Euro at Risk Ahead of Money Supply Report But Stock Gains May Deter Sellers

Key Overnight Developments

• US Dollar Japanese Yen Decline as Asian Stocks Follow Wall St Higher
• Australian Capex, Leading Index Figures Reinforce Static Rates Outlook

Critical Levels

The Euro and the British Pound tracked higher in overnight trade, adding 0.4 and 0.6 percent respectively against the US Dollar as rising stock prices sapped demand for the safety-linked greenback (see below). We remain short EURUSD and flat GBPUSD.

Asia Session Highlights

The US Dollar and the Japanese Yen declined against the spectrum of their major counterparts as Asian stock exchanges cautiously followed Wall Street higher, weighing on investors’ demand for the two safe-haven currencies. The MSCI Asia Pacific regional equity benchmark index added 0.2 percent, rebounding from a one-month low. Improved valuations were tipped as the catalyst for the rebound, with bargain-hunters stepping in as buyers after recent losses. Technical positioning hints that a deeper retracement may be in the cards in the near term, but a sharp slowdown in US economic growth in the second quarter set to be reported on Friday threatens to rekindle risk aversion. The economic calendar failed to attract significant attention.

Australian Private Capital Expenditure underperformed, with investment falling 4 percent in the second quarter amid expectations of a 2.3 percent increase while the first-quarter result was revised sharply lower. The outcome reinforced the likelihood of a forthcoming slowdown in the G10’s heretofore most resilient economy as the RBA’s aggressive rate-hike cycle (amounting to 150bps in tightening between October 2009 and May of this year) filters into the overall economy and weighs on growth. Separately, the Conference Board Leading Index foreshadowing future Australian performance added 0.1 percent in June after rising 0.4 percent in the previous month. Taken together, the figures reinforced expectations that the central bank was done raising interest rates for at least the coming year.

Euro Session: What to Expect

Switzerland’s Employment is expected to have added 0.8 percent in the year through the second quarter, marking the largest increase since the three months through March 2009. The labor market found a bottom in the second quarter of last year has since staged a modest recovery on the back of returning demand from Switzerland’s top trade partners – most notably the Euro Zone, which accounts for over 60 percent of the mountain nation’s overseas sales. Indeed, a strong second-quarter outcome would likely owe primarily to still-robust conditions in the currency bloc over the same period

Looking ahead however, the outcome looks far more ominous as growth in the Euro Zone begins to falter amid the region’s efforts to trim its sovereign debt burden. Exports amount to more than half of Switzerland’s total output, and a pronounced slowdown in its chief cross-border market certainly bodes ill for growth and by extension for employment. Indeed, a survey of economists polled by Bloomberg forecasts the trade surplus will shrink to 10.2 percent of GDP this year from 15.2 percent in 2009.

Euro Zone M3 figures are set to show money supply growth accelerated to an annual pace of 0.3 percent in July, the fastest in nine months. The result points to downward pressure on Euroland borrowing costs and may translate into renewed Euro selling considering the central role played by relative yields in the single currency’s rebound since early June. Indeed, linear regression studies suggest that a whopping 85 percent of the variance in EURUSD since the beginning of the third quarter is explained by variance in the spread between US and Euro Zone 2-year yields. That spread has now fallen to the lowest in six weeks having topped out in late July, with today’s figures threatening to encourage continued losses.

Turning to sentiment, US stock index futures are tracking 0.2 percent higher in late Asian trade, hinting that the recovery in risk appetite is likely to continue for the time being at the expense of the US Dollar and the Japanese Yen. Second-quarter earnings from Greece’s T Bank SA may also prove market-moving as traders size up the health of the troubled country’s lenders the recent turmoil in Southern European debt markets.

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