the Dow Jones Industrial Average are nearly flat ahead of the opening bell in Europe having been down as much as 1.1 and 0.8 percent in early Asian trade, pointing to near-term gains for the spectrum of major currencies against the safety-linked US Dollar and Japanese Yen.

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