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The US Dollar gained as stocks sold off in Asian trading on news that Japan’s third-largest consumer lender will suspend debt payments to its creditors, boosting demand for the safety-linked currency. German PPI, Euro Zone Current Account, and UK Public Borrowing figures are on tap ahead.

Key Overnight Developments

• Japan’s Third-Largest Consumer Lender to Suspend Debt Payments
• Hong Kong Monetary Authority Deputy Chief Says Mortgage Rates Too Low
• Euro, British Pound Decline as Stock Losses Boost the US Dollar

Critical Levels

The Euro lost as much as -0.4% against the US Dollar, testing below the 1.47 level in overnight trading. The British Pound was weaker still, slipping as much as -0.6% against the greenback.

Asia Session Highlights

Currency markets took their cues from stock exchanges in overnight trading, with the safety-linked US Dollar rising by as much as 0.3% on average against its major counterparts as stock exchanges in overnight trading. US equity index futures are trading firmly in negative territory ahead of the opening bell in Europe, suggesting risk-taking is likely to remain subdued and hinting at further gains for the greenback.

Asian exchanges declined on reports that Aiful Corp, Japan’s third-largest consumer lender, was going to suspend debt payments to its creditors citing fund-raising problems. Most worryingly, this may be a part of a larger problem: Japan’s government has capped the interest rates that consumer lenders can charge borrowers and mandated reimbursements of overcharged interest, meaning other major firms may follow Aiful’s lead.

Separately, Hong Kong Monetary Authority Deputy Chief Executive Y.K. Choi said that the city’s banks have lowered mortgage rates “to such an extent that they might not have given due regard to the reputation risk, interest rate risk and liquidity risk potentially associated with their pricing,” stoking fears that policymakers will push for higher borrowing costs and take the steam out of the rebound in asset prices.

Euro Session: What to Expect

German Producer Prices are set to show that the pace of contraction in wholesale prices slowed for the first time in 13 months in August, rising to -7.2% from a record-low -7.8% recorded in the previous month. The uptick likely reflects the recent rebound in energy prices – an index tracking energy costs from Bloomberg and UBS has rebounded over 54% since bottoming in February. While this foreshadows some moderation in deflationary pressure on consumer prices (the benchmark gauge of the price level) in the months ahead, the strength and durability of any rebound remains uncertain. Although economic growth has started to stabilize on the back of broad-based fiscal stimulus, low interest rates, and the inventory restocking cycle, unemployment rates have continued to press higher and will surely lead to anemic private demand once expansionary policy runs its course. Indeed, the International Energy Agency has forecast that global oil demand will remain firmly below its 2004-2008 average through the end of next year, working against sustainable gains in PPI growth.

The Euro Zone Current Account may post a surplus in six months in July following yesterday’s better-than-expected Trade Balance result for the same period as exports surged by 4.1%. The capital side of the equation also looks supportive: Euro area stock markets gained 9.8% while the currency advanced 0.1% on average against its major counterparts. Most interestingly, any improvement over June’s -0.3 billion euro outcome will amount to a break out of the downward trajectory that has guided the metric lower since the peak in June 2007. While it is early to be certain at the moment, this could be hinting at the formation of long-term fundamental support for a stronger Euro if it marks a sustained trend change in the regional bloc’s external position.

In the UK, the Public Sector Net Borrowing report is expected to show that the government deficit expanded by a whopping 17.6 billion pounds in August, the most since May. Public debt has swelled by a whopping 73.1 billion points so far this year and is expected to average 13% of the economy’s total output, the most among the G10 nations. To that effect, the data’s release may prove to weigh on the British Pound, stoking fears that Europe’s third-largest economy could face a cut of its sovereign credit rating.

Written by Ilya Spivak, Currency Analyst
Article Source – US Dollar Rises on Safety Demand as Stocks Retreat in Asian Trading (Euro Open)

With recent fears over inflation and fiscal deficits, the market surprisingly appears calmer than it should be. The USD has continued its decline, suggesting that either faith in the American economy is fleeting, or investors are increasing their risk appetite and dumping US Treasuries. Either way, the decline in the value of the USD has helped boost energy prices and fueled export growth worldwide. Economic recovery seems to be underway, but many caution that it will still be a long and bumpy ride.

USD – Dollars Falls on Market Optimism

The Dollar dropped to near 1-year lows against most of its major currency pairs yesterday as optimism about the global economy eroded the greenback’s safe-haven appeal. By yesterday’s close, the USD fell against the EUR, pushing the oft-traded currency pair to 1.4730. The Dollar experienced similar behavior against the GBP and closed at 1.6492.

