Euro Weakness Looms on Latvia Currency Crisis, EU Regulation Scheme (Euro Open)

The Euro looks increasingly vulnerable as on looming contagion from an increasingly likely currency crisis in Latvia as well as the introduction of a controversial EU-wide financial regulation scheme that could stir a backlash against the ECB across the region. The central bank is also set to release June’s edition of their Monthly Report.

Key Overnight Developments

• Japan’s GDP Shrank At Record Annual Rate in The First Quarter
• Australia’s Labor Market Worse Than Headline Data Would Suggest

Critical Levels

The Euro advanced in overnight trading, adding as much as 0.5% against the US Dollar. The British Pound followed suit, rising 0.4% against the greenback.

Asia Session Highlights

The Australian Dollar surged in overnight on news that the economy shed just -1.7k jobs in May versus expectations of a -30k decline. Looking at the details of the report, however, the labor market does not seem nearly as healthy as the headline figure would suggest. The economy actually lost 26.2k full-time jobs while gaining 24.5k part-time positions, a shift that implies shorter working hours and lower wages, darkening the outlook for spending. Although consumer confidence jumped higher in June, the result likely owed to the Prime Minister Kevin Rudd’s generous stimulus measures and sentiment may reverse course going forward as the flow of government cash dries up. The Unemployment Rate jumped to 5.7% as expected, reversing the April’s improvement to 5.5% and returning to the 5-year high registered in March. Economists polled by Bloomberg expect the jobless rate to continue to rise for the foreseeable future to top 7% by the first half of next year. If this indeed proves to be the case, Australia’s heretofore much-lauded ability to outperform other industrial economies may falter.

The final revision of Japan’s first-quarter Gross Domestic Product showed the economy contracted less than initially estimates suggested, shrinking -3.8% versus -4.0% expected. Still, the annual pace of decline continued to accelerate, printing at -14.2% from -13.5% in the three months to December 2008, setting a fresh record low. While the pace of decline may moderate in the coming months as firms replenish depleted inventories, the dismal outlook for global demand in the foreseeable future will mean that a robust recovery will remain elusive for the time being as output and employment levels remain at the lower end of the spectrum. Indeed, the current account surplus shrank more than expected in April as overseas sales tumbled -40.6%.

Euro Session: What to Expect

June’s edition of the European Central Bank Monthly Report is the only item of significance on the economic calendar for the upcoming session. The document is unlikely to offer much by way of new insight beyond what was revealed at the last monetary policy meeting. Other factors may stir Euro volatility however, as a proposed EU-wide financial regulation scheme threatens to stoke a backlash against the ECB while a currency crisis continues to loom in Latvia, warning of potential contagion. A failed bond auction has seen the Balkan country scramble to cobble together an IMF-backed rescue package to avoid a massive depreciation of the local currency. Western European banks are heavily invested in Latvia as well as neighboring Lithuania and Estonia; if the currency collapses, the value of Western European investments in the region will go with it, putting intense strain on lenders already battered by losses from the subprime crisis. Needless to say, such a scenario could weigh heavily on the Euro as traders seek to distance themselves from the turmoil.

Written by Ilya Spivak, Currency Analyst
Article Source - Euro Weakness Looms on Latvia Currency Crisis, EU Regulation Scheme (Euro Open)

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