The US Dollar and Japanese Yen continued to lose ground in overnight trading as confidence roared back into global financial markets. More of the same seems likely in European trading hours as jubilant investors push prices to correct last week’s bearish extremes.
Key Overnight Developments • UK Retail Sales Decline Accelerated in September, Says BRC • Japanese Producer Prices Down for Second Straight Month on Cheaper Oil • Rate Cuts and Softer Oil Prices Fail to Boost Australian Business Confidence Critical Levels The Euro traded higher against the US Dollar in the overnight session as easing risk aversion saw traders pare back their exposure in “safe-haven” assets. EURUSD moved to test pivot-point resistance at 1.3687, with a break above seeing the next hurdle at 1.3798. Support is seen at 1.3461. Sterling followed higher on broad Dollar weakness, testing above the 1.75 mark. Resistance stands at 1.7547, with support well below current levels at 1.7025. Asia Session Highlights Overnight trading saw confidence continue to return to global financial markets. Forex traders continued to sell the US dollar and Japanese Yen, extending the exodus seen at the week’s open following the announcement of the G7 plan address the credit crunch: stocks rallied across Asian exchanges, with Tokyo shares rising a record 13%; lending conditions eased cautiously as the “Ted” spread*, a common default risk gauge, fell -1.43% having set an all-time record high just yesterday; US equity index futures added about 2%; and the recent inverse correlation between the 30-year US Treasury Bond and EURUSD continued to break down, registering at -0.79% from last week’s peak at -0.84%. The Australian government added to optimism, announcing a A$10.4 billion fiscal stimulus plan. UK Retail Sales declined for a sixth month out of the past seven according to the British Retail Consortium (BRC), shrinking -1.5% in September. Food and drink was the only category to see meaningful gains as consumers restrained spending to the bare essentials in the face economic slowdown, a full-blown housing crisis, and intense turmoil in the financial markets. Japanese producer prices shrank in September as the Domestic Corporate Goods Price Index printed at -0.4%, bringing the annualized rate to 6.8%. The release marks the second consecutive decline after the metric peaked with oil prices in July. Australian businesses remained pessimistic in September as NAB Business Confidence printed at -8, down from August and within a hair of the 7-year low at -9 recorded in June. Lower oil prices and the dramatic interest rate cuts have thus far failed to boost sentiment. Crude has fallen over 40% to date since peaking at $147/barrel in July while the Reserve Bank of Australia cut borrowing costs by 0.25% in September. Looking ahead, an uptick in the October reading seems likely as the RBA’s surprise 100-basis-point rate cut is taken into account. * The Ted spread is defined as the price difference between short-term futures on US Treasury bonds and overseas USD-denominated deposits. Euro Session: What to Expect The French Consumer Price Index reading is expected to see headline inflation remain at a standstill in September for a second consecutive month, bringing the annualized rate to 3.1%. This would suggests that the pace of price growth has slowed 12.6% since topping out at 3.6% in July as crude oil turned sharply lower and the economy contracted at a rate of -0.3% in the second quarter. Final revisions of the analogous metric for Italy are set to follow a similar trajectory: price growth is seen shrinking -0.3% in September to bring the annualized rate to 3.8% (down from the peak at 4.1%). Alternatively, the UK Consumer Price Index is expected to see inflation accelerate to 5.0% in the year to September, the fastest since 1992. That said, a rate hike is naturally out of the question: the Bank of England was among the central banks that issued a coordinated 50-basis-point interest rate cut in an attempt to thaw frozen credit markets. Traders are likely to look past this release to the October result as the BOE has suggested it expects price growth to top out around 5% before giving way to cheaper oil as well as slowing growth at home and abroad. Germany’s ZEW Survey is expected to see investor sentiment take a turn for the worse in October after seeing improvement over the past two months. The metric hit a 15-year low at -63.9 in July. The deterioration is to be expected given dire credit market conditions and the precipitous slowdown in demand in Germany and across its key export markets. Indeed, last week saw Germany’s benchmark DAX 30 stock index drop 22%, the most on record, as investors feared oncoming recession (GDP growth shrank -0.5% in the second quarter, meaning a negative result in the three months through September would, by definition, constitute recession). The broad Euro Zone edition of the report is seen sharply lower at -60.0 in October from -40.9 in the preceding month. On balance, forex price action is likely to focus on the continued rebound in risk sentiment as jubilant investors push prices to correct last week’s bearish extremes. As we wrote yesterday, “A meaningful rebound in risk appetite will likely see the US dollar come under continued selling pressure in the coming weeks. However, the longer-term perspective continues to favor the Dollar as priced-in interest rate expectations point to the greenback gaining at least 150 basis points on the Euro and 175 basis points on the British Pound over the next 12 months.” To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.