Forex Trading

The Euro is likely to see significant selling pressure if today’s interest rate announcement sees the European Central Bank maintain a reluctance to commit to aggressive monetary stimulus as traders price in a longer path to recovery as well as the political implications of inaction.

Key Overnight Developments

• Australian Trade Surplus Higher Than Expected on Gold Export Demand
• New Zealand Commodity Export Prices See First Rise in 8 Months
• Euro, British Pound Rise as Asian Stocks Follow Wall St Higher

Critical Levels



The Euro added as much as 0.5% in overnight trading while the British Pound advanced 0.4% as stocks pushed higher across Asian exchanges, weighing on the safe-haven US Dollar. The MSCI Asia Pacific Index surged 3.6%, following a rally on Wall St sparked by better-than-expected US economic data and encouraging comments from US Treasury Secretary Geithner, who said global stimulus efforts are showing “traction”.

Asia Session Highlights



Australia’s Trade Balance showed a much greater surplus than economists expected, printing at A$2.1 billion in February versus expectations of a A$0.7 billion result, the seventh consecutive month in positive territory. The improvement was driven by a -3.5% drop in imports while exports increased for the first in fourth months, adding 7.7%. The uptick in outbound shipments was driven by a 55% surge in gold, likely driven by demand for store-of-value assets as central banks around the world buy billions in government and private-sector debt with printed money to lower borrowing costs and boost access to lending (a practice commonly referred to as “quantitative easing”). Importantly, it remains to be seen if gold demand has staying power as it becomes clear that rapid inflation is not entirely guaranteed as a consequence of quantitative easing. Still, trade data may continue to improve as lackluster consumer spending amid the deepening economic downturn pressures import volumes lower.

The ANZ Commodity Price Index of New Zealand’s top export goods saw positive gains for the first time in 8 months in March, rising 1% following a -4.6% drop in February. The CRB/Reuters Commodity Price Index jumped 2.9% through March as risk appetite rebounded across financial markets. Importantly, we continue to see substantial reasons conclude that the upswing in risky assets is temporary in the scope of a larger down trend: growth forecasts remain grim for 2009, suggesting weak demand will weigh on prices for some months to come. The recent appreciation of the New Zealand Dollar will also hurt the export sector, making the antipodean nation’s good more expensive to foreign buyers. A trade-weighted average of the currency’s value rose 11.7% in March.

Euro Session: What to Expect



The interest rate decision from the European Central Bank is the clear standout on the economic calendar for the forthcoming session. A survey of economists conducted by Bloomberg expects Jean-Claude Trichet and company to slash rates by 50 basis points to put overnight borrowing costs at 1%. Overnight index swaps tell another story however, with traders pricing the likelihood that only 25 basis points will be shaved off the benchmark rate. Interest rate futures offer a third scenario, showing traders are betting on a 75bps reduction. Mixed signals ahead of the release are likely to spark volatility with some traders caught on the wrong side of the market when the news hits the wires. The press conference following the initial announcement holds even more potential to stir price action. The ECB has been under the gun recently for being too timid in offering monetary stimulus as the Euro Zone sinks deeper into recession. Trichet has been teasing the market with promises to “study unconventional measures” beyond lowering the benchmark lending rate and sounded clearly defensive about criticisms that he is not doing enough in a recent Wall Street Journal interview. This will be his chance to give the markets something tangible; if it is wasted, the Euro is likely to see significant selling pressure as traders price in a longer path to recovery as well as the political implications of inaction. Indeed, grumbling electorates are likely to become more receptive to the notion that national monetary capabilities should be un-tethered from the ECB’s measured approach as the downturn hits home for an increasing percentage of Europeans, posing a serious structural threat to currency union itself.

Written by Ilya Spivak, Currency Analyst
Article Source - Euro Selling Likely If Central Bank Remains Soft on Interest Rate Cuts (Euro Open)