Japanese Yen Surges as Stocks Tumble on Global Economic Growth Concerns (Euro Open)

The Japanese Yen added a full percentage point in overnight trading, boosted by safety demand as Asian stock exchanges followed Wall St sharply lower on continued fallout from the World Bank’s discouraging global economic growth forecast. Switzerland’s Trade Balance and Euro Zone PMI are on tap in European hours.

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

[B]• Japanese Yen Gains as Stocks Tumble Across Asian Exchanges
• US Dollar Looks Past Risky Assets, Consolidates in Overnight Trading[/B]

[U]Critical Levels[/U]

The [B]Euro[/B] kept to familiar levels in overnight trading, oscillating above the US session low at 1.3826. The [B]British Pound[/B] slipped lower, trading down -0.2% ahead of the European markets’ open.
Related Articles[/B]: US Dollar Strength to Gain Momentum Against Forex Majors

Asia Session Highlights[/B][/U]

The [B]Japanese Yen[/B] added a full percentage point in overnight trading against a trade-weighted basket of top currencies, boosted by safety demand as Asian stock exchanges followed Wall St sharply lower. The MSCI Asia Pacific Index traded down -2.8% ahead of the opening bell in Europe on continued fallout from yesterday’s discouraging World Bank global economic growth forecast. The [B]US Dollar[/B], also a currency that has been inversely linked to risky assets in recent months, failed to capitalize this time around and consolidated in a narrow range after adding 0.7% higher on the week by the end of New York trading. Still, the Dollar Index remains -92.3% inversely correlated to the MSCI World Stock Index suggesting the greenback stands to gain if risky continue to falter.

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

Switzerland’s [B]Trade Balance[/B] surplus may widen in May after swelling to 2.55 billion francs in the previous month as prices for imported goods fell at the fastest pace in over 18 years and the currency appreciated. The import price index fell at an annual pace of -8.9% in May, deflating inbound shipment volume readings. Meanwhile, the Swiss Franc added 0.9% against a trade-weighted basket of top currencies in the same period, making the mountain nation’s goods comparatively more expensive for foreign buyers and pushing export volume readings higher. Overall, a survey of economists conducted by Bloomberg suggests the external balance will add just 5.75% to GDP this year, the smallest contribution in at least 12 years, as deep recessions grip the mountain nation’s main export markets and weigh on cross-border sales.

The advanced estimate of the Euro Zone’s Composite [B]Purchasing Manager Index[/B] is expected to show the metric rose to 44.9 in June from 44.0 in May, the fourth consecutive month that the reading has moved higher. Still, PMI remains below the 50 “boom-bust” level, suggesting the manufacturing and service sectors continue to deteriorate, albeit at a slower pace. As we noted yesterday, some recovery in sentiment is to be expected as governments’ fiscal efforts filter into the broad economy; the big question at this stage is whether growth is sustainable after stimulus cash dries up. On a comparative basis, Euro Zone GDP growth is expected to trail that of the US by an average of 1.5% over the next two years. This suggests the US will lead its European counterparts in unwinding expansionary policies and, most importantly, lead in reversing higher the trajectory of benchmark interest rates. Indeed, overnight index swaps reveal traders are pricing in the likelihood that the Fed will raise interest rates by 1.00 – 1.25% over the next 12 months as compared to 0.25 – 0.50% expected from the ECB, arguing for a yield shift in favor of the US Dollar that will put downward pressure on EURUSD.

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