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Dollar and Yen to Rise on Risk Trends, Pound Braces for GDP Report

Dollar and Yen to Rise on Risk Trends, Pound Braces for GDP Report

2010-05-25 04:47:00
Ilya Spivak, Sr. Currency Strategist
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Key Overnight Developments

• Dollar, Yen Rise as European Growth Fears Sink Stocks in Asia
• RBNZ Inflation Expectations Survey Boosts Rate Hike Outlook

Critical Levels

euroopen052520101

The Euro and the British Pound slid lower in Asian trade, down 0.6 and 0.5 percent respectively against the US Dollar as stocks declined, boosting safety-linked demand for the currency. We remain short EURUSD at 1.4881.

Asia Session Highlights

euroopen052520102

The US Dollar and the Japanese Yen advanced against the spectrum of major currencies – the former boosted by safe-haven demand and the latter by unwinding carry trades – as stocks dropped in Asian trade amid concerns that Europe’s debt-reduction efforts will undermine the global economic recovery. Indeed, bailing out high-deficit countries would imply taking on substantially more debt for bastions of fiscal discipline like Germany; financing this will drive borrowing costs higher, slowing economic growth. Taken together, the Euro Zone is the world’s second largest economy, so a marked downturn here bodes ill for worldwide growth at large. The MSCI Asia Pacific regional equity benchmark index fell 2.3 percent to touch the lowest level in ten months.

Meanwhile, an RBNZ Survey of Inflation Expectations showed that businesses polled for the report raised their 2-year CPI projections for the fourth consecutive quarter. Most respondents also noted that monetary conditions were looser than average, outpacing those that reckoned otherwise by 11.1 percent. Firms also boosted their economic growth and employment expectations over the same period, hinting the central bank may have substantial scope to withdraw stimulus without snuffing economic recovery. Indeed, a Credit Suisse gauge of the markets’ policy expectations shows traders are pricing in 151 basis points in RBNZ rate hikes over the next 12 months, the most of any G10 central bank.

Euro Session: What to Expect

euroopen052520103

UK Gross Domestic Product figures headline the calendar in European hours, with expectations calling for the economy to have added 0.3 percent in the three months through March, a slight upward revision from the 0.2 percent increase estimated by the Office for National Statistics in late April. However, the breakdown of the sources of growth promise to be more significant than the headline figure with traders sizing up the outcome against a backdrop of looming budget cuts looms as the new government moves to tackle the nation’s gaping fiscal deficit. Indeed, the Conservative/LibDem coalition administration has already announced 6 billion pounds in spending cuts this year, with more likely on the way when an emergency budget is unveiled in June.

On balance, this means the British Pound may find itself facing selling pressure as the release crosses the wires. Indeed, a survey of economists polled by Bloomberg suggests government spending drove expansion while private consumption and investment floundered once again. Perhaps most worrying, exports are forecast to have come to a standstill after a brisk upswing in the second half of last year, calling into question the hopeful theory that sterling’s 25 percent depreciation over the past three years will make foreign demand a major driver of growth as the economy emerges from recession.

Turning to risk sentiment, US equity index futures are trading sharply lower, down 1.6 percent ahead of the opening bell in Europe. This points to continued risk aversion, hinting that the US Dollar and the Japanese Yen will continue to advance against other major currencies.


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