The US Dollar tumbled as Asian stock exchanges surged 2.4% to on news that US lender CIT will avoid bankruptcy while commodities advanced, boosting financial and resources-linked issues and trimming demand for the safe-haven currency. German Producer Prices are on tap in European hours, with expectations calling for the biggest decline in 22 years.
[U][B]Key Overnight Developments[/B][/U]
[B]• UK House Prices See Smallest Decline in a Year, Says Rightmove
• Australian Producer Prices Fall More Than Expected on Stronger Currency
• US Dollar Falls on Stock Gains as CIT Avoids Bankruptcy, Commodities Rise[/B]
The [B]Euro[/B] pushed sharply higher in overnight trading, adding 0.6% against the US Dollar. The [B]British Pound[/B] mirrored its continental counterpart, testing above the 1.64 level. The greenback tumbled as Asian stock exchanges surged 2.4% to on news that US lender CIT will avoid bankruptcy while commodities advanced, boosting financial and resources-linked issues and trimming demand for the safe-haven currency.
[U][B]Asia Session Highlights[/B][/U]
[B]UK House Prices[/B] grew 0.6% in July after falling -0.4% in the previous month according to Rightmove, an online listing of for-sale properties. In annualized terms, prices fell -3.1%, the smallest decline in a year. Rightmove commercial director Miles Shipside said buyers interest was rising on “growing confidence that we’ve passed the bottom”, adding that the number of people looking at property listings on Rightmove’s website is “much higher than we would expect” for this time of year. Still, Shipside warned that a robust recovery is far from imminent: “With only seven [major] lenders remaining in the lending game, including three government-backed institutions that are prioritizing their balance sheets over new lending, we are set to bump along the bottom for some time yet.” That said, loans for house purchases have steadily moved higher having hit a record low in November 2008, printing at the highest level in a year in May. On balance, rising unemployment may prove to be the largest barrier to a sustained rebound in real estate prices: the jobless rate is expected to top approach a whopping 9% by the end of this year, trimming incomes and hindering Briton’s ability to pay their mortgages. This is likely to boost repossessions, flooding the market with fresh supply and sending property values downward.
In Australia, the [B]Producer Prices[/B][B] Index[/B] fell more than economists expected, shedding -0.8% in the second quarter to bring the annual pace of wholesale inflation to 2.1%, the lowest in 5 years. A stronger Australian Dollar was the likely catalyst behind the result: the Aussie added a whopping 10.4% in the three months through June, making imports cheaper in terms of the domestic currency. Slower PPI growth foreshadows downward pressure on consumer inflation in the months ahead as cheaper wholesale costs are passed on via a lower final price tag. This bolsters the case for additional rate cuts from the Reserve Bank of Australia. Indeed, RBA Governor Glenn Stevens said as much even as the bank kept rates unchanged in July, noting that “the outlook for inflation allows some scope for further easing of monetary policy.”
[U][B]Euro Session: What to Expect[/B][/U]
German [B]Producer Prices[/B] are set to fall at an annual pace of -4.1% in June, the most in over 22 years. The reading implies continued downward pressure on consumer prices in the months ahead, threatening to push CPI into negative territory for the first time since 1986 as lower wholesale costs filter into the final price tag. The onset of deflation in Euro Zone’s largest economy is all but certain to take the currency bloc as a whole along the same trajectory, threatening to commit the region to long-term stagnation as consumers and businesses are encouraged to wait for the best possible bargain and perpetually delay spending and investment.
The[B] European Central Bank[/B] has seemingly struggled to formulate an effective policy response thus far. Jean-Claude Trichet and company have focused on banks as the vehicle through which to make money cheaper and put a floor under falling prices, promising unlimited lending to the region’s financial institutions including an unprecedented 442 billion euro in 12-month bank loans as a means of de-facto monetary easing. The bank will also implement a 60 billion bond-buying scheme. To the ECB’s credit, borrowing costs have indeed moved lower: although the bank publicly maintains target interest rates at 1%, it has allowed the average cost of overnight lending (referred to as EONIA) to drift far below that. Indeed, borrowing in Euro has been consistently cheaper than doing so in British Pounds since late June, even though the Bank of England’s stated interest rates are substantially lower at 0.5%. However, the lower cost of credit between banks has not translated into lending, and so has offered little stimulus to the overall economy. Indeed, loans to Euro Zone businesses and households grew just 1.8% in May, the lowest since records began in 1991. Banks may be choosing to hang on to cash as a buffer against $1.1 trillion in as yet unrealized losses linked to the subprime mess, according to the IMF, as well as the fallout from looming defaults and/or devaluations among the EU’s newly-minted central European members. In any case, deflation is all but certain to take firm hold of the currency bloc if the ECB does not ensure that looser monetary conditions translate beyond the interbank market.
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