Euro Selling May Resume as German Jobs Data Underscores ECB Paralysis

Key Overnight Developments

• Japanese Industrial Production Outperforms But Outlook Still Gloomy
• Australian Retail Sales, Building Permits Fail to Boost Rates Outlook
• New Zealand Dollar Broadly Sold as Finance Firm Files for Receivership

Critical Levels

The Euro and the British Pound were little changed in overnight trade as prices consolidate NY-session losses against the US Dollar, with the safety-linked greenback capitalizing on renewed risk aversion. We remain short EURUSD and flat GBPUSD.

Asia Session Highlights

Preliminary Japanese Industrial Production figures surprised to the upside, showing output added 0.3 percent in July amid expectations for a 0.2 percent decline. Looking past month-to-month volatility however, the overall trend continues to point deterioration amid expectations of slowing demand in Japan’s largest export markets it the US and China. The annual growth rate fell for the fourth month since topping out in March, printing at 14.8 percent to reveal the lowest reading yet this year. Augusts’ Nomura/JMMA PMI gauge reinforced a cautious outlook on where things go from here, showing manufacturing sector growth eased to the slowest in 14 months. Separately, Retail Trade added 0.7 percent in July – the most in four months – as car and clothing sales led receipts higher with gains of 3.2 and 2.9 percent, respectively.

Australian economic data offered a mixed picture once again: Retail Sales outperformed, adding 0.7 percent, while Building Approvals soared 2.3 percent, snapping a three-month losing streak; meanwhile, Private Sector Credit fell short of expectations, posting the smallest increase in eight months. While the former two results hint the economy is starting to digest the downdraft from higher borrowing costs after the RBA led other central banks to add 150bps to benchmark borrowing costs between October 2009 and May of this year, the latter suggests otherwise. On balance, the recently patchy data flow seems unlikely to force a re-evaluation of traders’ conviction about the outlook for monetary policy and thereby the Australian Dollar, with anything shy of uniform resilience unlikely to alleviate concerns about mounting global headwinds. Indeed, a Credit Suisse gauge of rate hike expectations for the year ahead actually declined 6bps after today’s figures crossed the wires to the lowest level in 15 months. Separately, the Current Account deficit narrowed more than economists expected to print at –A$5640 million in the second quarter, an outcome that proved hardly surprising after yesterday’s corporate profits figures for the same period.

The New Zealand Dollar slumped against all of its major counterparts after South Canterbury Finance Ltd filed for receivership, meaning the government will be taking responsibility for repaying all of the firm’s depositors to the tune NZ$1.6 billion. The announcement weighed on the markets’ confidence in New Zealand assets, sending the Kiwi as much as 1.04 percent lower against a trade-weighted average of other top currencies.

Euro Session: What to Expect

German Unemployment figures headline the economic calendar in European hours, with expectations calling for jobless claims to drop 20,000 jobs for the second month in August. The Unemployment Rate is set to hold unchanged at 7.6 percent, matching the 20-month low reached in the previous month. While this seems to point toward resilience in the Euro Zone’s largest economy, it is important to note that much of Germany’s rebound in the aftermath of the 2008 meltdown has owed not to domestic consumption but toexports, the prospects for which look decidedly bleak of late amid increasingly ominous signs of a worldwide slowdown in the second half of this year. Furthermore, the implications of a strong German economy for ECB monetary policy and thereby the Euro are not clear cut considering the lack of symmetry between the currency bloc’s members. Indeed, the region-wide Euro Zone Unemployment Rate is expected to print at 10 percent. Looking at Euroland’s top three economies, French and Italian unemployment is expected to come in substantially higher than that of Germany in the year ahead. Looking further down the list, the disparity between Germany and Spain – the region’s fourth-largest economy – is forecast to top 12 percent this year and in 2011. Such wide divergences make setting a unified monetary policy that encourages growth and controls inflation a difficult task to say the least, hinting that continued outperformance in Germany may only serve to underscore the Euro Zone’s structural vulnerabilities and actually hurt the single currency.

The likelihood of a static monetary policy will be reinforced by preliminary Euro Zone Consumer Price Index figures, with expectations calling for the annual inflation rate to decline to 1.6 percent in August. The outcome points to tepid price growth that is both comfortably below the target 2 percent but not so low as to bring up the specter of deflation, amounting to little urgency to act on the part of Jean-Claude Trichet and company.

Turning to the UK, Mortgage Approvals are set to drop for the third month, likely owing to increasing worries among would-be homebuyers about the impact of the government’s austerity budget on the economy’s performance. The UBS Consumption Indicator rounds out the docket of significant event risk.

Sizing up sentiment, S&P 500 stock index futures have reversed initial gains and are down 0.2 percent in late Asian trade having been up as much as 0.3 percent earlier in the session, pointing to risk aversion and promising gains for the safety-linked US Dollar and Japanese Yenagainst most major currencies.

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