British Pound Vulnerable as UK Cash Shortage Rises, Threatening Credit Rating (Euro O

The British Pound may see selling pressure in European hours as the UK Public Finances report shows the government’s monthly cash shortfall rose again in June, boosting fears that mounting fiscal debt may lead to a reduction in the UK’s sovereign credit rating. Switzerland’s Trade Balance figures are also on tap.

[U][B]Key Overnight Developments[/B][/U]

[B]• Bank of Japan Says Global Economic Growth Faces Downside Risks
• Australia to Recover from Recession Later This Year, Says RBA
• Euro, British Pound Pare Gains Against US Dollar in Asian Trading[/B]

[U][B]Critical Levels[/B][/U]

The [B]Euro[/B] saw a bit of selling pressure in overnight trading, testing as low as 1.4190 to the US Dollar. The [B]British Pound[/B] also retreated, slipping -0.3% against the greenback.

[U][B]Asia Session Highlights[/B][/U]

Minutes from June’s [B]Bank of Japan[/B] policy meeting said conditions in the global economy have “begun to stop worsening” and credit markets are “starting to regain stability”. Turning to Japan itself, the bank echoed familiar sentiments, saying that exports will continue to recover “mainly due to progress in adjustments in overseas inventories” while private consumption remains relatively weak “as the employment and income situation [is] likely to become increasingly severe”. On inflation, the BOJ said that the pace of consumer price growth is likely to turn negative, reflecting the declines in the prices of petroleum products, stabilization of food prices, and overall economic weakness. On balance, policymakers concluded that uncertainty surrounding the outlook for the global economy [remained] high” and warned that “risks to the outlook were still tilted to the downside” despite some early signs of improvement.

Meanwhile, the [B]Reserve Bank of Australia[/B] released minutes from their July policy meeting. Policymakers struck a positive tone, saying the Australian economy has proved “more resilient than expected” as fiscal and monetary measures have been effective in stoking demand. The bank added that the full effect of lower interest rates is yet to be felt, with downside risks diminishing and the economy to recover later this year. Still, Glenn Stevens and company cautioned that the Australian labor market is likely to “remain soft for some time” and reiterated that they have “scope” to cut interest rates even though current policy is “consistent with fostering growth”. Perhaps most interestingly, the RBA said that exports have been “remarkably strong” on demand from China, a far different story than what is being seen in the latest Trade Balance figures.

Separately, [B]New Motor Vehicle Sales[/B] rose for the third consecutive month in June, adding 5.7% following a 5.4% increase in the previous month. In annual terms, sales fell -7.2%, the smallest decline in nearly a year. The improvements are likely linked to the government’s aggressive stimulus efforts, including over A$12 billion in cash handouts to households. The big question going forward is if current momentum can be maintained as the flow of stimulus cash dries up. The RBA’s optimistic posture notwithstanding, the labor market continues to suffer, erecting barriers to a meaningful rebound in demand.

[B]Related Articles:[/B] Bernanke Discusses Fed Exit Strategy in the WSJ

[U][B]Euro Session: What to Expect[/B][/U]

Switzerland’s [B]Trade Balance[/B] surplus may continue to contract in June as the country’s top trading partners in the US and the European Union continue to struggle with recession, weighing on export sales. That said, the possibility of a move higher in the headline figure does exist: the UBS Consumption Indicator that forecasts the trend in private spending in the coming 3-4 months fell to the lowest level in over 5 years in May, hinting at lackluster domestic demand that could weigh on sales of foreign-made goods and trim import volumes. Recent trends in the Swiss Franc are supportive of such an outcome: the currency has declined 2.4% in trade-weighted terms since the beginning of the year, a trend that makes Swiss goods comparatively cheaper for overseas buyers while cutting into domestic consumer’s purchasing power of imported products.

Turning to the UK, June’s [B]Public Finances[/B] report is set to show that the government’s monthly cash shortfall rose to 20.2 billion pounds from 18.8 billion in the previous month. The gap swelled for the first time in three years in 2008, rising 22.7%. Continued shortages will add to fears that mounting public debt may lead to a reduction in the UK’s sovereign credit rating. Indeed, a survey of economists conducted by Bloomberg expects the overall budget deficit to average 12.4% of GDP through 2010, amounting to the worst fiscal position of any G10 nation.

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