Forex Trading

The Euro tumbled against the US Dollar overnight after European Central Bank President Jean-Claude Trichet said that he supports the US’ “strong dollar” policy in a speech in Tokyo. The upcoming release of Euro Zone Trade Balance figures may amplify downward pressure the single currency, with trading terms set to drop a -6.7 billion euro in the year to February.

Key Overnight Developments

• New Zealand Annual Inflation Falls to 3% in First Quarter, as Expected
• Japan's Annual Service Demand Shrinks Most in 6 Months on Job Losses
• Euro Drops as ECB’s Trichet Says He Supports “Strong Dollar” Policy

Critical Levels



The Euro tumbled against the US Dollar in overnight trading, shedding as much as 0.9%. The British Pound followed suit, losing as much as -0.6% to the greenback. The Dollar advanced despite stock market gains across Asian exchanges as comments from ECB President Jean-Claude Trichet overwhelmed risk trends as the primary catalyst for price action (see below).

Asia Session Highlights



New Zealand’s Consumer Price Index fell to 3.0% as expected in the year to the first quarter. Deepening recession and lower global commodity prices are putting substantial downward pressure on price growth, a trend that is expected to bring annual inflation to 2% over the course of this year, a reading within the Reserve Bank of New Zealand‘s 1-3% target range. Lower CPI readings will give the central bank room for further interest rate cuts, with overnight index swaps pricing in a 25-50 basis point reduction when policymakers meet again in June. In their annual survey of New Zealand, the Organization for Economic Cooperation and Development (OECD) forecast the downturn will continue through 2009 and said the central bank has room to take benchmark rates as low as 2% in the months to come.

In Japan, the Tertiary Industry Index revealed that service demand shrank -0.8% in February from the previous month. The metric slipped -6.1% in annual terms, the most in at least 6 months. Dwindling overseas sales have pushed firms to scale back capacity, boosting unemployment and weighing on consumer spending, including that on services, and keeping downward pressure on economic growth. Earlier this week, the government unveiled a new stimulus plan worth 15 trillion yen ($154 billion) to boost the world’s second-largest market amid the worst downturn since the Second World War.

European Central Bank President Jean-Claude Trichet was typically cryptic in his speech in Tokyo: The ECB chief said central banks must do “all they can” to restore confidence but in the same breath said that this requires a “measured approach”. The ECB has been under the gun recently for being too timid in offering monetary stimulus as the Euro Zone sinks deeper into recession. Most significantly, Trichet said he supports the US’ “strong dollar policy”, sending the single currency tumbling 53 pips within 2 minutes to test as low as 1.3068. He further added that “any ambiguity in our medium-term policy direction would delay the return of sustainable prosperity,” signaling that the bank’s decision-making body will finalize their stance on using “unconventional measures” to ease lending conditions as promised when policy is announced in May.

Euro Session: What to Expect




Switzerland’s Retail Sales are expected to shrink -0.2% in the year to February, the first print in negative territory since November of last year. Sales were supported through the last two months as inflation came to a near-standstill, boosting Swiss consumers’ purchasing power and improving sentiment. Looking ahead however, the underlying fundamental environment is hardly supportive of continued strength. Unemployment has risen to 3.4%, the highest in close to 3 years, and will weigh on disposable incomes as well as prompt precautionary saving. Further, the fallout in price growth will begin to work against spending if deflation expectations become entrenched, encouraging consumers to perpetually put off purchases to wait for the best possible bargain. Consumer prices, the headline inflation gauge, turned negative for the first time in 5 years in March, shrinking at an annual pace of -0.4%.

Turning to the Euro Zone, the Trade Balance deficit is forecast to print at -5.0 billion euro in February, a narrower shortfall than the -10.5 billion result registered in the previous month. Setting aside month-to-month volatility, the expected result would amount to a -6.7 billion euro annual drop in trading terms as compared to a 0.6 billion improvement in the year to January. Meanwhile, the analogous metric in the US has been trending sharply higher, seeing the trade gap narrow by a hefty 58% in the year to February. A widening deficit in the Euro area coupled with a contracting one across the Atlantic implies a net outflow of capital from the currency bloc and into the States, extending our medium-term expectations of EURUSD downside into the long-term outlook.

Written by Ilya Spivak, Currency Analyst
Article Source - Euro Drops as ECB's Trichet Says He Supports "Strong Dollar" Policy (Euro Open)