US Dollar to Rise as Moody’s Stokes EU Debt Crisis Fears Aussie, NZ Dollars Follow Asian Bourses Higher Overnight Yen Gains as US-Japan Yield Spread Shrinks Most in 3 Weeks Risk sentiment appears to be on the defensive despite an impressive showing overnight (see below), with S&P 500 stock index futures in negative territory. Emerging selling pressure likely reflects investors’ response to news that Moody’s downgraded Portugal’s debt to junk status, stoking fears that they were about to see a replay of the Greek fiasco that had gripped the markets over recent weeks as EU policymakers cobbled together a second bailout effort. The “risk-off” mood is likely to boost the safe-haven US Dollar against its leading counterparts. The economic data docket appears likely to reinforce this dynamic, with expectations calling for a slowdown in German Factory Orders as well as deteriorating growth in the US service sector (as tracked by the ISM Non-Manufacturing gauge). Both reports reinforce increasingly overt concerns about a broad-based slowdown in global economic performance in the second half of the year. The New Zealand Dollar outperformed in overnight trade, following Asian stock exchanges higher amid broadly swelling risk appetite. The MSCI Asia Pacific regional benchmark index added 0.6 percent, seemingly shrugging off news of renewed sovereign stress in Europe. The Australian Dollar was also well-supported, although the perennial high-yielder has become a bit less responsive to bursts of investor optimism considering the rapidly evaporating RBA interest rate hike outlook. Indeed, traders’ priced-in policy expectations – as tallied by Credit Suisse – suggests markets now expect no further rate increases from Australia over the coming year while New Zealand boasts the most robust tightening outlook in the G10. Curiously, the Japanese Yen also yielded a strong showing despite its typical place on the opposite side of the sentiment spectrum, whereby the currency gains when pessimism is prevalent and stocks decline, as opposed to what happened today. The move may have owed to a sharp contraction in the US Dollar’s yield advantage against JPY. Indeed, the extra return on 2-year US Treasury bonds compared to their Japanese equivalents narrowed by nearly 5bps yesterday, the most in three weeks.

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