Forex Trading

The Euro advanced in overnight trading, adding as much as 0.8% against the US Dollar as corrected higher across Asian exchanges after yesterday’s selloff. Japan’s Leading Index slumped to the lowest since 1986, pointing to deepening recession. UK Industrial Production and German Current Account data are on tap in European hours.

Key Overnight Developments

• Australian Economy to Shrink 1% in 2009, Says NAB
• Japan’s Leading Index Falls to Lowest in 22 years
• Euro, British Pound Rise in Overnight Trading

Critical Levels



The Euro advanced in the overnight trading, reaching an inter-session high at 1.2680. The British Pound also pushed higher initially but gave up nearly all the gains ahead of the opening bell in London. For complete analysis of all the major currency pairs, please see the latest weekly technical outlook report.

Asia Session Highlights



Australia’s Business Confidence improved in February according to National Australia Bank (NAB), rising to -22 from a record low at -32 in the previous month. Still, the reading is firmly in negative territory and the overall trend is pointing decidedly lower. Indeed, NAB revised down its forecast for economic growth, saying output will shrink -1% through 2009 (versus previous forecasts of a -0.25% decline). Australia’s GDP shrank than economists expected in the fourth quarter, printing down -0.5%. An index of leading indicators compiled by the Westpac Banking Corp suggested the economy will shrink at an annual pace of -1.2% in the first half of 2009. Although the Reserve Bank of Australia said that the effects of monetary and fiscal measures already in place will “provide significant support to domestic demand over the period ahead”, overnight index swaps price in 100 basis points in additional easing over the next 12 months.

Japan’s Leading Index fell more than expected to print at 77.1 in January, the lowest since November 1986, signaling the world’s second-largest economy is set to sink even deeper into recession. The reading is a composite of 12 leading indicators and is aimed at showing the trajectory of the economy over the coming six to nine months.

Euro Session: What to Expect



Germany’s Current Account surplus is set to narrow in January to print at 9.2 billion euro from 12.3 billion in the preceding month. The seasonally adjusted decline in exports (-4.0%) is set to outpace the drop in imports (-3.5%) on dwindling demand for German manufactured goods. Indeed, factory orders have fallen -27.7% and industrial production has shed -12.0% in the year to December. On the capital side of the equation is likely to add to downward pressure: German stocks slipped -10.7% through January while the Euro lost -7%. The overall external balance for the Euro Zone has trended lower, down -67.3% through 2008. Meanwhile, the US trade gap has considerably narrowed, with December result showing the smallest monthly shortfall in nearly 5 years. From a long-term perspective, this implies a net outflow of money from the regional bloc and into the States, making for structural downward pressure on the EURUSD exchange rate.

In the UK, Industrial Production is set to fall -10.0% in the year to January while Manufacturing Production drops -11.7% in the same period. Dwindling global demand has weighed heavily on British industry and is likely continue to do so as 2009 brings the first global recession since World War II. This suggests firms will continue to reduce capacity and lay off workers, pushing the unemployment rate beyond the 9-year high at 3.8% registered in January. Job losses will weigh on disposable incomes, trimming spending and slowing the pace of economic growth. Indeed, the International Monetary Fund has predicted that the UK will see the deepest recession of all the G7 nations. In an effort to check the downturn, the Bank of England cut rates to a record-low 0.50% and signaled it would pursue quantitative easing. The implications of this could spell trouble for the British Pound. Manually expanding the money supply may prove profoundly inflationary as the eventual recovery materializes, eroding the currency’s value if lending rates do not rise fast enough to drain excess liquidity. Policymakers’ recognition of a rebound tends to lag behind its actual beginning, threatening to put the BOE behind the curve. On balance, this suggests the risks are to the downside in the long term sterling outlook.

Written by Ilya Spivak, Currency Analyst
Article Source - Euro Rebounds Against US Dollar as Stock Markets Correct Higher (Euro Open)