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Dollar and Yen Rise on Risk Aversion but Swiss Franc Outperforms

Dollar and Yen Rise on Risk Aversion but Swiss Franc Outperforms

2010-07-01 05:03:00
Ilya Spivak, Sr. Currency Strategist
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Key Overnight Developments

• Chinese PMI, Spain Downgrade Fears Set Off Risk Aversion in Asian Trade
• Japanese Business Confidence Soars But Real Impact Likely to be Limited
• Australian Manufacturing Slows, Building Permits and Retailing Disappoint

Critical Levels

euroopen070120101

The Euro and the British Pound slumped in overnight trade, down 0.3 and 0.1 percent against the US Dollar as stocks sold off in Asian trade, boosting the safety-linked greenback against most of its counterparts (see below). We remain flat EURUSD and GBPUSD.

Asia Session Highlights

euroopen070120102

The Australian and New Zealand Dollars led most major currencies lower against their US counterpart as well as the Yen as stocks fell in Asian trade, feeding demand for safety-linked assets and weighing on carry trades to boost funding currencies. Interestingly, the Swiss Franc led the greenback and the Japanese unit against its higher-yielding counterparts, marking a notable departure from previous patterns where it tended to move with risk appetite. While a single day of trade is hardly enough to say traders have re-branded the Swissie as a safe-haven asset, the development certainly merits further attention to see if a pattern begins to develop. The MSCI Asia Pacific regional benchmark stock index fell 1.6 percent after China’s Manufacturing PMI reading showed activity slowed for the second month in June and Moody’s Investors Service said it may downgrade Spain’s sovereign credit rating.

Australia’s AiG Performance of Manufacturing Index fell to 52.9 in June from 56.3 in the previous month, showing the pace of industrial-sector activity declined for the second month to the slowest since March. A gauge of output growth dropped to the lowest since January while the one tracking exports fell the most since October 2009. Notable draw-downs were also noted in metrics tracking new orders and employment. Separately, Building Approvals recorded a second large decline – down 6.6 percent in May after a 14.8 percent drop in April – while Retail Sales posted the smallest increase in three months. On balance, such lackluster outcomes reinforce the tepid outlook for monetary policy going forward, with a Credit Suisse gauge of priced-in expectations showing traders are betting on no further rate hikes in the next 12 months.

Japan’s Tankan Survey of business confidence surprised to the upside, with a gauge of large manufacturers’ outlook soaring to the highest in two years in the second quarter. Interestingly, production capacity and employment posted sharp declines and were forecast to track lower still in the third quarter. Further still, despite a drawdown in inventories, survey respondents continued to report excess supply and naturally accompanying downward price pressure. On balance, the outcome hints that despite optimism suggested by the headline figure, the benefits to be had in the real economy are likely to be modest as firms continue to reduce production and trim workforces to bring output in line with the “new normal” level of global demand. Indeed, while firms said they plan to boost capital expenditure for the first time in three years – spending 4.4 percent more in the 2010 fiscal year than the preceding 12 months – the increase feels like a drop in the bucket compared to the brutal pace of cost-cutting seen in 2009. Further still, deflation is likely to persist (albeit at a slowing pace), keeping the Bank of Japan firmly in dovish territory for the foreseeable future.

Euro Session: What to Expect

euroopen070120103

The economic docket looks broadly uneventful in European hours. German Retail Sales are expected to rise 0.4 percent in May but the outcome seems hardly noteworthy, amounting to a shallow uptick that falls far short of challenging the down trend in place since September 2008, particularly given the headwinds facing consumers from austerity measures (be they spending cuts or tax hikes) and rising borrowing costs as European governments make tackling budget deficits a priority.

June’s UK Manufacturing PMI is set to show the sector’s growth rate slowed for the first time in four months while the analogous Swiss SVME-PMI report shows activity decelerated for the first time since December 2009. The outcomes seem hardly surprising given expectations of protracted slowdown in the Euro Zone, which both countries rely upon for the bulk of their export demand.

Turning to sentiment, US equity index futures are trading down close to 0.6 percent, pointing to risk aversion that promises to continue boosting the safety-linked US Dollar and anti-carry Japanese Yen against their major counterparts. The Swiss Franc also warrants monitoring to see if it continues to trade with the “safety” rather than the “risk” bloc of assets.


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