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Australian Employment Change Rose: 13.5k, Est: 10.0k with Participation Rate: 66.1%, Est: 66.0%

US Dollar, Japanese Yen Decline as Stocks Advance in Asian Trade

US Dollar, Japanese Yen Decline as Stocks Advance in Asian Trade

2010-07-20 04:30:00
Ilya Spivak, Sr. Currency Strategist

Key Overnight Developments

• RBA Says Inflation Below 3 Percent, Claims Asian Slowdown ‘Desirable’
US Dollar, Japanese Yen Decline as Stocks Advance in Asian Trade

Critical Levels


The Euro and the British Pound added 0.2 percent apiece against the US Dollar as most Asian stocks advanced, sapping demand for the safety-linked currency. The Japanese Yen also sold off against all of its major counterparts as the broad recovery in risk appetite boosted carry trades funded cheaply in the low-yielding currency. We remain flat EURUSD and GBPUSD.

Asia Session Highlights


Minutes from July’s Reserve Bank of Australia monetary policy meeting proved encouraging, with the bank seeing signs that the economy is transitioning from public to private demand and even argued that some moderation in Asian economic growth is “desirable”, hinting they expect the economy to remain well-supported despite a likely slowdown in demand from China, the major buyer of its mineral exports. Indeed, Beijing has been actively pushing to slow domestic economic growth amid fears of asset bubbles and runaway inflation. That said, the RBA said it will continue to monitor the extent to which Asia can growth despite lackluster performance in Western economies and remained cautious on the overall global economic landscape, saying the results of EU bank stress tests to be released this week can have a “significant impact” on confidence. On the inflation front, policymakers said they expect the underlying rate of price growth has moderated below 3 percent and promised to monitor incoming data for “material” changes in the outlook going forward.

Euro Session: What to Expect


German Producer Prices are set to rise 0.2 percent in June, pushing the annual pace of wholesale inflation to 1.1 percent. While this amounts to the biggest increase in 16 months, the overall inflation landscape in Germany and the Euro area as a whole remains lackluster, hinting the release promises little by way of actionable information to move exchange rates. Rather, the main event for European monetary policy this week comes with Friday’s release of EU bank stress test results, an outcome that promises to gauge if top lenders can withstand a sovereign default in the region. Most interestingly, these will determine if the ECB will renew long-term repo operations (LTROs), and outcome that would deepen the liquidity pool and weigh yields, sending the Euro lower. In the meantime, short-covering appears to be the top catalyst for the single currency.

Turning to sentiment, US equity index futures are tracking 0.2 percent higher in late Asian trade, hinting risk appetite remains supported heading into European hours and promising to keep the safety-linked US Dollar and Japanese Yen under pressure against their major counterparts. Second-quarter results from Johnson & Johnson, Bank of New York and Goldman Sachs headline the earnings calendar late into the session.

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