Traders have sold the Dollar heavily this month as recovery hopes have diminished safe-haven demand. The prospect of low U.S. yields and concerns about the U.S. fiscal deficit also fueled Dollar selling. In addition, market participants increased bets on stocks and commodities, encouraged by better-than-expected U.S. consumer price index (CPI) and Industrial production data yesterday, while Federal Reserve chairman Ben Bernanke said the U.S. recession was most likely over, though he also warned the recovery would be slow.

Today’s Unemployment Claims and Building Permits releases are expected to have a strong impact on the U.S currency. Any result could be a surprise, and the Dollar could go either way as a result. In any case, traders are unsure how the market will react to today’s data. A weak report could feed risk aversion, boost Treasuries and actually aid the U.S Dollar. Then again, a better than expected result might be seen as a sign of relative U.S. economic strength, and lift the Dollar. Or it could also encourage risk-taking and aid commodities and higher-yielding currencies at the Dollar’s expense.

EUR – EUR Rises on Weaker Dollar

The EUR strengthened against most of its major currencies yesterday as gains in stocks and commodities prompted investors to wade into riskier currency trades. The 16 nation currency extended gains to hit a near one-year high against the dollar and closed at around 1.4714. The EUR experienced similar behavior against the CHF as the pair rose from 1.5150 to 1.5195 by day’s end.

The EUR was affected by the global stock market rally and the bearish Dollar. The U.S. stock market rally led investors to buy-back into the EUR, as they looked for returns on buying commodity-linked and higher-yielding currencies in Wednesday’s trading.

The Sterling extended losses against the EUR and JPY yesterday, after U.K. unemployment jumped to the highest level since 1995 as the recession destroyed work in industries from banking to construction, stoking concerns about the pace of recovery in the British economy. The GBP was also down 0.8% against the EUR at 0.8920.

Looking ahead to today, the most important economic indicator scheduled to be released from Britain is the Retail Sales report at 8:30 GMT. Analysts are forecasting this figure to decrease from its previous reading. Traders will be paying close attention to today’s announcement as a better than expected result may boost the GBP in the short-term. Traders are also advised to follow the Trade Balance figures coming out of Euro-Zone at 9:00 GMT, as this result may set the EUR’s main currency crosses going into today’s trading.

JPY – USD/JPY Hits 7-Month High

The Yen completed yesterday’s trading session with mixed results versus the other major currencies. The JPY was broadly unchanged versus the EUR yesterday and closed its trading session around the 133.70 level. The Japanese yen also saw bullishness against the Dollar, closing in on a 7-month high against the U.S. currency after Japan’s incoming finance minister said a strong yen had advantages for the nation’s economy.

The Japanese market should have a heavy effect on the JPY versus its major currency counterparts, as the Overnight Call Rate will be announced today. The rate is expected to remain unchanged, but traders should pay close attention to the BoJ Press Conference that will follow to look for expectations of Japan’s economic future. A bullish statement from the BoJ could lead some traders to believe that it is forecasting a rosier financial climate in Japan.

Crude Oil – Crude Oil spikes on Better Inventory Data

Crude Oil prices experienced another day of appreciation as the oft-traded commodity rose above $72.80 during yesterday’s trading session. Oil prices traded up for the second straight day. This has been compounded by a weaker Dollar that has also caused investors to flee to commodities such as Crude Oil.

Moreover, with crude oil inventories in the US shrinking more than anticipated, there is a chance that prices will continue to rise as demand climbs from market optimism and economic growth. These factors point to the notion that Crude Oil’s price may stumble across more support in the near future and continue to rise.

Article Source – USD Continues Decline; Slow Economic Recovery Expected

The Swiss Franc may see volatility ahead as the Swiss National Bank gets set to make their quarterly monetary policy announcement, including an update on their policy of intervention into the currency market to prevent the appreciation of the currency. UK Retail Sales and the Euro Zone Trade Balance are also on tap.

Key Overnight Developments

• Japanese Service Demand Rises to Highest Since February
• NZ Manufacturing Shrinks at Faster Pace as Orders Plummet
• Bank of Japan Holds Rates at 0.10%, Raises Economic Forecast

Critical Levels

The Euro advanced in the overnight session, testing as high as 1.4734 to the US Dollar. The British Pound initially moved downward, touching as low as 1.6468, but recovered late into the session to trade little changed ahead of the opening bell in Europe.

