Euro, British Pound Punish US Dollar as Stock Markets Gain Momentum (Euro Open)

Key Overnight Developments

• Tankan Shows Japanese Manufacturing Sentiment at 9-Year Low
• UK House Prices Fell for Sixth Straight Month, Will Lose Further 10% in 2009

Critical Levels



The Euro started the week on a stronger note against the US Dollar, pushing above 1.3450 en route to challenge the 1.35 mark. The British Pound also registered gains against the greenback, challenging the 1.5050 level.


Asia Session Highlights



Japan’s Tankan Survey showed firms’ outlook in the manufacturing sector fell sharply to print at -36 for the fourth quarter, matching the lowest reading in since 1999. Economists had expected a shallower decline to -27. Companies’ pessimism is liked to the rapid decline in export growth as global slowdown crimps demand for Japanese cars and electronics. Indeed, last week saw exports fall 7.3% in the year through October, the largest drop in nearly 7 years. Today’s result will likely compound existing weakness in the labor market as firms cut back capacity, weighing on wages, incomes, and consequently pushing consumer spending lower. From a policy perspective, Japanese authorities are up against a wall: monetary easing has little scope with rates already at just 0.30% and fiscal stimulus could be hit-or-miss given the Japanese consumer’s infamous proclivity to favor saving over spending. Attempting to revive exports remains one of the few options still available, suggesting Japan may return to a policy of intervention in the currency market to undercut the recent surge in the value of the Yen. Japanese officials have already floated the idea: last week, Vice Finance Minister Naoyuki Shinohara said, “Currency moves have been excessive” and promised to “take appropriate action in accordance with market moves” as the Yen rose to the highest since 1995 against the US dollar.

In the UK, Rightmove House Prices fell -6.3% in the year to December, marking the sixth consecutive month of decline. The print is a nominal improvement over last month’s -7.1% decline, the lowest in over 6 years and the worst on record. Rightmove, a website that provides listings of selling properties across the UK, also predicted that prices would fall another 10% next year as a recession keeps consumers away from committing to big-ticket purchases. Recent data showed that banks approved just 32k mortgages in October, the lowest in at least 9 years.

Forex traders continued to sell the US Dollar through the overnight session following last week’s slump as now familiar correlations with risk appetite pushed capital out of safe-haven assets. Top Asian stock exchanges were up between 2-5% while US equity index futures added nearly 1% ahead of the opening bell in Europe. We have suggested that seasonal forces will bring a corrective rebound in risk appetite to push stocks higher and the US Dollar lower in December before dominant, long-term trends regain momentum. EURUSD remains 94% correlated with the MSCI Index of world stock performance.


Euro Session: What to Expect



The economic calendar is comparatively tame in European hours, with Switzerland’s Producer and Import Prices the only significant item on the docket. Wholesale inflation is expected to fall to 1.9% in the year to November, the lowest in over 2.5 years. The decline foreshadows further slowdown in consumer prices, the most common measure of headline inflation, as producers pass on falling input costs through cheaper final goods. Indeed, the SNB lowered its inflation forecast for 2009 by a full percentage point last week as the central bank cut interest rates by another 0.50%, stating explicitly that they were willing to take “further measures” if needed. As interest rates tumble to zero around the world, policymakers may look to “quantitative easing” in an attempt to spur spending and investment. This technique essentially means the central bank will flood the banking system with excess money to promote lending.


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