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Dollar, Yen Gain on Risk Aversion as Asian Stocks Drop Most in a Month

Dollar, Yen Gain on Risk Aversion as Asian Stocks Drop Most in a Month

2010-03-22 06:52:00
Ilya Spivak, Sr. Currency Strategist
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Key Overnight Developments

• Currency Markets Unmoved as US House Passes Heath Care Overhaul
• Dollar, Yen Gain on Risk Aversion as Asian Stocks Drop Most in a Month
• Australian Vehicle Sales Fall for Second Month on Tax Break Expiry


Critical Levels

03222010 1

The Euro and the British Pound moved about 0.1 and 0.4 percent lower against the US Dollar in Asian trade, with the UK unit coming in as the worst performer on the session. We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.


Asia Session Highlights

03222010 2

Currency markets were unmoved as the US House of Representatives narrowly passed contentious legislation to overhaul America’s health-care system, a proposal that is projected to cost $940 billion dollars over the next 10 years by the Congressional Budget Office (CBO). The same assessment also suggests that the measure – through various spending cuts and new revenue – will cut the fiscal deficit by $138 billion over the same period. However, the actual measure voted in today had been changed since the CBO’s assessment to help secure enough votes for its passage. Further, even the previous cost/savings analysis assumes that Congress will actually do what it tells the CBO will be done, which is often not the case for politically unpopular things like excise taxes and reduced spending. While traders seemed to ignore the issue in thin Asian trade, it may resurface as a significant catalyst should the markets conclude that the fiscal implications of the passed legislation are not as rosy as the CBO reading seems to suggest.

Worries about public deficits may be particularly acute after IMF First Deputy Managing Director John Lipsky said over the weekend that the average debt-to-GDP ratio for advanced economies will rise to 110% by 2014 for the first time since 1950. Indeed, the comments helped push Asian stock exchanges lower by an average of 1.2 percent to start the trading week, the largest decline in a month, and propelled the safety-linked US Dollar and Japanese Yen higher against most major currencies.

Australia’s New Motor Vehicle Sales fell for the second consecutive month in February, slipping 1.9 percent. As in the previous month, the outcome was led by a drop in Sales of “other” vehicles (a category that includes vans, trucks, buses and government-owned vehicles), which fell 8.6 percent. The outcome may have been linked to lingering fallout from the removal of a tax break for businesses making new vehicle purchases, which expired in December 2009. Sales of passenger vehicles fell 0.1 percent after consumer confidence fell in February, with a gauge Australians’ willingness to make major purchases (such as cars) down by the most in at least five months.


Euro Session: What to Expect

03222010 3

The economic calendar is decidedly lackluster, with a preliminary estimate of the March Euro Zone Consumer Confidence report being the only somewhat noteworthy item on the docket. However, the figure’s ability to drive Euro price action seems limited with the traders seemingly consumed by anticipation of the outcome of an EU summit set to take place in Brussels at the end of this week to discuss a mechanism for offering Greece some form of bailout to stave off a default, calm markets, and bring down the southern European country’s borrowing costs.

Last week ended with renewed escalation of the Greek fiasco after Greek PM George Papandreou has said that his country will be able to deal with their 2010 shortfall of 53 billion euros – 20 billion of which are needed by April and May – only if it is able to borrow on “reasonable” terms, otherwise turning to the IMF for help as a last resort. The comment was designed to prod the EU to offer something more concrete beyond broad statements of support for Greek austerity efforts, which have failed to meaningfully narrow the spread between the yields that Greece must pay to its lenders versus those required of Germany (the region’s benchmark).

The feasibility of an internal EU resolution to the matter became suddenly remote last Thursday after a German administration official said that “in the case that the Greeks get into really serious problems, [Berlin] would support an IMF solution.” Reaching agreement on a bailout will be all but impossible without support from Germany, the region’s top economy. Anything short of a decisive outcome in Brussels and the subsequent involvement of the IMF would likely have severe negative implications for the Euro and risk appetite at large, showing that the world’s largest economy is unable to keep its own house in order.

On balance, this leaves the door open for risk sentiment to continue driving currency markets in the upcoming European session. US equity index futures are trading down 0.4 percent, hinting that the intense risk aversion seen in Asian trade is likely to continue. On balance, this likely bodes well for the safety-linked US Dollar and Japanese Yen against most of their major counterparts.


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