US Dollar May Gain as Currency Markets Follow Risk Trends in European Hours (Euro Open)

The US Dollar may rise as stocks retreat and US equity index futures point to a lower open on Wall St with currency markets focused on trends in risk sentiment to drive price action, looking past a virtually empty economic calendar.

Key Overnight Developments

• NZ Service Sector Expands For Second Month on Inventories; Sales Decline
• UK House Prices Fell Least in a Year in September, Says Rightmove
• Euro, British Pound Sold Against US Dollar as Most Stocks Fall in Asia

Critical Levels

The Euro trended lower to start the trading week, testing as low as 1.4678 to the US Dollar in overnight trading. The British Pound followed suit, dropping as much as -0.4% against the greenback. We continue to hold a short GBPUSD position, initially targeting 1.6112.

Asia Session Highlights

New Zealand’s Performance of Services Index rose to 51.3 in August, showing the sector expanded for the second consecutive month. The details of the report are not nearly as encouraging as the headline figure would suggest, however. Inventory growth led the metric higher, adding 5.9% from the previous month, while Sales fell -1.2% to register the first decline in four months. On balance, this looks to be a reflection of the same dynamic we have seen throughout the apparent economic recovery of recent months: companies are restocking, all the while cutting costs and shedding jobs, which boosts relative output readings but says very little about the sustainability of the rebound once government stimulus is withdrawn and private demand (increasingly ravaged by unemployment as it is) has to step in and pick up the slack. Separately, Credit Card Spending fell -1.9% in the year to August, in line with the average noted over the past four months.

UK House Prices fell -1.5% in the year to September, registering the smallest decline in over a year according to Righmove Plc, an online listing of for-sale properties. Righmove commercial director Miles Shipside said, “Confidence is up, stock is down and the number of people searching is high.” The rebound says little about the health of the economy, however, with low supply being the dominant force behind higher home values according to a report from the Royal Institution of Chartered Surveyors (RICS) released last week. Consumer confidence has tracked the rebound in the FTSE 100 benchmark UK equity index with a correlation of over 90% since March, making this part of the equation highly vulnerable to any reversal of the recent rally in risky assets. For our part, we have long argued that the markets have done too much, too fast over the past six months, with global equities trading at levels unseen since 2003 relative to earnings. The world economy grew nearly 3% in real terms that year, whereas virtually every credible forecast calls for the first post-WWII contraction in real growth in 2009, pointing to lackluster revenues and overextended asset prices. Further, trading volumes have steadily declined for the bulk of the equity rally (the past 5 out of 6 months). While some of this may be chalked up to a seasonal slowdown that is typical for the summer, it may also be hinting at waning conviction behind the up move and a forthcoming reversal as traders return from holiday and volumes pick up into the Fall.

Euro Session: What to Expect

With next to nothing on the economic calendar, risk sentiment is likely to be the primary catalyst driving currency markets in European hours. Risk appetite retreated at the start of the trading week: most Asian markets sold off, led by finance and mining companies, and US equity index futures suggested Wall St will open as much as -0.5% lower on Monday. This points to continued gains for the safety-correlated US Dollar after the greenback rose against the spectrum of major currencies in overnight trading.

Written by Ilya Spivak, Currency Analyst
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