FX - Currency Markets Unimpressed as G20 Pledges to Halve Budget Deficits

Currency markets showed little directional conviction to start the trading week with investors seemingly unimpressed by pledges to halve advanced economies’ deficits following a G20 summit over weekend.

Key Overnight Developments

• Currency Markets Unimpressed as G20 Pledges to Halve Budget Deficits
• Japanese Retail Sales Declined Most in Five Years on Fading Stimulus
• New Zealand Business Confidence Fell Most in 19 Months, Says NBNZ

Critical Levels



The Euro and the British Pound were little changed in overnight trade, with the single currency drifting sideways in a narrow range below the 1.24 figure while sterling oscillated within 20 pips of 1.5050 to the US Dollar. We remain flat EURUSD and GBPUSD.

Asia Session Highlights



The final communiqué from the G20 summit in Toronto said advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016. Policymakers acknowledged that there is a risk that fiscal retrenchment could adversely impact the global economic recovery but added that a failure to implement consolidation where necessary would undermine confidence and hamper growth. Traders seemed broadly disinterested in the outcome, with price action showing little directional conviction as most markets treaded water in familiar territory to start the trading week.

Japan’s Retail Trade figures proved disappointing, with receipts down 2 percent in May to mark the largest monthly decline in over five years as car and machinery sales tumbled 5.9 and 7.9 percent respectively. The outcome likely reflects the fading effects of the government’s incentive programs to buy energy-efficient vehicles and appliances, some of which are set to expire this year. Economists predicted a far narrower 0.1 percent drawdown ahead of the release. Sales rose 2.8 percent from a year before, amounting to the smallest annualized increase since January.

New Zealand Business Confidence fell the most since October 2008 according to a report from the National Bank of New Zealand (NBNZ). Details of the report revealed eroding expectations across most industries (with the exception of livestock), with the share of firms expecting profits to increase over the near term falling to the lowest in five months (18.8 percent). Interestingly, indexes tracking pricing intentions and inflation expectations saw the largest gains in at least half a year, hinting firms are looking toward a period of stagflation and hinting that the central bank may have its hands full in the months ahead as it tries to reconcile a rising price level with lackluster growth. As it stands, a Credit Suisse gauge of priced-in policy expectations shows traders are betting the RBNZ will add 131 basis points to benchmark borrowing costs over the next 12 months, the most in the G10.

Euro Session: What to Expect



Preliminary German Consumer Price Index figures headline the economic calendar in European hours, with expectations calling for the annual inflation rate to decline to 1 percent in June. The outcome reinforces a benign outlook for price growth in the Euro Zone’s largest economy as well as the region as a whole, underscoring the likelihood that the European Central Bank is likely to maintain a broadly dovish posture in a bid to prevent a renewed slide into recession as governments’ deficit-cutting measures translate into spending cuts, tax hikes, and rising borrowing costs.

Turning to risk sentiment, the path of least resistance seems to favor cautious optimism as US equity index futures track close to 0.2 percent higher to start the trading week, promising gains for most major currencies against the safety-linked US Dollar and Japanese Yen.

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