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Dollar, Yen to Decline as European Stock Index Futures Point to ‘Risk On’ Trade

Dollar, Yen to Decline as European Stock Index Futures Point to ‘Risk On’ Trade

2010-03-29 07:35:00
Ilya Spivak, Sr. Currency Strategist
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Key Overnight Developments

• Japan’s Retail Sales Surge on Improving Employment Outlook
• Australian New Home Sales Drop on Borrowing Costs, Grants
AUD, NZD Outperform as HK Stocks Rally on Earnings, Drought


Critical Levels

03302010 1

The Euro added as much as 0.9 percent in early trade on the lingering effects of Friday’s announcement of an IMF-assisted EU scheme to bail out Greece but the single currency pared gains to tick just 0.2 percent higher against the US Dollar ahead of the opening bell in Europe amid (justifiable) skepticism that the arrangement will prove effective and robust enough for larger problematic countries like Spain and potentially even Italy. The British Pound added 0.1 percent against the greenback, with price action following that of its Continental counterpart. We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.


Asia Session Highlights

03302010 2

Japan’s Retail Trade figures surprised sharply to the upside, rising to the highest level in over four years with a seasonally adjusted monthly gain of 0.9 percent in February. Sales rose 4.2 percent from the previous year, marking the largest annualized increase in 13 years. Clothing sales led the metric higher with a monthly gain of 2.2 percent. Large retailers’ sales sank 4.0 percent, showing that bargain-hunting continues to divert consumers away from department stores. The outcome likely reflects the cautious improvement in employment seen in January’s labor-market figures, although it is important to note that the number of employed workers is still 1.5% lower than a year ago having recovered less than half of the drop from the peak in December 2007, hinting that any recovery that may be underway is young and fragile.

Australian New Home Sales dropped 5.2 percent in February, the most in four months, according to the Housing Industry Association. The outcome follows January’s 7.9 percent drop in home loans – the largest decline in nearly a decade – after the central bank raised interest rates while the government reduced cash handouts to first-time homebuyers.

The Australian and New Zealand Dollars outperformed on the session, adding 0.6 and 05 percent respectively against their US counterpart following a rally in Hong Kong equities after China Resources Land Ltd reported that’s its 2009 profits more than doubled to HK$4.41 billion, topping expectations calling for a HK$3.4 billion result. The Aussie got an added lift as severe droughts in southwest China boosting coal producers on expectations that demand will rise as burning the fossil fuel is used as an alternative for electricity generation to compensate for a 15 percent drop in output at hydropower pants.


Euro Session: What to Expect

03302010 3

The economic calendar is fairly light in European trade. UK Mortgage Approvals are set to print at 48,400 in February, a modest gain from the previous month, although a downside surprise is not out of the question after a Bank of England survey of the UK’s largest banks showed that new loans unexpectedly declined over the same period. UK Consumer Credit measures are expected to tick lower, an outcome consistent with data released by the British Bankers Association last week. The final revision of Euro Zone Consumer Confidence is expected to confirm a reading at -17.2 in March, the lowest since October of last year.

On balance, risk sentiment is likely to remain the dominant driving force behind price action. European equity index futures are trading firmly higher (about 0.5 percent on average) ahead of the opening bell, hinting at further losses for the safety-linked US Dollar and Japanese Yen after both currencies retreated against the spectrum of their major counterparts in Asian trade.


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