The Euro corrected higher against the US Dollar in Asian trade but selling pressure may return as Germany’s ZEW Survey of investor confidence declines for the fifth month after a disappointing fourth quarter GDP result and fears of Greek contagion.
Key Overnight Developments[B]
• Australian Business Confidence Gains Mask Sluggish Sales, Orders
• RBA Held Rates to Gauge Impact of Past Hikes, Overseas Developments
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Critical Levels
The Euro and the British Pound advanced, adding 0.4% and 0.3% respectively against the US Dollar as stock exchanges ticked higher in Asian trade, sapping demand for the safety-linked greenback. We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.
Asia Session Highlights
Australian Business Confidence advanced the most in five months according to a report from the National Australia Bank. The details of the report look far less encouraging than the headline figure, however, as most industries saw confidence trending lower. The mining industry was an exception, where confidence rose as the effects of last year’s $2 trillion in global fiscal stimulus continued to underpin demand. Most disturbingly, a gauge of Business Conditions dropped to the lowest level since September 2009 as sales fell the most in over a decade while profitability and forward orders suffered the largest monthly declines in15 months. On balance, the outcome paints a sobering picture, adding to increasing concerns about the resilience of the Australian economy particularly as China (the largest export market for Australian mining firms) clamps down on lending to slow growth and prevent the buoyant economy from overheating.
Meanwhile, minutes from February’s Reserve Bank of Australia policy meeting revealed that the surprise decision to keep interest rates on hold was “finely balanced”, with rates likely to rise further if the economy continues to improve as expected. The decision to pause this time around was taken as borrowing conditions were no longer “exceptionally accommodative” (though still somewhat below average), giving the central bank some room to wait and see “some more information on how the economy was responding to the monetary tightening that had already occurred [as well as] allow time to monitor events overseas,” a reference likely pointed at the sovereign debt concerns developing in southern Europe. Separately, RBA Assistant Governor Guy Debelle said that despite a significant improvement in global financial market conditions, considerable risks still remain in Europe and the U.S., hinting the central bank may remain on the sidelines again in March.
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Euro Session: What to Expect[/B][/U]
UK Consumer Price Index figures are expected to show that the annual inflation rate jumped to 3.5% in January, the highest in 14 months and well above the central bank’s upper target limit of 3%. However, as we note in our weekly British Pound forecast, the outcome is unlikely to prove market-moving, with its implications for monetary policy seemingly limited after the Bank of England struck a dovish tone in latest quarterly inflation report released last week. The central bank predicted that “inflation is likely to fall back to below the target” over the medium term despite a likely uptick above 3% in the first quarter as higher oil prices and sterling depreciation feed through.
Germany’s ZEW Survey of investor sentiment is set to show that confidence declined for the fifth consecutive month in February after preliminary figures showed that economic growth unexpectedly stalled in the fourth quarter as well as amid growing concerns that the fiscal crisis unfolding in southern Europe will spread across the Euro Zone.
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