Forex Trading

The Euro gained against the US Dollar in overnight trading as Asian stock markets rose for the fourth consecutive session. The single currency may run out of steam if risk appetite fades, however, as another dollop of dour Euro Zone economic data points to tumbling inflation and deepening recession.

Key Overnight Developments

• Australia's Annual Inflation Fell in March, Says TD Securities
• Japan’s Leading Index Drops to Lowest Since 1983 in February
• Euro, British Pound Capitalize as Asian Stocks Extend Rally

Critical Levels



The Euro and the British Pound gained against the US Dollar in overnight trading as Asian stock markets rose for the fourth consecutive session. While risky assets have staged an impressive rebound over recent weeks, technical positioning hints the upswing is corrective in the context of a larger downtrend.

Asia Session Highlights



Australia’s TD Securities Inflation fell to 2.6% in the year to March, down from 3.1% in the preceding month. Signs of slowing price growth give the Reserve Bank of Australia more room to surprise economists calling for rates to remain at 3.25% with a rate cut at a policy announcement later this week. Traders seem to agree, with overnight index swaps pricing in a 0.25% reduction this time around and between 50-75 basis points in total easing over the next 12 months. Early signals coming out of the central bank itself also hint at a dovish bias: Governor Glenn Stevens recently reiterated that lower benchmark rates remain an effective way to stimulate lending while his assistant Ric Battellino noted last week that annual output is “likely to fall in 2009”.

Preliminary estimates showed Japan’s Leading Index fell to 75.2 in February, the lowest in 26 years. The metric tracks a variety of leading indicators (including inventories, machine orders and stock prices) and is intended to forecast the economy’s trajectory over the coming 6-9 months. The reading compounds expectations of deepening recession in the world’s second-largest economy.

Euro Session: What to Expect



The Euro Zone Producer Price Index is expected to print in negative territory again in February, shedding -0.5% from the previous month to put the annual pace of wholesale inflation at a decade-low -1.5%. The release foreshadows lower consumer prices (the headline inflation gauge) as firms pass on lower production costs through cheaper finished goods. A separate report is set to show that Euro Zone Retail Sales fell -2.5% in the year to February, a reading uncomfortably close to the record low at -3.1% seen in June. A shallow rebound April’s Sentix Investor Confidence measure to -40.7 from the all-time low at -42.7 seems hardly good enough news to inject any lasting optimism into the currency bloc’s medium-term economic outlook.

Despite tumbling prices and deepening recession, the European Central Bank cut interest rates less than economists expected last week. In the press conference following the initial announcement, bank president Jean-Claude Trichet said rates had not reached “the lowest limit” and revealed that “the Governing Council intends to decide on further non-standard measures at our next monetary policy meeting”. It seems the ECB has been playing for time since March, first promising to “study unconventional measures” and now committing to making a decision on quantitative easing when policy is announced in May. Trichet’s notably defensive rhetoric, apparent both in his boasting about that “[the ECB’s] balance sheet is larger as a proportion of GDP than that of the Federal Reserve System” as well as in a recent Wall Street Journal interview, is unwittingly legitimizing concerns about the structural integrity of currency union itself. Indeed, such comments seem intended to placate grumbling electorates, increasingly receptive to freeing national monetary capabilities from the ECB’s measured approach as the downturn hits home for an increasing percentage of Europeans. While the day of reckoning may have been delayed for another month, the Euro could see significant selling pressure ahead if May brings further waffling, pushing traders to price in a longer path to recovery as well as the political implications of inaction.

Written by Ilya Spivak, Currency Analyst
Article Source - Euro Rises with Stocks but Outlook at Risk as Recession Deepens (Euro Open)