Forex Trading

The US Dollar extended gains against the Euro and the British Pound as Asian stock exchanges followed Wall St lower on concerns about the impact of deepening global recession on the upcoming round of earnings reports. Key index futures are down over a percent ahead of the opening bell in Europe, pointing to further gains for greenback.

Key Overnight Developments

• UK Economy Shrank 1.5% in the First Quarter, Says NIESR
• Japan's Annual Current Account Fell 55.6% on Collapsing Exports
• Rebound in Australian Consumer Confidence is Temporary, Says Westpac
• Japanese Merchant Sentiment Improves For Third Straight Month in March

Critical Levels



The Euro lost as much as -0.7% against the US Dollar while the British Pound shed as much as -0.5% as Asian stock exchanges sold off for the second consecutive session to boost demand for safe-haven assets.

Asia Session Highlights



The UK economy shrank -1.5% in the first quarter of this year according to a GDP estimate from NIESR, a think tank. The statement accompanying the release said that the current downturn looks “very similar to that of the recession that began in the summer of 1979…if the 1980s profile were followed, output would continue to decline for up to another year and it would take two further years before the level of output enjoyed at the start of 2008 would be reached again.” The current slump has weighed on industrial output and pushed the unemployment rate to the highest in a decade, eroding disposable incomes and discouraging spending. Indeed, Nationwide Consumer Confidence dropped to 41 in March, matching the record low initially set in January. The Bank of England is expected to keep benchmark interest rates on hold at 0.50% later this week, but policymakers will almost certainly announce further quantitative easing measures as they scramble to check the slide in output.

Japan’s Current Account surplus printed slightly higher than expected in February, registering at 1.1 trillion yen. More tellingly, broad trading terms fell by a whopping -55.6% from a year earlier as the global economic downturn weighed on overseas demand to send exports tumbling 50.4% in the twelve months to February. Business confidence fell to a record low in the first quarter, suggesting that the slump will continue to boost unemployment and weigh on spending, deepening the worst recession since the Second World War. Yesterday, the Bank of Japan said the economy will continue to deteriorate “for the time being” and alluded to the possibility of deflation.

Australian Consumer Confidence jumped 8% in April according to the Westpac Banking Corp, rising by the most since August of last year. Westpac’s chief economist Bill Evans credited the government with the uptick, saying “the stimulus package is likely to be buoying consumers.” Fiscal measures currently in place call for a total of A$12.2 billion in cash handouts for individuals. Evans seemed skeptical about the rebound’s staying power, however, saying “disturbing signals from all the leading employment indicators” are likely to push sentiment to new lows in the months ahead. The survey was conducted between March 30th and April 5th, suggesting the recent upswing in stock prices also helped to improve sentiment. The MSCI World Stock Index added close to 25% since early March but technical positioning suggests the move is a correction in the context of larger downtrend.

The latest edition of Japan’s Eco Watchers Survey revealed merchant sentiment improved for the third consecutive month in March: respondents’ assessment of current conditions rose to 28.4 from 19.4 in the previous month while the reading measuring future expectations rose to the highest in 11 months. Still, the metric remains below the 50 “boom-bust” level, suggesting demand for taxis, restaurants, and other consumer services continues to contract albeit at a slower pace.

Euro Session: What to Expect



Germany’s Current Account is expected to improve a bit in February, showing a 5.8 billion euro surplus following a 4.2 billion result in the preceding month. Because of the volatility in monthly trade figures, the annualized picture is far more telling. From this perspective, a print in line with expectations would amount to a whopping -64.2% decline in trading terms in the year from February 2008. Indeed, December’s drop-off convincingly snapped a multi-year uptrend dating back June 2001. Meanwhile, the most recent release of the analogous metric for the United States saw the deficit shrink to the smallest in 5 years. On balance, this calls for downward pressure on the EURUSD exchange rate in the long-term outlook, implying a net outflow of money out of the Euro Zone’s biggest economy and into the States.

Risk trends are likely to dominate price action in overnight trading. Stocks slid on Wall St and continued lower in Asian hours as investors began to fret about the impact of deepening global recession on the upcoming round of earnings reports. Dow Jones and S&P index futures are down a hefty -1.2% ahead of the opening bell in Europe, arguing for continued US Dollar strength ahead.

Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar to Extend Gains Against Euro, British Pound as Risky Assets Falter (Euro Open)