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Dollar, Yen Surge as S&P Sinks Risky Assets with Greek Downgrade Threat

Dollar, Yen Surge as S&P Sinks Risky Assets with Greek Downgrade Threat

2010-02-25 05:57:00
Ilya Spivak, Sr. Currency Strategist
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Key Overnight Developments

• Dollar, Yen Surge as S&P Sinks Risky Assets With Greek Downgrade Threat
• Australian Business Investment Gains Most in a Year, Boosts Rates Outlook
• New Zealand Business Confidence Rose to Highest Since 1999, Says NBNZ


Critical Levels


euro open 02252010 1

The Euro and the British Pound dropped 0.6 and 0.5 percent respectively against the US Dollar as renewed risk aversion boosted demand for the safety-linked greenback. We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.


Asia Session Highlights

euro open 02252010 2

Australian Private Capital Expenditure, a measure of business investment, surged 5.5 percent in the fourth quarter to register the biggest increase in a year. Economists were forecasting a more modest 2 percent increase ahead of the release. Plant and equipment spending led the metric higher, yielding an impressive quarterly increase of 12.4 percent. The apparent decision to expand production capacity suggests Australian firms are turning more optimistic about future demand, which has potential to translate into greater hiring, wages and consumption – the largest component of overall economic growth. The outcome boosted expectations that the Reserve Bank of Australia will raise benchmark interest rates at next week’s monetary policy meeting, with a Credit Suisse gauge tracking the markets’ priced-in outlook rising to show traders now see a 53 percent chance of a 25bps increase versus just 30 percent yesterday.

Meanwhile, a gauge of New Zealand Business Confidence surged to 50.1 – the highest reading in nearly eleven years – according to a survey from the National Bank of New Zealand (NBNZ). A net 41.9 percent of the firms polled for the report said they expect sales to improve while only 10.3 percent foresee the unemployment rate will be higher 12 months from now. The implications of this seemingly robust outcome for monetary policy looked muted however, as the survey revealed that companies’ inflation and interest rate expectations printed below those recorded as recently as November and have remained relatively flat over the past.

The positive tone of the economic calendar faded into the background however as Asian markets reacted to news that ratings giant Standard & Poor’s may lower Greece’s sovereign credit rating again by the end of March, setting off a fresh bout of risk aversion that sent stock exchanges lower and boosted the safety-linked US Dollar and Japanese Yen. The comments follow yesterday’s news that Moody’s – another ratings powerhouse – downgraded the long-term debt of Greece’s four largest banks on concerns about deteriorating asset quality and over-reliance on funding from the European Central Bank. Meanwhile on the political front, the UK Telegraph reported that Greece has substantially hurt its chances of a bailout after the country’s Deputy Prime Minister Theodoros Pangalos told the BBC that Germany had no right to criticize Greece for anything after it devastated the country under the Nazi occupation. Pangalos complained that Germany “took away the gold that was in the Bank of Greece, and they never gave it back,” before turning his scorn to the current set of EU leaders, saying there were of "very poor quality" and not up to the task of managing Europe’s fortunes.


Euro Session: What to Expect

euro open 02252010 3

Risk aversion seems likely to retain its grip on currency markets in European trade, boosting the safety-linked US Dollar and Japanese Yen at the expense of most of the majors as concerns about the deteriorating fiscal situation in Greece return to the forefront. The MSCI Asia Pacific regional stock benchmark index reversed early gains to drop 0.9 percent while US equity index futures slipped to trade down 0.7 percent late into the overnight session, hinting at a decidedly negative tone ahead of the opening bell in Europe.

German Unemployment figures headline the economic calendar, with expectations suggesting the economy will lose 16,000 jobs in February – the largest drop in seven months – although the jobless rate is seen printing unchanged at 8.2 percent after increasing for the first time since June 2009 in the previous period. The outcome may compound selling pressure on the Euro after the single currency fell to the lowest level in a year against the Japanese Yen and tested a nine-month low against the US Dollar in Asian trade, with the mix of lackluster economic fundamentals (particularly after yesterday’s disappointing GDP result) and EU-led risk aversion likely to be a potent catalyst. Swiss Employment and Euro Zone Economic Confidence figures round out scheduled event risk.


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