Forex Trading

The Euro rose against the US Dollar in overnight trading as Asian stocks extended the biggest weekly rally since late August 2007. The single currency may see pressure in the coming session with Germany’s Consumer Price Index set to print at the lowest in 6 years.

Key Overnight Developments

• New Zealand Economy Shrank at Fastest Pace Since 1992
• NZ Trade Balance Rises as Imports Fall More than Exports
• Japan’s Annual Retail Sales Fall Most in 7 Years

Critical Levels



The Euro added 0.4% while the British Pound rose 0.3% against the US Dollar in overnight trading. The greenback retreated as stocks extended the biggest weekly rally since late August 2007, with the MSCI Asian Pacific Index trading 0.6% higher.

Asia Session Highlights



New Zealand’s Gross Domestic Product fell -0.9% in the fourth quarter, bringing the annual rate of decline to a 17-year high of -1.9% in the year through December 2008. Yesterday, the International Monetary Fund said they expect New Zealand’s economy to shrink about 2% through 2009, noting that “households are constrained by high debt levels, falling house and equity prices, and uncertain employment prospects.” Still, overnight index swaps suggest the market is pricing a limited scope to further interest rate cuts, calling for at most a 25 basis point cut in April and no net change in a year from now.

Separately, the Trade Balance deficit narrowed substantially more than economists expected in February, showing a monthly surplus of NZ$4.8 billion. The annual trade deficit, a more accurate measure of the trend in trade flows because of the volatility in month-to-month data, narrowed for the second consecutive month to print at –NZ$5.2 billion in the year to February. While this looks good on the surface, the improvement in the headline figure came not from robust export growth but rather owed to the impact of deepening recession on consumer spending. Indeed, imports fell at an annual pace of -14.2%, outpacing the -6.6% drop in exports.

In Japan, Retail Sales fell for -5.8% in the year to February, the most in 7 years. Dwindling overseas sales are continuing to push Japanese companies to cut back production capacity, boosting unemployment to put downward pressure on consumer spending and overall economic growth. Deepening recession is beginning to translate into deflation: the Consumer Price Index slipped into negative territory for the first time in 16 months in February, shrinking at an annual pace of -0.1%. The current downturn could substantially accelerate if expectations of falling prices become entrenched, encouraging consumers and businesses to perpetually put off spending and investment waiting for the best possible bargain, thereby putting the brakes on economic growth altogether.

Euro Session: What to Expect



Germany’s Consumer Price Index is set to add a meager 0.1% in March, bringing the annual pace of inflation to a 6-year low at just 0.7%. Anemic economic performance has pressured price growth lower as Germany struggles increasingly deepening recession. The economy shrank -1.7% in the fourth quarter and current expectations call a -2.5% contraction through 2009, the deepest downturn since World War II. The slump is set to push inflation into negative territory, threatening to amplify the current malaise as expectations of falling prices encourage consumers and businesses to wait for the best possible bargain, perpetually putting off spending and investment.

For their part, the European Central Bank is expected to respond with an additional 25 basis point interest rate cut on April 2nd, with borrowing costs set to bottom at 1% through the second quarter. The ECB’s hesitation to commit to aggressive easing may pose substantial political risks down the road: calls to un-tether national monetary capabilities from Trichet’s measured approach are likely to find greater favor as the downturn hits home for an increasing percentage of Europeans, threatening to aggravate electorates against currency union. The reality of this structural threat to the Euro was reinforced earlier this week as the ECB President visibly tried to downplay it in a recent Wall Street Journal interview.

In the UK, the final revision of fourth-quarter Gross Domestic Product is expected to confirm that the economy shrank -1.5% in the three months to December 2008, the most in nearly three decades. Retail Sales fell substantially more than expected yesterday as rising unemployment continued to weigh on consumption, threatening to deepen the current downturn. The IMF has predicted that the UK will see the worst recession among the G7 nations. Separately, the Current Account deficit is set to narrow to -5.9 billion pounds in the fourth quarter, down from -7.7 billion in the three months to September. The reading suggests that trading terms deteriorated at an annual pace of 12.1% through 2008.

Written by Ilya Spivak, Currency Analyst
Article Source - Euro Higher as Stocks Rebound But Data Threatens with German CPI to Hit 6-Year Low (Euro Open)