Forex Trading

The Euro may come under fire as the Euro Zone Unemployment Rate rises to the highest in over 2 years, adding to evidence of deepening recession and bolstering expectations of a 0.50% interest rate cut later in the week. Overnight data showed Japan’s business confidence fell to a record low in the first quarter while Australian retail sales plunged the most in 8 years.

Key Overnight Developments

• Japan’s Business Confidence Drops to Record Low on Export Slump
• Australian Retail Sales Fall Most in 8 Years, Boosting Recession Fears
• US Dollar Scores Gains Against Euro, British Pound Despite Stock Advance

Critical Levels



The Euro slipped as much as -0.6% against the US Dollar in overnight trading, while the British Pound lost -0.3% to the greenback. Interestingly, Dollar gained even as Asian stock markets rose 1.6% on hopes that Japanese and South Korean automakers will earn market-share after the US administration threatened to let General Motors and Chrysler go into bankruptcy. The typical dynamic over recent months has seen the Dollar display an inverse correlation with stock markets.

Asia Session Highlights



Japan’s Tankan Survey of business sentiment collapsed to record lows as dwindling overseas demand crushed current and expected revenues. The report revealed that sentiment among large manufacturers slumped to -58, the lowest since records began in 1974. Large firms across the industry spectrum said they would cut expenditures -6.6% this fiscal year, suggesting the slump will continue to boost unemployment and weigh on spending. Yesterday, Finance Minister Kaoru Yosano said the government would complete a new stimulus package by mid-April aimed at preventing the economy from “falling apart”. Yosano said last week that spending as much as 20 trillion was “not out of line”.

In Australia, Retail Sales slumped much more than economists expected, falling -2.0% through February to register the largest monthly drop in over 8 years. Department store sales led losses, dropping -9.8%. Household consumption accounts for over half of the economy’s total output, suggesting the slump in spending is likely to push the larger antipodean nation into the first recession since 1991. Indeed, Reserve Bank of Australia Assistant Governor Ric Battellino noted yesterday that annual output is “likely to fall in 2009”. Overnight index swaps show the market is pricing in the likelihood that the central bank will cut interest rates by 50-75 basis points over the next 12 months. At this point, the RBA is one of only two central banks that are expected to lower borrowing costs in the coming year, hinting at implicit downward pressure on the Australian Dollar.

Euro Session: What to Expect



The flood of dour fundamental data continues on the European continent: German Retail Sales are set to slip -1.2% in the year to February and the Euro Zone Unemployment Rate jumps to 8.3%, the highest in over 2 years. Anemic economic growth has weighed on price growth, with initial estimates suggesting that annual inflation slowed to a record low 0.6% in March. Against this backdrop, the European Central Bank is expected to slash interest rates by 50 basis points later this week, taking borrowing costs to a record low of 1%. The ECB is treading carefully for the moment, reluctant to follow their major counterparts in the UK, US, and Japan down the road to quantitative easing. This may prove perilous politically as calls to un-tether national monetary capabilities from the Trichet’s measured approach find greater favor amid electorates increasingly burdened by deepening recession. This poses a structural threat to the very existence of the single currency, forcing the ECB president to try to talk down the critics in a recent Wall Street Journal interview.

Written by Ilya Spivak, Currency Analyst
Article Source - Euro Zone Recession Deepens with Unemployment Rate to Hit 2-Year High (Euro Open)