US Dollar Holds Up Despite Asian Stock Gains, UK CPI and German ZEW on Tap (Euro Open)

Published October 13th, 2009 - 08:22 GMT

The US Dollar held its own in overnight trading despite a rally across Asian stock exchanges that would be expected to have weighed on the safety-correlated currency. Australian and New Zealand data yielded opposing surprises. Germany’s ZEW survey of investor confidence and UK consumer prices are on tap ahead.

Key Overnight Developments

• New Zealand Retail Sales More Than Double Expectations in August
• UK House Prices Rose for Second Month in September, Says RICS
• Australian Business Confidence Fell For Time First in Five Months
• US Dollar Supported Overnight Despite Rally on Asian Stock Exchanges

Critical Levels

The Euro yielded an effectively flat result in overnight trading while the British Pound moved slightly lower, losing as much as -0.2% against the US Dollar. The greenback remained supported despite gains across most Asian stock exchanges that sent the MSCI Asia Pacific regional benchmark index up 0.7% ahead of the opening bell in Europe. We remain short GBPUSD at 1.6617 and EURUSD at 1.4710.

Asia Session Highlights

New Zealand Retail Sales more than doubled economists’ expectations in August, adding 1.1% from the previous month to clock in the largest gain in nearly two years. Sales fell -0.6% from the previous year, the smallest decline since October 2008. Rising home values and record-low interest rates seem to have boosted consumer confidence, which surged to the highest in 3 years in the third quarter. Rising unemployment continues to present a hurdle however, with economists expecting the jobless rate to rise to top 7% next year. The stronger New Zealand Dollar may be playing an important role in delaying firms’ hiring plans, weighing on exporters’ profits as it drives away foreign demand that accounts for close to 30% of the economy’s total output. The government and the central bank are both keenly aware of this and have made attempts to talk down the buoyant currency. On balance, this suggests that the RBNZ is unlikely to substantially speed up the timetable to raise interest rates from the “latter part of 2010” despite encouraging signs from leading economic indicators (such as today’s report), fearing that beating other central banks to the punch will drive the Kiwi dollar even higher and derail recovery.

UK House Prices grew for a second consecutive month in September according to Royal Institution of Chartered Surveyors (RICS), an industry association for real estate agents, as the number of property brokers polled for the survey that reported price gains outnumbered those reporting declines by 22%, the largest margin since May 2007. The rebound in property values may be reflective of shallow supply rather than robust demand however as the number of for-sale properties per real estate agent remained unchanged in September from the previous month, when it had fallen 23% from the previous year. At that time, RICS chief economist Simon Robinsohn had said that it would be “foolish to believe prices are going to go up in a straight line” and cautioned that “2010 will be a more difficult year.” Demand will likely continue to face substantial headwinds in the months ahead as the unemployment rate continues to rise, trimming incomes and weighing on real estate affordability, while access to mortgage financing sees constraints from the small number of remaining lenders. Indeed, the six top lenders (Barclays, HSBC, Lloyds, Nationwide, Royal Bank of Scotland and Santander) now account for 80% of the mortgage market versus 50% just 2 years ago. A survey of economists conducted by Bloomberg forecasts the UK jobless rate will surpass 9% in the second half of next year.

Australian Business Confidence fell for the first in five months in September according to the National Australia Bank (NAB), dropping four points to a reading of 14 from a six-year high of 18 recorded in the previous month. The sub-gauge measuring firms’ profitability led the metric lower, falling 7 points. NAB chief economist Alan Oster said that it was “probably inevitable” that some weakening was due after the steady surge in confidence in recent months, adding that “our view was, and still is, that the readings for confidence are somewhat unrealistic.” The survey that served as the basis for the report was conducted before the central bank unexpectedly raised interest rates last week, suggesting confidence may continue lower in the months ahead as companies prepare to cope with higher borrowing costs. NAB’s Business Conditions gauge of the current hiring, sales, and profits environment also fell, registering the first decline in four months.

Euro Session: What to Expect

The UK Consumer Price Index is expected to show that the annual pace of inflation slowed to 1.3% in September, the lowest in nearly five years. However, the metric may actually offer support to the beleaguered sterling: a reading in line with expectations would amount to an average inflation rate of 1.6% through the third quarter, a meaningfully higher outcome than the median market forecast of 1.35%. Coupled with last week’s better than expected producer price report, this may relax concerns that the BOE will act on concerns that CPI will stay below the 2% target level for longer than two years, expanding its asset-purchasing scheme and possibly lowering the interest rate it pays on banks’ reserve deposits. The BOE opted to hold off on policy changes this month but many observers (including former MPC policymaker David Blanchflower) have suggested a dovish shift will coincide with the release of the bank’s updated inflation forecast next month.

Turning to the continent, Germany’s ZEW Survey of investor sentiment is forecast to rise to 58.8 in September, the highest in over three years. The equivalent reading for the Euro Zone as a whole is set to follow suit. Still, a survey of economists polled by Bloomberg reveals that most market-watchers expect the currency bloc to underperform most G10 economies this year and in 2010, hinting that European sentiment figures are likely to head lower as analysts shift focus away from broad relief that an “Armageddon scenario” for the global economy has likely been averted to relative comparisons of who will recovery first.

Beyond economic data, risk appetite is also likely to factor into price action in European hours as pharmaceutical giant Johnson & Johnson reports third-quarter earnings late into the session.

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