[B]Talking Points
• Yen: Japanese Manufacturing PMI, labor markets unexpectedly improve
• Pound: UK house prices tumble for second consecutive month
• Euro: Up over 300 points this week on test of 1.47
• Swiss Franc: Regaining safe-haven status
• US Dollar: Falling precipitously, Friday’s data unlikely to help[/B]
Risk aversion remained high on Friday morning – a day after the assassination of former Pakistani PM Benazir Bhutto – as the greenback continues to crumble while the Euro and Swiss franc surged as traders sought the safe-haven of the day. Meanwhile, Asian and European equities tumbled following Wall Street’s losses yesterday, taking carry trades like GBPJPY and USDJPY out with them. US data has been broadly mixed as of late, with consumer confidence and spending reports surprisingly proving to be more optimistic, while production and housing figures have been broadly disappointing. Nevertheless, with risks for the US economy vastly to the downside and the Federal Reserve still perceived as being dovish, it is little wonder the greenback is so susceptible to losses, especially at times of geopolitical distress.
Taking a look at this morning’s economic releases, according to Nationwide Building Society, UK house prices fell 0.5 percent in December, marking the second consecutive month of declines and dragging the annual rate to a one-and-a-half year low of 4.8 percent. Indeed, property prices have started to pull back as demand wanes in the face of affordability issues and stricter lending standards. Moreover, mortgage rates have remained high despite the Bank of England’s December 25bp rate cut, and with these factors unlikely to subside substantially in the near-term, house price growth in the UK should continue to slow and take a toll on GDP. These obvious cracks in the UK economic picture help to explain the British pound’s weakness against the Euro, as the EURGBP has surged to record highs above 0.7350. With the Bank of England unlikely to shift from their neutral-dovish monetary policy bias anytime soon, the EURGBP pair may not start to recede until European Central Bank President Jean-Claude Trichet backs off from his staunchly hawkish stance.
Meanwhile, the Swiss franc has undoubtedly benefited from the risk aversion pervading the market, as USDCHF plunged over 100 points on Friday morning to break below 1.13. At first glance, Swiss data released this morning appears to be unsupportive of the Swissie’s gains, as the November UBS Consumption Indicator eased to 2.131 while the KOF Leading Indicator slipped to a seven month low of 1.99 in December. Though these indices did fall lower - indicating a slowing in consumption and economic growth in coming months – the figures are relatively high and tight labor market conditions along with strong demand for Swiss goods should keep the economy’s engine running at a fairly robust pace.
Looking ahead to today’s US session, Chicago PMI and New Home Sales are both anticipated to fall lower, reflecting souring business conditions and a deteriorating housing market. As a result, traders will likely ramp up speculation of a January rate cut by the FOMC – as fed fund futures already price in a 76 percent chance of a 25bp cut – which could weigh on the greenback and Dow even more.
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