special reports

UK Unemployment Seen At Highest in 9 Years in September (Euro Open)

Wednesday, 12 November 2008 04:58:45 GMT  |  Ilya Spivak, Currency Analyst

Australia’s Consumer Confidence ticked higher in November as monetary and fiscal stimulus improved sentiment. The Japanese Yen lost ground as risk-taking cautiously advanced late into the overnight session. UK labor data headlines the economic calendar in European hours, with the ILO Unemployment Rate expected at the highest level in nearly 9 years.

Key Overnight Developments

• Australia Consumer Confidence Rebounded in November, says Westpac
• Yen Slips Against High-Yielders as Risk Appetite Rebounds


Critical Levels 



The Euro remained confined to a choppy range in overnight trading, failing repeatedly to mount a meaningful test of the 1.26 level. The British Pound also failed to pick up meaningful directional momentum, oscillating in a wide 125-pip channel below 1.5470.


Asia Session Highlights 



A combination of monetary and fiscal stimulus pushed Australians to become more optimistic in November as Westpac Consumer Confidence sentiment index rose 4.3% after falling 11.0% in the preceding month. As we noted in the latest Forex Weekly Forecast, an uptick could be reasonably expected after the Reserve Bank of Australia slashed borrowing costs by a whopping 200 basis points since September. The government’s pledge to hand out A$10.4 billion ($6.8 billion) to private households has also helped. The RBA is expected to slash rates by an additional 150-175 basis points over the next 12 months. Still, we are unlikely to see significant follow-through in consumer sentiment considering Last week’s employment report that revealed the economy shed 9,200 full-time jobs October. While 43.5k part-time jobs were added, the shift implies fewer payable hours and therefore lower disposable incomes. 

The Japanese Yen slipped against the Australian and New Zealand dollars late into the overnight session as Asian stock exchanges pared back early loses and US index futures ticked into positive territory. Japan’s low interest rates make the Yen a favored currency for those looking to put on the “carry trade”, whereby investors borrow funds at low cost to buy higher yielding assets. To that effect, pairs like AUDJPY and NZDJPY tend to rise when risk appetite improves and vise versa. Indeed, AUDJPY currently shows a whopping 96% correlation with the MSCI World Stock Index.


Euro Session: What to Expect

Conditions in the UK labor market are set to deteriorate in the three months to September with the ILO Unemployment Rate expected to print at 5.8%, the highest in nearly 9 years. British firms are cutting back production capacity (including labor) as a globally expanding economic slowdown dwarfs demand. Going forward, the external sector may prove to be the saving grace for UK employment. Yesterday saw the trade deficit shrink more than forecast in September, issuing a shortfall of -3.9 billion pounds versus expectations of a -4.7 billion gap. As we suggested, the improvement was driven by the sharp depreciation of the British Pound. Loosening monetary policy is likely to continue to put pressure on the Sterling, with the Bank of England expected to trim 50-75 basis points off benchmark borrowing costs over the next 12 months. This may offer yet more impetus for export growth, renewing the vigor of British industry and urging firms to expand their workforce.

Euro Zone Industrial Production is expected to continue to contract, shrinking -1.4% in the year through September, the lowest in over 5 years. Analogous metrics from Germany, France and Italy all registered greater-than-expected loses as firms cut back production in the face of dwindling global demand. Paradoxically, at least Germany posted a better-than-expected external balance in September as the cheaper Euro boosted exports. One way to reconcile this may be to suppose that the added export shipments are clearing existing inventories but producers are not topping them up with new merchandise. If this is indeed the case, it means that the economic stimulus from the decline in the Euro may be in part squandered as supplies dry up, slowing the pace of what could be an export-led Euro Zone recovery.


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

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