US Dollar Rises as Stocks Tumble Across Asian Stock Exchanges (Euro Open)

Key Overnight Developments

• New Zealand May Retail Sales Print Better Than Expected
• Japanese Consumer Confidence Rises for Sixth Month in June
• US Dollar Rises as Stocks Fall Nearly 2% in Asian Trading

Critical Levels



The Euro trended lower in the overnight session, testing as low as 1.3924. The British Pound followed suit, falling as much as -0.6%. The US Dollar saw buying interest as Asian stock exchanges tumbled close to 2% on average, boosting demand for the safety-linked currency.

Related Articles: Forex Majors Look Weak Against the US Dollar, Yen Diverging

Asia Session Highlights



New Zealand Retail Sales grew more than economists expected, adding 0.8% in May. Excluding autos and related expenses, sales rose by 1.6%. Clothing and other soft goods led the metric higher, surging 12.6% from the previous month. In annual terms, sales fell -1.04%, the smallest decline in 19 months. The encouraging news follows improvement in consumer confidence: Westpac’s sentiment gauge rose to the highest in 1.5 years in the second quarter, boosted by income tax cuts and record-low interest rates. The outlook on spending could darken in the months ahead however as job losses continue to mount, trimming disposable incomes and discouraging consumption. Indeed, the unemployment rate rose to a 6-year high in the first quarter and the OECD has forecast that it will average 6.3% this year and 7.9 % in 2010.

As we suggested in our Japanese Yen Weekly Forecast, Consumer Confidence ticked higher for the sixth consecutive month in June, mirroring recent improvements in the Eco Watchers and Tankan Survey measures of merchant and business sentiment as the government’s record-breaking 25 trillion yen fiscal package continues to work its way into the broad economy. The important question going forward is whether such improvements are sustainable after the flow of stimulus cash dries up. The Bank of Japan seems pessimistic on this front, noting that consumption is likely to remain weak as the “employment and income situation becomes increasingly severe.” Indeed, the jobless rate rose to the highest in over 5 years in May as the economy shed 440k jobs. Still, near-term stabilization is welcome if only in delaying the need for further stimulative action, bringing Japan closer to an eventual recovery in overseas demand that will ultimately feed a rebound in the world’s second-largest economy. This means the upcoming monetary policy announcement is likely to be a non-event once more, with Maasaki Shirakawa and company saving any ammunition they may still have until they really need to use it.


Euro Session: What to Expect



Switzerland’s Producer and Import Prices are set fall -5.4% in the year to June, the steepest decline in over 22 years. The metric foreshadows continued downward pressure on consumer prices as lower wholesale costs are reflected in the final price tag after CPI printed in negative territory for the fourth consecutive month in June. Strictly speaking, deflation implies an appreciation of the Franc, with falling prices boosting the currency’s purchasing power. Perversely, this means that the Swiss unit could actually see near-term buying interest following lower PPI figures. That said, the net effect is difficult to gauge considering the Swiss National Bank has explicitly committed to “take firm action to prevent an appreciation of the Swiss franc” to keep prices anchored. It is much easier for a central bank to drive the domestic currency lower than to support its value against speculative assault because it can simply print more of it, suggesting any upside is likely to be short-lived.

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