Euro, British Pound May Decline Against US Dollar as Equity Futures Point Lower (Euro Open)

The Euro and the British Pound may see selling pressure with US stock index futures are trading down nearly 1% ahead of the opening bell in Europe, pointing to sagging risk appetite that stands to boost the safety-linked US Dollar. Germany’s ZEW survey of investor confidence, Swiss Industrial Production, and UK CPI highlight the economic calendar.

Key Overnight Developments

• New Zealand Manufacturing Falls Most on Record in Second Quarter
• UK House Prices See First Gains in Two Years on Low Supply, Says RICS
• Australian Dollar Falls as RBA Minutes Weigh on Rate Hike Expectations

Critical Levels

The Euro traded lower in Asian trading, slipping as much as -0.3% against the US Dollar. Meanwhile, the British Pound advanced, adding 0.4% to test as high as 1.6629 against the greenback.

Asia Session Highlights

New Zealand’s second quarter Manufacturing Activity report showed that sales fell -4.8%, the most on record, while the outcome for the first three months of the year was revised down to reflect a -1.3% drop from the -0.9% result that was originally reported. The reading reinforces last week’s comments from Reserve Bank of New Zealand Governor Alan Bollard, who said the stronger currency puts business profits “under pressure” and warned that “If the exchange rate were to continue its recent appreciation…the sustainability of the present recovery will be brought into question.” The New Zealand Dollar has appreciated 27.3% in trade-weighted terms to date since hitting a record low in January as a broad rebound in risk appetite drove demand for the high-yield currency.

UK House Prices grew for the first time in over two years, adding 10.7% in August according to a survey from the Royal Institution of Chartered Surveyors (RICS), an industry association for real estate agents. Economists were forecasting a flat result ahead of the release. The rebound may not reflect a rebound in demand however: RICS chief economist Simon Robinsohn said “Its fair to say that a lack of supply is driving the rise in house prices,” adding that it would be “foolish to believe prices are going to go up in a straight line” from here and predicting that “2010 will be a more difficult year.” Indeed, the number of for-sale properties per real estate agent fell by about 23% from a year earlier. Rising unemployment looks to be the central challenge to a sustainable recovery in housing, trimming incomes and weighing on purchasing power. The jobless printed at 4.9% in July, the highest in nearly 12 years, and is expected to top 9% next year.

Minutes from the September policy meeting of the Reserve Bank of Australia weighed on the Aussie dollar as Glenn Stevens and company said they were seeking to avoid “premature tightening”, upsetting expectations that the central bank was ready to hike interest rates in the near future. An index measuring traders’ priced-in expectations of RBA rate hikes over the next 12 months dropped by a hefty 8% (13 basis points) after the announcement.

Euro Session: What to Expect

Switzerland’s Industrial Production is set to shrink at an annual pace of -11.1% in the second quarter, the most in at least 18 years. This is quite telling: manufactured goods top the list of Swiss export commodities, so the drop in industrial output is indicative not only of a sagging domestic economy but of lackluster demand in key overseas markets. The top three Euro Zone economies alone account for close to 50% of Swiss export demand; considering EURCHF has been trading sideways in a fairly narrow range since the SNB took hold of the exchange rate in mid-March and therefore is unlikely to have significantly impacted European preferences for Swiss-made products, it would seem that the forthcoming Industrial Production figures stand in contrast of the surface-level improvements in second-quarter GDP readings out of the Euro area.

In the UK, the Consumer Price Index is expected to show the annual pace of inflation slowed to 1.4% in the year to August, the lowest in five years. The Bank of England has said that CPI will fall below 1% at some point in the third quarter in its latest quarterly inflation report. From there, Mervyn King and company expect inflation to be “unusually volatile”: upward pressure is seen as past changes in energy prices drop out of year-on-year comparisons and from firms’ continued adjustments to a weaker British Pound (as compared to the peak in late 2007); meanwhile, downward pressure is seen as rising unemployment depresses wages. The central bank concluded that “inflation is more likely to be below [the 2% target level] in the medium term [than above it]”. On balance, such open-ended accounting of what to expect in the coming months suggests that, barring a wild deviation from the forecast, the CPI result is unlikely to prove considerably market-moving having probably been priced into the exchange rate at this point. Indeed, with interest rates already at 0.5% and a 175 billion pound asset-buying scheme firmly in place, lending growth figures (showing the degree to which aggressive easing is filtering into the broad economy) are far more important to gauge future monetary policy than inflation data.

The forward-looking Expectations component of Germany’s ZEW Survey of investor sentiment is forecast to rise to 60.0 in September, the highest in over three years. The broader Euro Zone equivalent is set to follow suit. Still, a survey of economists polled by Bloomberg reveals that most market-watchers expect the Euro Zone to underperform the spectrum of industrial economies next year, so any optimism born of growing confidence that an “Armageddon scenario” has likely been averted seems temporary at best, with European sentiment figures likely to head lower as analysts focus on questions of who will recover first.

On balance, risk sentiment may prove to be the key driver for currency markets in the coming session: US stock index futures are trading down nearly 1% ahead of the opening bell in Europe, pointing to sagging risk appetite that stands to boost the safety-linked US Dollar against the likes of the Euro and the British Pound.

Written by Ilya Spivak, Currency Analyst
Article Source – Euro, British Pound May Decline Against US Dollar as Equity Futures Point Lower (Euro Open)