The US Dollar pushed higher as stocks sold off in Asia on Japanese share sales and news of the imminent collapse of a German bank. The safety-linked currency may extend gains in European hours as expectations of a downward revision in US third-quarter GDP weigh on risk appetite.

Key Overnight Developments

• Japan’s Central Bank, Finance Ministry Quarrel Continues
• US Dollar Rises as Stocks Decline in Overnight Trading


Critical Levels



The Euro and the British Pound fell as much as 0.3% against the US Dollar as investors moved capital out of risky assets, boosting the safety-correlated greenback (see below). We remain short GBPUSD at 1.6648.


Asia Session Highlights




The Bank of Japan Monthly Report saw policymakers raise their economic outlook for the third consecutive month, saying the economy is “picking up” on global stimulus efforts but cautioning that “the momentum of self-sustaining recovery in domestic private demand remains weak.” The BOJ was relatively sanguine on the outlook for price growth, saying “the year-on-year pace of decline in consumer prices is expected to moderate toward the year-end” as downward pressure from the drop in the price of petroleum products relative to a year ago abates. Perhaps most importantly, the central bank said that credit supply and firms’ financial positions are “improving”.

On balance, the report suggests that the BOJ is refusing to be pressured by the Ministry of Finance’s attempts to cajole the central bank to keep its asset-buying programs in place beyond the end of the year with threats of returning deflation. For their part, government officials were back on the offensive: Finance Minister Hirohisa Fujii once again stressed that monetary policy plays a “significant role” in combating shrinking prices while Financial Services Minister Shizuka Kamei accused the BOJ of “falling asleep at the wheel as usual.” As we have previously noted, asset purchases have been a source of increasing tensions between monetary and fiscal authorities, with the BOJ eager to unwind them while the MOF prefers to see them continue as a way for the government to keep long-term borrowing costs in check as it prints bonds to cover Japan’s soaring budget deficit. The Japanese Yen is highly sensitive to bond yields, with the currency likely to rise if the BOJ gets their way and the MOF is forced to issue debt without the central bank offsetting the effect of increased supply on long-term borrowing costs.

The US Dollar pushed higher, adding as much as 0.2% on average against the major currencies as stocks slipped in overnight trading, boosting demand for the safety-linked greenback. The MSCI Asia Pacific Index regional equities benchmark slipped 0.7% on expectations of new share issues from top Japanese firms. Financials traded particularly heavy after news that German regional bank WestLB AG may shut down by the end of this month if it does not get a public capital injection of 5 billion euro after its majority stakeholders said they were prepared to let it become insolvent.


Euro Session: What to Expect





The final revision of Germany’s third-quarter Gross Domestic Product figures is set to confirm that the Euro Zone’s largest economy expanded 0.7% in the three months to September. The components of the release may prove of interest however considering the critical Private Consumption component of output is expected to contract -0.4%, marking the first decline since the fourth quarter of 2008. This puts into question the ability for the current rebound to remain on track as the boost from fiscal stimulus wanes all the while the Euro pushes higher, working against export demand. To that effect, traders may not read too much into another uptick in the German IFO gauge of business confidence for November: the metric has been trending higher since putting in a bottom in December 2008 as aggressive monetary and fiscal measures kicked in and credit markets began to come to life, but this says relatively little about the economy’s ability to sustain itself once the flow of government cash dries up.

Rounding out the calendar, the British Banking Association is expected to report that UK Loans for House Purchase grew by 44,000 pounds in October, the largest gain in nearly two years, while Switzerland’s UBS Consumption Indicator may rise after the SECO Consumer climate indicator and the KOF leading indicator rose over the same period, although a drop in new car registrations (a component of the UBS metric) may keep a lid on any large moves to the upside.

On balance, risk sentiment is likely to remain the dominant currency market catalyst. US equity index futures are trading down 0.4%, suggesting safe-haven currencies like the US Dollar and the Japanese Yen are likely to continue higher for the time being. Risk aversion may also be boosted ahead of revised figures on US GDP. The data is expected to show that the world’s top economy grew at an annual pace of 2.9% in the third quarter rather than the 3.5% initially reported, with at least some of the reduction accounted for by a lower personal consumption levels.
 
Written by Ilya Spivak
www.dailyfx.com