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US Dollar Under Pressure As Risk Sentiment Pushes Higher (Euro Open)

Friday, 28 November 2008 07:09:36 GMT  |  Ilya Spivak, Currency Analyst

The Euro climbed steadily higher overnight and the British Pound was not far behind as top Asian stock markets pushed higher despite a swath of dismal Japanese economic data. Equity index futures in Europe and the US point higher, suggesting the US dollar is likely to remain on the defensive.

Key Overnight Developments

• Japanese Economic Indicators Continue to Sink Lower
• Euro, Pound Push Higher in Thin Holiday Trading


Critical Levels 



The Euro climbed steadily higher overnight, topping the 1.29 once again to reach as high as 1.2956 before correcting into the 1.2930s. The British Pound was a bit late to the party: sterling spent most of the session in a well-defined 30-pip range but managed to pick up steam late into Asian market hours to retake the 1.54 level. Technical positioning points to a bullish correction in EURUSD and GBPUSD in the near term before the dominant down trend regains momentum.


Asia Session Highlights 



Recession was on full display in the barrage of Japanese economic data that hit the tape overnight. While the Jobless Rate declined to 3.7% in October, it was hardly an improvement: by definition, the metric measures those looking for work but are not able to find it. The improvement in the headline figure this time around occurred because people stopped looking and thereby were not included in the count. Indeed, the ratio of available vacancies to seeking applicants dropped to 0.80, the lowest in over four years. Businesses are clearly cutting back as global demand dwindles: Industrial Production slowed -7.1% in the year to October, a record low. With firms scaling back their operations and trimming staff, it is no wonder that Household Spending declined again in October, down -3.3% from the preceding month, while the annualized Retail Trade metric declined to the lowest in 15 months. As economists predicted, the sluggish pace of economic activity has dampened inflation, with the Consumer Price Index registering at just 1.7% in October. The pace of price growth has declined a hefty 27% since peaking with commodity prices in July.

Japan sank in recession having posted negative GDP results in the second and third quarters and the road back to prosperity is an uncertain one. We have noted for some time now that policymakers are quickly running out of alternatives to offer meaningful stimulus to the economy: monetary measures have little scope with interest rates already within a hair of 0% and fiscal stimulus could be hit-or-miss given the Japanese consumer’s infamous proclivity to favor saving over spending. This means that proposals of intervention in the currency market to suppress the Yen and boost the export sector (a stand-by crutch for Japanese economic growth) are likely starting to make the rounds among officials. Short of this drastic course of action, the world’s second largest economy has little left but hope that China’s bout of sweeping monetary easing and increasing policy ingenuity in the US will bring a rebound in Japan’s main trade partners sooner rather than later.


Euro Session: What to Expect



The European economic docket looks painfully predictable in the European session. French Producer Prices are set to issue another down reading, this time shrinking -0.2% in October to bring the annualized rate to 5.1%. An estimate of the broader Euro Zone Consumer Price Index is expected to see the currency bloc’s headline inflation gauge drop to 2.5% in the year to November, pointing to a staggering 40% slowdown in just 4 months and the lowest reading in over two years. Traders will hardly be surprised by either reading: the collapse in commodity prices and acute slowdown in the region’s economic growth has long taken the wind out of the sails of price growth, with monetary policy expectations focused on magnitude of forthcoming rate cuts rather than their likelihood. To that effect, the market is pricing in at least a 0.50% cut when the ECB meets in early December and between 125-150 basis points in easing over the next 12 months.

The situation in Switzerland is expected to fare little better as the KOF Leading Indicator is seen dropping to 0.20, a new 5-year low. The metric is an index of six leading indicators and forecasts how the Swiss economy is expected to perform in the next six to nine months.

On balance, risk trends are likely to remain in focus across forex markets. The Euro and the British Pound rose overnight as top Asian stock markets pushed higher. European equity index futures are firmly in positive territory ahead of the opening bell, suggesting the US dollar will likely remain under pressure.


To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.

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