US Dollar Ignores Asian Stock Drop as Forex Traders Brace for NFP (Euro Open)

Published March 6th, 2009 - 09:47 GMT

The “safe-haven” US Dollar failed to see a boost as Asian stock markets followed Wall St lower with traders looking ahead to a record job loss in February’s Non Farm Payrolls report. UK Producer Prices and Switzerland’s Consumer Price Index are on tap for release in European hours.

Key Overnight Developments

• Asian Stock Drop Ignored by US Dollar as Markets Look to NFP
• British Pound Rises, Euro Confined to Familiar Ranges

Critical Levels

Overnight trading saw the Euro keep to the consolidation range established in the US session, oscillating below the 1.26 mark. The British Pound advanced higher, adding 0.4% on the US Dollar. For complete analysis of all the major currency pairs, please see the latest weekly technical outlook report.

Asia Session Highlights

Risk trends faded into the background in the overnight session as forex traders looked ahead to tomorrow’s Non Farm Payrolls release. The cues from stock exchanges were decidedly negative: shares traded lower across Asian exchanges following a 4% drop on Wall St. Financials led the selloff after it was revealed that the US administration’s mortgage rescue plan would effectively be confined to loans owned by Fannie Mae and Freddie Mac, leaving banks like Wells Fargo (which owns 16% of the mortgage market) in the cold. Downward pressure was compounded as Moody’s downgraded JPMorgan, the heretofore beacon of financial stability, while the chairman of the FDIC said its deposit insurance fund may become insolvent by the end of this year. Interestingly, the flight from risky assets failed to boost the US Dollar (the current safe haven du jour) as the markets braced for the US economy to shed -650k jobs in February.

Euro Session: What to Expect

Switzerland’s inflation is set to come to a standstill with the Consumer Price Index expected to print at 0.0% in the year to February. The growth outlook remains decidedly bleak, with a survey of economists conducted by Bloomberg calling for GDP to contract at an increasing pace through the third quarter of 2009, meaning inflation could well turn negative in the near to medium term. This poses a serious threat to consumption and investment because if individuals and businesses expect prices to fall in the future they will perpetually delay spending to get the best possible deal, putting the brakes on economic growth altogether. Indeed, Swiss National Bank Vice-Chairman Philipp Hildebrand has even suggested forex market intervention to check the deflation threat.

In the UK, the Producer Price Index is set to add a meager 0.1% through February to bring the annual pace of wholesale inflation to an 18-month low at 3.1%. The metric foreshadows further downside in consumer prices, the headline inflation gauge, as firms pass on lower manufacturing costs through cheaper finished products. On balance, the metric is unlikely to have much of an immediate impact on British Pound price action after the Bank of England suggested it was done cutting interest rates after the last reduction to a record-low 0.50%. The policy statement accompanying the rate decision warned of the potential dangers of taking borrowing costs too low and signaled that Mervyn King and company would now embark on a policy of quantitative easing.

The implications of the central bank’s new policy could spell trouble for the British Pound. Manually expanding the money supply may prove profoundly inflationary as the eventual recovery materializes, eroding the currency’s value if lending rates do not rise fast enough to drain excess liquidity. Policymakers’ recognition of a rebound tends to lag behind its actual beginning, threatening to put the BOE behind the curve. On balance, this suggests the risks are to the downside in the long term sterling outlook.

To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.

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