Euro, British Pound May Gain Against US Dollar as Stock Futures Rise (Euro Open)

The Euro and the British Pound may gain against the US Dollar in European trading hours with equity index futures trading 0.6% higher and pointing to losses for the safety-linked greenback. Germany’s Current Account and Switzerland’s Unemployment data headline the economic calendar.

Key Overnight Developments

• Japan: Current Account Shows Continued Exports Slump, Merchant Sentiment Falls
• Australian Business Confidence Rises to Highest in Nearly Six Years, Says NAB

Critical Levels



The Euro traded sideways in the overnight session, with prices confined to a narrow 15-pip range above 1.4330. The British Pound followed suit, oscillating in a choppy 40-pip range below 1.6360.

Asia Session Highlights



Japan’s Current Account balance registered at 1.3 billion yen in July, up from the 1.2 billion registered in June. Still, the overall trend continues to point lower: the surplus shrank -19.4% from year earlier as exports fell -37.6%, driven lower as the global economic downturn translated into weaker foreign demand for Japanese cars and electronics. More of the same is likely going forward: although manufacturing has rebounded over recent months, spurred by global fiscal stimulus efforts (including “cash for clunkers” programs in the US and Germany that target autos) and a restocking of inventories, the International Monetary Fund (IMF) has said in its latest world economic outlook that advanced-country exports will rebound just 1.3% after falling by a staggering -15.0% in 2009.

Separately, the Eco Watchers survey revealed that Japanese merchant sentiment declined for the first in eight months in August. The forward-looking Outlook component of the report fell for the second consecutive month, suggesting rising unemployment is starting to overwhelm the effects of aggressive fiscal stimulus on consumer spending.

Australia’s Business Confidence surged to the highest in nearly six years in August according to the National Australia Bank. The bank abandoned its previous forecast calling for the economy to shrink this year, now saying output will gain 0.6% in 2009, while chief economist Alan Oster said the outcome “clearly points to continuing strong growth in demand in the third quarter.” Oster added that sharp improvements in confidence “erode the case for maintaining emergency lows in interest rates.” Details of the report are less encouraging than the headline figure, however. The upswing looks to have been driven by a jump in the Profitability sub-index, which began to rebound along with industrial commodity prices (Australia’s chief export sector) at the beginning of the year. Commodities could reverse lower in the months ahead as China, Australia’s largest trading partner, begins to rein in expansionary economic policy. This would reflect detrimentally on profitability and send the overall confidence metric lower. Indeed, sub-indexes tracking Forward Orders and Export Sales both declined in August for the first time in three months.

Euro Session: What to Expect



Switzerland’s Unemployment Rate is expected to rise to 4.1% in August, the highest in 11 years, pointing to mounting headwinds for consumer spending and thereby overall economic growth. In fact, the jobless rate may actually be understating the total impact of the current downturn on consumers’ spending power as many firms looked to cut costs by switching a portion of the workforce to a “short-time” schedule, which amounts to fewer hours and thereby smaller paychecks. Naturally, this trims disposable incomes and adds to already formidable disincentives to consume. Although exports are heavily represented as a component of Swiss economic growth, domestic demand is still by far the most important driver of activity, contributing about 60% to total output. The government has forecast that the economy will shrink -2.2% this year and rebound just 0.1% in 2010.

Germany’s Current Account surplus is set to narrow to 10.0 billion euro in July, down from 13.3 billion in the previous month. The outcome falls firmly within the downward trajectory that has been in place since the surplus peaked in the third quarter of 2007. As with Japan’s trading terms, this corresponds closely to the cyclical peak in US personal consumption of durable goods (Germany’s top export sector). Rising unemployment suggests it will be some time before a meaningful pick-up in American consumers’ demand for big-ticket items, meaning sales should remain lackluster for German exporters. Indeed, economists polled by Bloomberg predict that the external sector will contribute an average of 4.1% to overall economic growth this year and in 2010, the smallest in 6 years. To that effect, expectations of continued moderation in Industrial Production (set to print down -15.8% in the year to July versus -18.1% in the previous month) may not have much staying power in the months ahead.

The pace of decline in UK Industrial Production is set to slow for the fifth consecutive month, with forecasts calling for output to shrink -10.1% in the year to July. As with similar developments in Japan and Germany, the improvements over recent months have been driven by global fiscal stimulus efforts and the inventory cycle. Going forward, however, it remains to be seen if the rebound will continue absent a meaningful recovery in private demand as countries unwind expansionary policies and restocking is completed.

Turning to risk trends, equity index futures are trading 0.6% higher ahead of the opening bell in Europe, pointing to likely gains for the Euro, the British Pound and the commodity currencies at the expense of the safety-linked US Dollar.

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