Forex Trading

The Euro corrected higher in Asian trading but the economic calendar threatens a sustained rebound as expectations suggest annual inflation fell to the lowest since the introduction of the single currency in March. Overnight data showed Japan’s labor market continued to weaken in February while expectations of economic growth remained near record lows among New Zealand’s businesses.

Key Overnight Developments

• Japan’s Labor Market Continues to Suffer as Recession Deepens
• Cheaper Yen Boosts Manufacturing for Second Month in February
• New Zealand’s Businesses Expect Demand Will Not Recover in 2009
• Euro, British Pound Correct Higher Against USD in Overnight Trading

Critical Levels



The Euro corrected higher in overnight trading, adding 0.5% against the US Dollar. The British Pound followed suit, testing as high as 1.4340 against the greenback. The single currency has slid -2.4% while sterling dropped -1.3% in the past two days as risk aversion returned to financial markets.

Asia Session Highlights



Japan’s labor market continued to deteriorate in February: the Jobless Rate ticked up to 4.4%, the highest in 2 years, while the ratio of available jobs to seeking applicants dropped to 0.59, much lower than economists expected and the lowest since 2003. The theme at work is a familiar one: dwindling overseas sales are pushing Japanese companies to cut back production, boosting unemployment to put downward pressure on consumption and thereby on overall economic growth. Indeed, Household Spending shrank for the 11th consecutive month to register at -3.5% in the year to February.

Ironically, the sheer depth of the current malaise may help to spur an eventual recovery. Increasingly dismal economic data has eroded the Japanese Yen’s heretofore iron-clad status safe-haven status, sending the currency tumbling by a hefty -12.2% to date from the peak high January. Sustained downward momentum will encourage overseas sales by making Japanese goods cheaper for foreign buyers, breathing new life into the export-dependent economy. In fact, sentiment in the manufacturing sector is already beginning to reflect some early signs of improvement, with the Nomura/JMMA PMI ticking higher for the second consecutive month in February. Separately, Japan’s Finance Minister Kaoru Yosano said the government would complete a new stimulus package aimed at preventing the economy from “falling apart” by mid-April. Yosano said last week that spending as much as 20 trillion was “not out of line”.

In New Zealand, NBNZ Business Confidence ticked marginally higher to -39.3 in March from -41.2 in the preceding month. Most tellingly, the outlook component measuring expectations of future activity printed at within a hair of the 21-year low recorded in two months ago (-21.2 in March versus -21.5 in December). The reading suggests firms remain deeply pessimistic about the trajectory of the antipodean economy in the next 12 months.

Euro Session: What to Expect



Signs of deepening recession will be on display in European hours: Germany’s Unemployment Rate is set to rise to 8.0% as the economy sheds 52k jobs in March while Italian Retail Sales shrink for the fourth straight month, dropping -2.0% in the year to January. Acute economic slowdown will weigh on price growth, with initial estimate of March’s Euro Zone Consumer Price Index set to show annual inflation slowed to the lowest since the introduction of the Euro. A survey of economists conducted by Bloomberg expects the economy will shrink by a whopping -2.8% this year, threatening to put inflation into negative territory and amplify the malaise as 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 more aggressive stimulus (as has been done by their counterparts in the US, UK, and Japan) 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 as the ECB President visibly tried to downplay it in a recent Wall Street Journal interview.

In Switzerland, the UBS Consumption Indicator is likely to continue lower in February after unemployment rose to 3.4%, the highest in nearly 3 years. The metric is a composite of five proxy indicators including new car sales, overnight hotel stays and credit card transactions.


Written by Ilya Spivak, Currency Analyst
Article Source - Euro Zone Annual Inflation Set to Print at Record Low March (Euro Open)