Forex Trading

The US Dollar shrugged off gains across Asian stock exchanges, with the typically safety-linked currency advancing 0.4% against top counterparts. Overnight data saw New Zealand’s Retail Sales beat expectations while Japan’s Consumer Confidence rose for the fifth consecutive month in May.

Key Overnight Developments

• NZ Retail Sales Top Expectations as Currency Boosts Auto Receipts
• Japanese Consumer Confidence Top Forecasts But Outlook Remains Bleak

Critical Levels



The Euro trended slightly downward in overnight trading, testing as low as 1.4069 to the US Dollar. The British Pound sold off more aggressively, slipping as low as -0.4% to the greenback. Rising stock markets failed to hold back the US unit in Asian trading, with the Dollar Index 0.4% higher ahead of the opening bell in Europe.

Asia Session Highlights



New Zealand Retail Sales trumped expectations in April, rising 0.5% following a -0.4% decline in the previous month. Economists had forecast a 0.2% result ahead of the release. Interestingly, retail receipts excluding auto sales actually fell -0.1%, a result substantially worse than the 0.4% expected. The discrepancy may be accounted for by currency appreciation: a trade-weighted index tracking the average value of the Kiwi dollar advanced 12.3% in March, suggesting that by April foreign-made goods were comparatively cheaper in terms of the local currency; vehicles and machinery top the list of commodities imported by New Zealand, and auto sales clearly showed to be the make-or-break sector taking retail activity into positive territory. On balance, suggests the strength in the headline figure does not reveal much underlying improvement in consumer sentiment. Indeed, standing labor market forecasts make any meaningful recovery in confidence unlikely: the Reserve Bank of New Zealand expects the jobless rate to hit 5% this year and top 7% in 2010, weighing on disposable incomes and darkening the outlook for the retail sector.

Japanese Consumer Confidence advanced for the fifth consecutive month in May, rising to 36.3 from 33.2 in the previous month. Although the metric has advanced nearly 30% since setting a record low in December of last year, it remains below the 50 mid-point level, suggesting consumers’ outlook remains sour albeit less so than in the recent past. The improvement likely owes to the government’s record-setting $25 trillion yen stimulus package as well as the rebound in share prices. Indeed, the Nikkei benchmark index has surged 44.3% to date since early March. Looking ahead, the outlook for consumer sentiment looks shaky at best: the dismal outlook for global trade volumes in 2009 and 2010 will mean that a robust recovery for the export-dependent Japan will remain elusive for the time being, leaving output and employment levels at the lower end of the spectrum. Indeed, the current account surplus shrank more than expected in April as overseas sales tumbled -40.6%. Lower wages will trim disposable incomes and weigh on confidence

Euro Session: What to Expect



The economic calendar looks fairly uneventful in European hours, with most of the outcomes of most releases reflecting themes that have already been priced into exchange rates. On the inflation front, Germany’s Wholesale Price Index is set to shrink -9.0% in the year to May, the largest decline on record; meanwhile, France’s Consumer Price Index is set to dip into negative territory with a print at -0.2% for the annualized metric. German and Italian consumer inflation also turned weaker, with the former coming to a standstill and the latter dropping to a record-low 0.8% in the year to May. Such outcomes hammer home the fact that the Euro Zone now faces a credible deflationary threat, arguing for a far more forceful monetary response than anything that has been introduced by the European Central Bank thus far. Overnight index swaps suggest that traders are pricing in virtually no chance that the ECB will lower rates at the next policy meeting and quantitative easing will be difficult to expand beyond the modest measures announced earlier this month given the internal conflict about such policies within the central bank. On balance, the currency bloc is looking increasingly vulnerable to slipping into prolonged stagnation as entrenched expectations of lower prices see consumers and businesses hold off on spending and investment as they perpetually wait for the best possible bargain.

Separately, Euro Zone Industrial Production is set to contract for the eighth consecutive month in April, shedding -0.4%. Although the decline is markedly smaller than anything seen in recent months, some moderation is to be expected as companies restock depleted inventories. Global demand remains extremely fragile and output is likely to remain at subdued levels in the months ahead.

Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar Looks Past Stock Markets to Advance in Asian Trading (Euro Open)