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US Dollar, Japanese Yen Rise as Stocks Fall on China Slowdown Fears

US Dollar, Japanese Yen Rise as Stocks Fall on China Slowdown Fears

2010-05-11 05:21:00
Ilya Spivak, Sr. Currency Strategist
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Key Overnight Developments

• Dollar, Yen Rise as Stocks Fall on China Slowdown Fears
• UK House Prices Top Expectations, Retail Sales Disappoint

Critical Levels

05112010 1

The Euro and the British Pound tracked lower in Asian trade, down 0.5 and 0.4 percent respectively against the US Dollar amid a return to risk aversion (see below). We remain short EURUSD at 1.4881.

Asia Session Highlights

05112010 2

The US Dollar and the Japanese Yen advanced against their major counterparts as stock markets sold off in Asian trade, spurring demand for safety and weighing on carry trades to the benefit of funding currencies. The MSCI Asia Pacific regional benchmark stock index fell 0.9 percent after China’s Consumer Price Index rose 2.8 percent in the year to April – amounting to the highest annual inflation rate in 17 months – while New Yuan Loans soared to 774 billion, topping analysts’ forecasts for a 585 billion result. The outcomes stoked fears that Beijing will introduce additional measures to slow lending growth and rein in the buoyant economy before it overheats.

UK House Prices rose for the first time in six months in April according to a survey from the Royal Institute of Chartered Surveyors (RICS). The report showed that the number of polled real estate agents reporting price increases exceeded those indicating declines by 17 percent, topping economists’ expectations for a 10 percent result. RICS spokesman Jeremy Leaf attributed the outcome to “good weather,” claiming the onset of spring was improving sentiment.

Meanwhile, UK Retail Sales plunged 2.3 percent from a year ago at stores open for at least12 months in April according to a study by the British Retail Consortium (BRC). The report chalked up the outcome to the timing of the Easter holiday, with BRC director general Stephen Robertson arguing that “this April’s trading period only included the last two days of Easter, while last year’s had the entire build-up and holiday weekend.” However, a 3-month average that smoothes out monthly volatility notched its smallest increase in 8 months in April, hinting that there is more to the poor outcome than just a seasonal anomaly. On balance, the drop may reflect broad uncertainty in the run-up to last week’s UK general election as consumers fret about what the incoming government’s approach to reducing the gaping budget deficit will mean for jobs and taxes.

Euro Session: What to Expect

05112010 3

The economic calendar is fairly tame in European hours, with risk trends likely to retain their grip on currency markets. European stock index futures are trading down 1.4 percent ahead of the opening bell, pointing to continued gains for the anti-risk US Dollar and Japanese Yen against the spectrum major currencies.

The final revision of German Consumer Price Index figures is expected to confirm the annual inflation rate at 1 percent in April. The outcome is unlikely to stir much of a reaction with prices well below the European Central Bank’s 2 percent target level and policymakers moving toward looser monetary conditions as part of the EU’s response to the sovereign credit meltdown on the region’s southern periphery.

UK Industrial Production is set to rise 0.3 percent in March, a slowdown from the previous month’s 1 percent increase. Looking past month-to-month volatility however, output is expected to rise 0.6 percent from the preceding year, the first positive reading in the annual growth rate in two years. Still, the outcome is unlikely to prove market-moving as traders remain preoccupied with lingering uncertainty about the make-up of the next UK government its approach to dealing with the nation’s gaping budget deficit.


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