Asia Session Highlights

Japan’s Tertiary Industry Index grew slightly more than economists expected, adding 0.6% in July to show that demand for services has rebounded to the highest level since February. The result likely owes to continued support from the government’s record-setting 25 trillion yen stimulus package. Indeed, government spending accounted for the bulk of economic growth in the second quarter. The question now facing Japan as well as most other developed countries is what happens when the flow of public funds invariably dries up. On balance, unemployment continues to push higher, trimming incomes and hinting at turn lower in spending (including that on services) in the months ahead.

New Zealand’s Business NZ Performance of Manufacturing Index fell to 48.7 in August from 49.6 in the previous month, showing the pace of contraction in the industrial sector quickened for the first time since May. The sub-index measuring New Orders led the metric lower, dropping by -5.1 points to register the largest decline in 9 months, while output shrank the most since February. The report follows news that manufacturing sales dropped the most on record in the second quarter, adding yet more weight to last week’s comments from Reserve Bank of New Zealand Governor Alan Bollard, who said the stronger New Zealand Dollar puts business profits “under pressure” and warned that “If the exchange rate were to continue its recent appreciation…the sustainability of the present recovery will be brought into question.”

The Bank of Japan unanimously agreed to keep interest rates unchanged at 0.10%, as expected, but policymakers raised their forecasts for economic growth as economic conditions begin to “show signs of recovery”, calling for growth to begin to rebound in the second half of the 2009 fiscal year (the 12 months ending April 2010). The bank still sees downside risks to the economy, however, saying fiancial conditions continue to be “severe” while consumption remains weak and capital spending is still falling. Policymakers made no changes to their asset-buying and lending programs. On balance, BOJ Governor Maasaki Shirakawa concluded that “risks to the economy are still on the downside [with the outlook] attended by a significant level of uncertainty.”

Euro Session: What to Expect

The Swiss Franc may see volatility late into the European session as the Swiss National Bank makes their quarterly monetary policy announcement, including an update on their policy of intervention into the currency market to prevent the appreciation of the currency. As with most major central banks, there is little doubt that the SNB will leave benchmark interest rates unchanged. Rather, traders will focus on any updates to policymakers’ commitment to keep a lid on the value of the Swiss Franc with direct intervention into the currency markets. Consumer prices printed a bit better in August, rebounding from the low set in July, and a similar moderation in Producer Prices earlier this week foreshadows slightly better results for the headline inflation gauge in the months ahead. Still, it is surely much too early to say that the specter of deflation has dissipated, so the SNB is unlikely to do a complete about-face on exchange rate policy. To that effect, the markets will look for a more nuanced hint at the bank’s bias going forward, such as an upward revision of inflation expectations. The 1.50 level in EURCHF seems to have been the threshold of the SNB’s comfort zone, and traders would be wise to watch the behavior of the cross vis-à-vis this juncture ahead of the policy announcement.

UK Retail Sales are expected to rise 2.7% in the year to August, snapping two months of consecutive gains in the annual growth rate. The metric has seen atypical volatility over recent months as rising unemployment grappled with rebounding asset prices and government stimulus for dominance over consumer sentiment. Looking ahead, we see the downside scenario as more plausible. Fiscal support is inherently limited with the UK budget deficit already set to average close to 13% of GDP though 2010, threatening the country’s sovereign credit rating. Meanwhile, global equities are looking increasingly overdone having finished August at the highest level relative to earnings since May 2003. The upward trend in unemployment looks far more permanent, however, with a survey of economists polled by Bloomberg expecting the jobless rate to top 9% by the end of next year. This will trim incomes and discourage spending, weighing on retail activity in the months ahead.

The Euro Zone Trade Balance surplus is set to expand to 6.4 billion euro in July, the most in over two years. Exports figures may prove disappointing, however: industrial production fell more than economists expected in the same period while the currency has been pushing higher in trade-weighted terms since late April, now up over 5.6%, making European-made goods comparatively more expensive and thereby less attractive to foreign buyers. A drop in imports seems like a much more plausible driver for an improvement in the headline figure, especially considering the sharp decline in Swiss industrial output reported earlier this week. As we have previously noted, manufactured goods top the list of Swiss export commodities, so the drop in production is indicative of lackluster demand in key overseas markets, where the top three Euro Zone economies alone account for close to 50% of demand.

