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Pound Slumps to Yearly Low, G7 to Hold Conference Call on Greece

Pound Slumps to Yearly Low, G7 to Hold Conference Call on Greece

2010-05-07 05:27:00
Ilya Spivak, Sr. Currency Strategist
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Key Overnight Developments

Pound Slumps to Lowest in a Year Ahead of Final Poll Count
• Australian Rate Hike Outlook Slashed After RBA Policy Statement
• Japan’s FinMin Says G7 to Hold Conference Call on Greek Crisis

Critical Levels

05072010 1

The Euro corrected higher in Asian trade, adding as much as 0.7 percent against the US Dollar. Meanwhile, the British Pound slumped to the lowest level in over a year against the greenback ahead of the release of final results for yesterday’s UK general election (see below). We remain short EURUSD at 1.4881.

Asia Session Highlights

05072010 2

The Quarterly Monetary Policy Statement from the Reserve Bank of Australia cautioned that “the fiscal problems in Europe could intensify, prompting a retreat from risk-taking by investors and a sharp slowing in the world economy [while] a marked slowing in the pace of growth in Asia could have a significant impact on the Australian economy, in particular changing the outlook for commodity prices and the resources sector.” The outcome weighed heavily on RBA interest rate expectations, with a Credit Suisse gauge of the priced-in outlook showing traders see no chance of a rate hike in June and just 33bps in tightening over the next 12 months, down 29bps from yesterday.

Separately, the AiG Performance of Construction Index rose to 55.8 in April, showing the Australian building sector expanded at the fastest pace in three months. Apartment construction led the metric higher while indexes tracking new orders and employment rose for the first time since January.

The G7 will discuss the festering Greek budget crisis in a conference call according to comments from Japanese Finance Minister Naoto Kan. The policymaker added that he didn’t think the conversation would lead to a call for intervention. Commenting on recent Japanese Yen volatility, Kan said “disorderly forex moves are undesirable” but stressed that “markets determine currency levels”, hinting the government does not intend to step into FX markets for the time being.

Euro Session: What to Expect

05072010 3

The European economic calendar is likely to fade into the background despite a fair amount of significant scheduled releases as the final results from the UK general election and the upcoming US Nonfarm Payrolls report dominate the spotlight.

In the UK, results available thus far suggested David Cameron’s Conservatives probably won the most seats but failed to secure an outright majority according to a forecast from the BBC, amounting to the first hung parliament since 1974. Traders will watch closely for confirmation of the outcome, which could prove to have dire consequences for the British Pound and risk appetite at large as investors fret that a divided government will not have the conviction to meaningfully deal with the nation’s soaring budget deficit, a gap expected to top 11 percent of GDP in 2010.

Meanwhile, the US jobs report set to cross the wires late into the session is expected to show that the economy added 190,000 jobs in April, the second consecutive monthly increase and the largest one in over two years. A print in line with expectations still leaves room for uncertainty about how the markets will interpret the outcome, sending the US Dollar higher on expectations that firming labor markets will pave the way for the Federal Reserve to tighten monetary policy or pushing it lower amid a recovery in risk appetite heartened by an improved spending outlook for the world’s largest consumer market.

Equity index futures show a mixed picture. European exchanges set to open sharply lower following the harrowing selloff on Wall Street, but this seems more like an aftershock from something that is already priced into exchange rates rather than truly renewed risk aversion and may not factor substantially into currency markets (as was the case in Asian trade). Meanwhile, futures on top US indexes are little changed, revealing investors’ uncertainty about where to take markets into the week-end.

Scanning the data docket, the UK Producer Price Index is expected to show the annualized wholesale inflation rate eased to 4.8 percent April, the first decline in eight months, while German Industrial Production continued to pick up speed with a gain of 6.4 percent from the previous year – the biggest since January 2008. Switzerland’s Unemployment Rate is expected to post the third straight decrease, sliding to 4.1 percent in April while Retail Sales add 2.8 percent in March, amounting to a slowdown in activity through the first quarter from the three months through December 2009.


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