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US Dollar, Japanese Yen Vulnerable As Demand Returns for Risky Assets (Euro Open)

Wednesday, 04 February 2009 04:58:29 GMT  |  Ilya Spivak, Currency Analyst

The US Dollar and Japanese Yen sold off in overnight trading as better-than-expected US housing data boosted demand for risky assets and pushed stock markets higher across Asian exchanges. Euro Zone Retail Sales are on tap, but risk appetite is likely to retain dominance over forex price action in European trading hours.

Key Overnight Developments

• Australian Retail Sales Rise Most Since 2000 on Rate Cuts, Stimulus Plan
• UK Consumer Confidence Fell to Lowest in 4 Years, Says Nationwide
• US Dollar, Japanese Yen Retreat on Rising Risk Appetite


Critical Levels



The Euro consolidated in a narrowing range around the 1.30 level in the overnight session. The British Pound initially sold off to reach as low as 1.4358 but regained a foothold above 1.44 ahead of the opening bell in Europe.


Asia Session Highlights



In the UK, Nationwide Consumer Confidence fell more than economists expected: sentiment dropped to 40, the worst since the survey was introduced in May 2004. A whopping 82% of survey respondents characterized the current economic situation as “bad”, and 61% said there were not sufficient jobs available. For the first time since September, over half of respondents said they expect the situation to get worse in the future. Last week, the GfK Consumer Confidence survey revealed that expectations of future savings have fallen to the lowest since 1996. Taken together, these figures paint a sobering picture: the dire economic environment has boosted unemployment, cut disposable incomes, trimmed consumption, and left UK households with little left over to build savings. Eroding savings signal that the UK recession may intensify in the coming months: as more people lose their jobs, savings are substituted for salaries; assuming per today’s report that the labor market continues to deteriorate, these savings are unlikely to be replenished adequately and will be depleted; this will accelerate the drop in consumption and depress overall economic growth. The Bank of England is expected to cut interest rates by 50 basis points late this week to bring borrowing costs to 1%, the lowest ever. Overnight index swaps see traders pricing in the likelihood that this will be the last cut for next 12 months. However, a recent speech by Governor Mervyn King saw the BOE chief warn of a “marked” contraction in the first half of 2009 and suggest a move to quantitative easing in the near term. King specifically mentioned the central bank may buy corporate bonds and commercial paper to boost access to lending.

Australian Retail Sales rose sharply higher, adding 3.8% in December, the most in over 8 years. As we noted in our forex trading weekly outlook report, an up-tick was to be expected: the series of aggressive interest rate cuts (totaling 4% since September), a fiscal stimulus package, and the sharp drop in oil prices (down close to 70% since peaking in July) all contributed to breathing some life into consumer spending and even helped to modestly improve business sentiment. Still, traders may see the effects of these policies losing steam in the months ahead as rising unemployment threatens to weigh on disposable incomes and prompt cautionary saving. Indeed, consumer confidence slipped -2.2% in January, the first decline in three months. Although yesterday saw the government introduced a second stimulus plan, a coalition of opposition parties in the Australian parliament indicated they would vote against the measure. “Someone has to stand up for fiscal discipline,” said opposition leader Malcolm Turnbull.


Euro Session: What to Expect



Euro Zone Retail Sales are expected to shrink -1.4% in the year to December, the sixth consecutive month of decline. Deepening recession pushed unemployment to a 2-year high of 8% in December, weighing on disposable incomes and sending consumer confidence to the lowest level in 24 years. Private consumption is the largest contributing factor to the economy’s overall performance, so a contracting retail sector bodes ill for the common market’s hopes of a rebound in the near term. Despite the clear threat to economic growth and the slowest inflation rate since the adoption of the Euro, the ECB is likely to keep interest rates on hold at 2% this week as policymakers wait for “new information”. Meanwhile, bank President Jean-Claude Trichet has not excluded taking rates below 2%, suggesting the bias looking on to the March decision favors greater easing.

On balance, risk appetite is likely to shape forex price action in European trading hours. Asian stock markets followed Wall St higher, adding 2.2% as investors reacted to better-than-expected US housing data. Traders have treated the trajectory of the US economy as synonymous with that of the world at large, expecting a rebound in the world’s largest consumer market to have positive spillover elsewhere. The rebound in demand for risky assets saw traders selling the US Dollar and Japanese Yen (down as much as -0.4% and -0.6%, respectively) as well as pushed US equity index futures into positive territory. Safe haven currencies are likely to continue to feel selling pressure should bullish momentum carry over to European stock exchanges.


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

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