FOREX: US Dollar May Give Ground on Irish Bailout News

Key Overnight Developments

• US Dollar Torn Between Irish Bailout News, North/South Korean Saber-Rattling
• NZ Trade Surplus Widens as Exports Shrug Off Currency, Rise Most in 2 Years
• Australian Firms’ Profits Show First Loss in Over a Year Ahead of Q3 GDP Data
• Japanese Retail Sales See First Loss in 2010 as Stimulus Expires, Taxes Rise

Critical Levels

The Euro and the British Pound were little changed against the US Dollar in overnight trade despite a rally across major Asian stock exchanges, an outcome that would have been expected to weigh on the safety-linked greenback, on news that European officials offered Ireland an 85 billion euro bailout. One plausible explanation is that the US currency may have found a degree of support amid lingering geopolitical risk emanating out of the Koreas (see below). We remain long the US Dollar against the Euro, Yen and the Kiwi.

Asia Session Highlights

The Swiss Franc – a go-to safe haven in times of geopolitical stress – outperformed in overnight trade, rising 0.3 percent on average against its major counterparts after South Korean President Lee Myung Bak said his country’s belligerent neighbors would pay for any further provocations in a televised speech today. Meanwhile, North Korea said it will “deal a merciless military counter-attack at any provocative act,” according to the country’s official news agency.

New Zealand’s Trade Balance surplus unexpectedly widened to NZ$1.2 billion in the year to October as exports rose at an annualized pace of 24.5 percent – the fastest in over two years. Curiously, on a trade-weighted basis, the New Zealand Dollar was at its strongest in about the same time period in October. This hints the country’s exporters may prove resilient in the face of the currency’s recent appreciation, potentially giving the Reserve Bank of New Zealand a bit more room to raise interest rates than previously expected. Bolstering the likelihood of such a scenario, a gauge of Business Confidence from ANZ National Bank surged to the highest in five months.

Australian Companies’ Operating Profits dropped for the first time in over a year in the third quarter, sliding 1.5 percent, led by sharp draw-downs in machinery and equipment manufacturing as well as the food and metal fabrication sectors. The outcome may point toward a disappointing outcome on the headline third-quarter Gross Domestic Product figure set for release later this week, an outcome that could prove to compound recent downward pressure on RBA rate hike expectations. As it stands, economists expect output to have added 0.5 percent, marking the smallest quarterly increase in a year.

Japanese Retail Sales fell for the first time this year, down 0.2 percent in the year to October, after a government subsidy for the purchase of energy-efficient cars expired in September the tax cigarettes rose by a third as of October 1. The outcome underscores the weakness in Japanese domestic demand noted in last week’s Trade Balance report, reinforcing deflationary pressure and hinting that the funding currency status of the Japanese Yen will firmly intact for the foreseeable future.

Euro Session: What to Expect

With currency markets focused on macro-level trends, today’s set of second-tier economic data releases is unlikely to cause much of a stir. UK Mortgage Approvals are expected to decline for the sixth consecutive month, underscoring the tough position of the Bank of England as it balances elevated inflation with a need to backstop the economy ahead of the onset of the government’s austerity program. Meanwhile, the final revision of November’s Euro Zone Consumer Confidence reading is forecast to confirm the highest print in nearly three years while the Euro Zone Business Climate Indicator climbs to the highest since August 2007.

Needless to say, Euro traders are likely to be far more concerned with the sovereign debt issues on Euroland’s southern periphery. Signs of lingering stress clearly remain, with Irish, Spanish and Portuguese credit-default swap(CDS) spreads rising overnight despite news that European officials offered the former Celtic tiger a bailout while Portugal passed its austerity-laden budget. The anxiety may be linked to Irish ruling party Fianna Fáil’s by-election loss on Friday that narrowed its parliamentary majority to just two seats. Both of the MPs in question are independents; should they withdraw their support for the administration ahead of the budgetary vote on December 7, today’s bailout announcement would prove moot. Still, stock index futures are well into positive territory in late Asian trade, hinting that some room for a corrective advance across the risk space and to the detriment of the US Dollar may be in the cards over the short term.

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