Japanese Yen May Stumble as Risk Aversion Eases in European Trade

Key Overnight Developments

• Yen Soars as Japanese GDP Disappoints, Sinking Risk Appetite
• UK House Prices Down Most in Eight Months, Says Rightmove
• Australian Vehicle Sales Fall for Third Month on Borrowing Costs
• New Zealand Service Sector Growth Slowest in 10 Months in July

Critical Levels

The Euro inched higher in overnight trade, adding 0.2 percent against the US Dollar. The British Pound showed weakness, down 0.1 percent against the greenback. We remain flat EURUSD and GBPUSD.

Asia Session Highlights

Japan’s Gross Domestic Product figures printed sharply lower than expected, showing the economy added 0.1 percent in the second quarter while the annual growth rate declined to 0.4 percent. Looking at the details of the report, public investment and inventories were notable weak spots, trimming 0.1 and 0.2 percent respectively off the overall result. Net exports – the key driver of Japan’s rebound in the aftermath of the global financial crisis – added 0.3 percent, amounting to the smallest contribution in three quarters. Private and public consumption was unchanged from the three months through March.

The disappointing GDP outcome weighed heavily on risk appetite, sending the MSCI Asia Pacific regional benchmark stock index down the lowest level in three weeks as lackluster performance across the world’s top economies continues to fuel concern about the continuity of the global recovery. Perversely, this sent the Japanese Yen higher against all of its major counterparts as traders unwound carry traders funded cheaply in the low-yielding currency.

A dour tone permeated the remainder of the economic calendar. UK House Prices fell 1.7 percent in August according to a report from Rightmove Plc, an online listing of for-sale properties. The outcome marks the largest decline in eight months and reinforces negative cues noted in an analogous report from the Royal Institute of Chartered Surveyors released last week. Australian Motor Vehicle Sales fell 2.6 percent July – marking the third consecutive decline – with the outcome likely linked to rising borrowing costs as the central bank’s aggressive round of tightening that added 150bps to benchmark borrowing costs between October 2009 and May of this year continues to filter into the overall economy. New Zealand’s Performance of Services Index slipped to 50.5, showing the sector was expanding at the slowest pace in 10 months.

Euro Session: What to Expect

The final revision of July’s Euro Zone Consumer Price Index figures is expected to show the annual inflation rate rose to 1.7 percent, the highest since November 2008. Core CPI inflation – a rate that excludes volatile items like food and energy – is expected to print at more modest 1 percent. The outcome may not prove market-moving considering its limited implications for monetary policy. Indeed, price growth remains below the central bank’s 2 percent target level and lending conditions have actually turned more restrictive in the aftermath of last month’s expiry of the central bank’s 12 month repo – a lending facility allowing European banks to secure access to the central bank’s funds for a year – that amounted to a large liquidity drain and upward pressure on short-term borrowing costs. On balance, this meansthe European Central Bank is likely in no hurry tighten further, particularly as economic growth faces considerable headwinds from the currency bloc’s debt-cutting efforts.

Turning to sentiment, US stock index futures hint that much of the negative sentiment noted in early Asian trade has been unwound, with prices essentially flat ahead of the opening bell in Europe having tracked as much as 0.8 percent lower 3 hours into the overnight session. This suggests that risky assets may have scope for a bit of a corrective rebound in the near term given the pace of last week’s selloff – the largest in over three months – hinting at the potential for weakness in the safety-linked US Dollar and Japanese Yen against other major currencies.

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