The Euro and the British Pound rebounded in overnight trading as gains on Wall St and on Asian stock exchanges reflected strengthening risk appetite. Releases marked for European hours offer little new information, opening the door for follow-through in current sentiment to be amplified in illiquid holiday conditions and threatening a breakdown in the US dollar.
Key Overnight Developments • New Zealand Trade Gap Shrinks as Exports Soar 21% • Bank of Japan Divided on Future Policy, Meeting Minutes Reveal • Australian Home Sales Rise on Interest Rate Cuts Critical Levels The Euro rebounded in overnight trading, retaking the 1.29 level then settling into consolidation. The British Pound followed a similar dynamic, cementing a foothold above 1.5350 then settling in a range between this and the 1.54 mark. 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 New Zealand’s Trade Balance saw the deficit shrink to –NZ$942 million in October as the growth in exports outpaced that of imports. Indeed, outbound shipment volumes added a whopping 21% from the preceding month. Foreign demand for the country’s goods has edged higher as the sharply depreciating New Zealand dollar makes them comparatively cheaper for overseas buyers. The Kiwi lost 13% in October alone, the fifth consecutive month of decline. The currency is likely to remain under pressure as the Reserve Bank of New Zealand is priced in to slash borrowing costs by another 224 basis points over the next 12 months. That said, the New Zealand dollar is now substantially undervalued against its US counterpart and technical positioning points to a recovery in the medium term. Minutes from the October’s Bank of Japan meeting revealed policymakers were deeply divided on the appropriate monetary response as the world’s second largest economy sinks to recession. The bank settled on lowering borrowing costs by a somewhat bizarre 20 basis points (rate cuts are usually announced in multiples of 25) to bring the benchmark lending rate to 0.30%. Four BOJ governors supported this course of action, three preferred a larger 25bp cut, and one pushed to leave rates unchanged. Governor Maasaki Shirakawa cast the deciding vote. The dissenting voice, Governor Atsushi Mizuno, said the bank should hold off on easing to boost liquidity for corporate and government debt markets (as the minutes suggested) and leave additional room for future rate cuts in case the real economy “worsened further”. We have noted for some time now that Japan is quickly running out of alternatives to offer meaningful stimulus to the economy: monetary policy has 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. On balance, 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. HIA New Home Sales jumped higher in October, adding 4.5% after having declined -1.8% in the previous month as Australians began to respond to the monetary and fiscal stimulus thrown at them over recent months. The Reserve Bank of Australia slashed borrowing costs by a full two percentage points since September while the government offered A$10.4 billion ($6.8 billion) in handouts, including a tripling of the grant to first-time homebuyers to A$21,000. The speedy response to policymakers’ actions owes to Australia’s low household savings rate, one of the most modest among OECD nations. Still, a recent report from Westpac Banking Corp suggests that the economy is on pace to see its first recession in 17 years in 2009. The bank’s index of leading economic indicators fell to a 23-year low in September, suggesting annualized GDP growth had slowed to a meager 1.1%. Euro Session: What to Expect A flurry of low-level economic data releases is unlikely to spark meaningful directional momentum in European trading. Nearly every report is set to print in the red, serving as confirmation of established themes of broad-based economic slowdown but adding little that has yet to be priced into the market. US markets are closed for the Thanksgiving holiday tomorrow, meaning an absence of American fundamental data and Wall St stock performance to steer risk appetite. On balance, the markets went into the recess period on an upbeat note as US equities registered the forth consecutive day of gains. Top Asian bourses picked up on the positive momentum, adding an average 2.3% in overnight trading. Should European exchanges follow suit, the markets may actually produce a decisive rebound across most major currencies vis-à-vis the US dollar. The absence of a large chunk of major players for the holiday drains liquidity, meaning price action could be pushed into making an outsized leap with relatively smaller trading volumes than normal. We have seen that the US dollar is now over 90% correlated with global stock performance, so a rebound in risk appetite through the holiday period could plausibly ignite rallies in currencies like the Euro and the British Pound against the greenback. To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com