Written by Ilya Spivak, Currency Analyst
Swiss Franc in Focus as SNB Announces Rates, Currency Policy (Euro Open)

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The U.S Dollar struck a one-year low against a basket of currencies on Wednesday, as investors reduced dollar holdings on views that the U.S. currency may weaken for now due to pessimism over the U.S. economy. Investors have been selling the greenback across the board as they speculate the Federal Reserve will be forced to keep its Interest Rates low for the time being to support the country’s fragile economy. Looking ahead, currency players will watch for the U.S. consumer price index (CPI) for August to be released later in the day. The CPI data has the biggest potential to move forex markets, since a weak figure could lead to lower long-term U.S. interest rates, and that might prompt more Dollar selling.

USD – Dollar Reaches Lowest from Improving Risk Appetite

The U.S Dollar declined Tuesday, pushing the currency to the lowest level in a year and reversing earlier gains versus major counterparts after a pair of economic reports said U.S Retail Sales and Producer Prices rose more than economists expected, encouraging speculation that the economy is reviving.

As the global recovery continues, and risk diversification takes place, traders could see the U.S. Dollar remain under pressure for the upcoming months. Against the Japanese yen the Dollar also gave up earlier gains to trade at 91.07 yen, little changed from 91.02 yen late Monday.

The greenback was also undermined by gains in global stock markets, which reduced the USD appeal as a safe haven. For months, the greenback has tended to move in the opposite direction as equities as investors’ willingness to buy riskier assets fluctuates. That trend has shown signs of diminishing in the past month or so, and resuming its more traditional correlation to economic data.

Traders have sold the U.S. currency heavily so far this month as optimism about a global economic recovery diminished safe-haven demand. The prospect of low U.S. yields and concerns about the widening U.S. fiscal deficit fueled Dollar selling.

Today in focus will be a slew of U.S. data to be released later in the day. The U.S. consumer price index (CPI) for August, 2nd quarter current account data, August industrial production numbers and September NAHB housing data are all due.

EUR – Pound Drops versus USD and EUR

The EUR dropped early Tuesday versus the Dollar after the ZEW German Economic Sentiment index showed weaker than expected results; however, the common currency later trimmed its losses, trading at $1.4671, from $1.4614 versus the Dollar on Monday.

The British Pound was the big mover on currency markets, dropping versus the greenback and falling to a 3-month low versus the European single currency after Bank of England (BOE)Governor Mervyn King said the Monetary Policy Committee was considering a cut in the deposit rate paid on some reserves held by commercial banks at the BOE. The GBP fell 0.5% versus the USD to $1.6498. The EUR advanced to its highest level against the GBP since June, trading at 88.94 pence

While a slow news day is expected from the Euro-Zone today, the release of the British Unemployment data at 8:30 GMT might help the Pound to regain some of its losses. The release of the Euro-Zone CPI report might weigh down on the common currency if the number is worse than expected, sparking fears of deflation.

JPY – JPY Down after Release of Encouraging US Data

Japan’s currency traded at 133.45 per EUR early morning, from 133.47 yesterday in New York. It traded at 91.02 per USD from 91.05. The Yen is being sold as investors move away from risk averse trading and into higher yielding assets following encouraging economic data from the US which signaled the recession is coming to an end.

The release of the Industrial Production report today at 13:15 GMT is predicted to show an increase of 0.6%, the most since October. This will likely contribute to further sell off of the Yen versus its riskier counterparts.

Crude Oil – Crude Prices Near $71 a Barrel

Crude Oil fell nearly 1% toward $71 on Wednesday, giving up some of the previous day’s gains of 3%, as a higher-than-expected rise in oil product stocks outweighed news signaling a U.S. economic recovery.

Though Crude Oil has more than doubled from this year’s low of $32.70 hit on January 20, it is trading 72$ below the record high of more than $147 struck in July 2008. Economists expect Crude prices to hover between $60 and $70, as demand has still not recovered to the extent that would help to sustain prices above $70.

The American Petroleum Institute said in its weekly inventory report after Tuesday’s close that crude stocks rose by 631,000 barrels last week, against the forecast for a 2.4-million-barrel drawdown. The oil market is currently focusing more on EIA data than equities or the Dollar, analysts have said.

While today’s release of US inventory data due at 14:30 GMT is expected to show a drop in stockpiles, a modest drop might not be enough to push Oil on another rally as inventories are still at their highest level.

Article Source – USD Hits 1-Year Low on U.S Economic Pessimism