The US Dollar set a new yearly low in overnight trading after China’s exports shrank at the slowest pace in eight months, boosting confidence in the global economic recovery and sending stocks higher in Asian trading to weigh on the safety-liked currency. UK unemployment data is on tap ahead.
Key Overnight Developments
• Australian Consumer Confidence Rose to Highest in Two Years, Says Westpac
• Japan: BOJ Keeps Rates, QE Unchanged as Expected; Consumer Confidence Underperforms
• US Dollar Sets New 2009 Low as Chinese Export Figures Boost Asian Stock Exchanges
Critical Levels
The Euro traded higher in the overnight session, adding 0.2% against the US Dollar. The British Pound followed suit, testing as high as 1.5965 against the greenback. A rally on Asian stock exchanges weighed on the safety-correlated US currency, with the MSCI Asia Pacific regional benchmark index hit a 13-month after China’s exports shrank at the slowest pace in eight months in September, boosting confidence in the global economic recovery. We remain short GBPUSD at 1.6617.
Asia Session Highlights
Australian Consumer Confidence added 1.7% in October, rising to the highest level in over two years according to Westpac Banking Corp. Westpac chief economist Bill Evans said the gain was particularly significant because the survey that served as the basis for the outcome was conducted after the central bank unexpectedly raised interest rates last week, suggesting spending will remain supported as borrowing costs continue to rise. Indeed, traders are now pricing in a 100% probability that the RBA will hike rates by another 25 basis points next month. September’s drop in the jobless rate also likely helped to drive sentiment higher, though as we noted previously, the labor market may stumble if government stimulus is withdrawn. Also of concern, a gauge tracking consumers’ confidence in purchasing a home fell 11% to the lowest level since November 2008, hinting that optimism may not translate into actual spending and supporting our suspicions of a forming housing bubble in Australia.
Japan’s Domestic CGPI gauge added 0.1% in September, showing that the annual pace of contraction in wholesale inflation moderated to -7.9% from the record -8.5% registered in the previous month. The shallow improvement likely came as the price of oil and other raw materials rebounded with the global surge in risky assets. Consumer Confidence gained less than expected, rising to 40.7 in September. Economists had expected a 41.3 result ahead of the release. Details of the report appear similar to that of Australia’s release: respondents polled for the report were cautiously more optimistic on income and employment prospects, but said they were less willing to commit to big-ticket durable goods purchases than they were in August. While this disparity may be accounted for by Augusts’ surge in household spending engineered by the government’s incentive programs to buy electronics, it is nonetheless worrisome and raises questions about whether higher sentiment will translate into robust spending.
For their part, the Bank of Japan said personal consumption remains “generally weak” as it kept interest rates at 0.10% as expected and made no changes to its unconventional monetary easing programs. Policymakers once again upgraded their economic forecast on signs that growth is starting to pick up, but cautioned that the outlook remains significantly uncertain with risks still on the downside.
Euro Session: What to Expect
UK Jobless Claims are set to add 24,500 in September, pushing the Claimant Count Rate (unemployment rate) to a 22-year high of 5.1%. More of the same is expected going forward, with a survey of economists polled by Bloomberg calling for the jobless rate to top 9% in the second half of next year. While labor market weakness has been a foregone conclusion that has been priced into the exchange rate for some time, the market could prove sensitive to the release this time around with the release coming on the heels of yesterday’s disappointing inflation data. Bank of England Governor Mervyn King has recently voiced concerns that rising unemployment will weigh on wages to keep inflation below the central bank’s 2% target level into 2011 and possibly beyond, opening the door to speculation that the central bank may expand its asset-buying scheme and possibly lower the interest rate it pays on banks’ reserve deposits. Policymakers opted to hold off on any changes this month but many observers (including former MPC policymaker David Blanchflower) suggest a dovish shift will coincide with the release of the bank’s updated inflation forecast next month.
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