The US Dollar slumped as G7 finance ministers stayed silent on recent weakness in the greenback at a summit in Istanbul despite hints that this would be a talking point, but Japan’s Fujii threatened to intervene into the currency markets if currencies show “excessive moves”.
[U][B]Key Overnight Developments[/B][/U]
[B]• New Zealand Commodity Export Prices Rise Most in Over 22 Years
• US Dollar Sold as G7 Finance Ministers Stays Silent On Recent Losses
• Japan’s FinMin Fujii Threatens Act on Currency on “Excessive Moves”[/B]
[U][B]Critical Levels[/B][/U]
The [B]Euro[/B] pushed higher to start the trading week, adding as much as 0.5% against the [B]US Dollar[/B], while the [B]British Pound[/B] briefly tested above the 1.60 level as the absence of explicit currency-related language in the final statement following the weekend’s meeting of G7 finance ministers in Istanbul disappointed traders looking for follow-through after hints that the Dollar’s weakness will be a talking point. We remain short GBPUSD at 1.6617 and EURUSD at 1.4710.
[U][B]
Asia Session Highlights[/B][/U]
The[B] ANZ Commodity Price Index[/B] gained 6.8% in September, showing prices for New Zealand’s top export goods grew the most in over 22 years in US Dollar terms. In terms of the local currency, however, prices gained just 2.4% as gains in the New Zealand Dollar offset a large portion of exporters’ income from overseas sales. Further, the rebound in the USD-based index over the past seven months has tracked global equity prices (as measured by the MSCI World Stock Index) with near-perfect precision, suggesting it is being driven by swelling risk appetite in capital markets rather than a genuine rebound in demand. This makes recent gains inherently fragile considering traders’ conviction has been noticeably lacking in recent weeks as headline economic data began to falter, a trend capped by September’s disappointing US jobs report. Looking further ahead, the [B]New Zealand Treasury[/B] speculated in a report released today that any near-term improvement in the current account deficit will come on the back of falling imports, not robust overseas sales, saying the shortfall may narrow to little as 5% at some point next year but warning that “a larger more sustained fall is unlikely [as] the higher exchange rate [reduces] the competitiveness of exports.”
[B]Japan’s Finance Minister Hirohisa Fujii [/B]said that his country will “take action” if currencies show “excessive moves,” issuing what amounts to a clear threat to intervene in FX markets if the Japanese Yen becomes too strong. This marks a major reversal for Fujii, who just last month said that he believed it was not the government’s job to set exchange rates. Last week, Fujii hinted at the change in rhetoric saying he was open to take steps “in the national interest” if currency moves are “abnormal”.
[U][B]Euro Session: What to Expect[/B][/U]
[B]Euro Zone Retail Sales[/B] are expected to shrink for the second consecutive month in August, slipping -0.5% to bring the annual pace of contraction to -2.4%, the fastest since May. German retail sales proved disappointing last week despite apparent improvement in the employment situation as the jobless rate unexpectedly fell to 8.2%, supporting our skepticism about Germany’s spending climate ahead of the release and hinting the broader currency bloc may follow the path of its largest economy. Indeed, unemployment rose to a decade-high 9.6% in August and is expected to continue higher to hit 11% by the fourth quarter of 2010, amounting to tremendous headwinds for retail activity especially as some government support schemes (such as subsidizing employers to keep workers on shortened schedules rather than fire them outright) begin to expire in the very near term.
Separately, the[B] Euro Zone Sentix Investor Confidence[/B] indicator is expected to print at -11.8 in September, showing pessimists outnumber optimists by the narrowest margin since in 14 months. The metric hit a record low in March and has tracked European equities higher ever since, now showing a hefty 93.1% correlation with a Morgan Stanley index reflecting the average performance of EZ-based stock exchanges. Interestingly, it appears that the formation of major tops and bottoms in equities have preceded similar developments in the Sentix by about one month, meaning price action had shaped investors’ outlook as presented in the survey rather than the other way around. To that effect, it would appear that the reading offers little insight into the future direction of risk appetite and so is unlikely to make a lasting impression on currency markets.
[B]
For streaming currency market news and analysis, please visit[/B] http://forexstream.dailyfx.com
[I]To reach Ilya regarding this article or to subscribe to his email distribution list, please contact <[email protected]>[/I]