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Japan emerged from recession in the second quarter, but much of this was due to government spending with private-sector demand continuing to dwindle. Equities in the Asian country took notice, shedding 2.57% at 00:07 EST. Euro price action lost for a second day, touching upward sloping support dating back to May 6.

Key Overnight Developments

• Japan Emerges From Recession, But Private Spending Contracts
• Foreign Direct Investment Into China Worse-Than-Expected

Critical Levels



Euro price-action reached a critical level during the opening trading session of the week. The 16-nation currency traded down to upward sloping support, dating back to May 6, against the U.S. Dollar. Action on the British Pound front saw it decline for a second day against its American counterpart, but fail to reach any critical levels.

Asia Session Highlights



The Japanese economy rose from recession, expanding in the second quarter by 0.9% and 3.7% on an annualized basis. Economists had anticipated the GDP figure to have added 1.0% to the nation's output. Nonetheless, a bit of added relief came as the contraction for the first three months of the year was reevaluated to be far better than originally estimated. Indeed the 3.8% decline in annual output was revised up to only a 3.1% slip. Despite this headlining optimistic news, there may be some reason for concern. A deeper look into the data reveals a private and consumer sector that is still at odds with the overall global economic environment. Domestic demand slipped 0.7% and private demand lost 1.3%. Most of the rise in GDP came on the back of an activist government. Public demand rose 1.2%, following at 4.7% and 2.8% expansion in the previous two quarters. It seems that the market mechanism, which is responsible for long-term and sustained economic growth is simply not functioning in a positive manner. A reliance on government spending to prop the world's fourth largest economy will only lead to higher fiscal deficits and rising yields which may continue to cripple the private sector.

Foreign direct investment into China declined for a 10th straight month, by 35.7% to $5.36 billion in the 12 months through July. Since January, FDI has declined 20.30%. Expectations for the year-to-date figure had forecast the contraction to be realized at only 16.80%. Worse-than-expected figures come after new Yuan loans plummeted 76.75% in the month of July alone, to lows last seen in November.

Euro Session: What to Expect



Swiss Retail Sales probably declined in the year through June for the second straight month after labor market weakness contributed to an already dwindling consumer demand base. Indeed, the seasonally adjusted June unemployment rate rose more than expected, by 0.3 percentage points to nearly a 4-year high of 3.8%. Such conditions probably left the public with even less free cash in their pockets to spend on various goods. To add to the downward spiral, consumer prices contracted by more than expected in July, by -0.7%. Seeing that prices are sticky, it may have taken at least one month for the decline in the previous month's spending to weigh on prices of the current period. As such a decline in prices may have been led by plummeting employment and thus dwindling consumption.

The Euro-Zone Trade Balance for June, expected to expand to the highest level since September 2007, will likely improve dramatically as anticipated. Imports from the region to the United States, the area’s largest trading partner, shot up 12.0% in June alone. China’s recent trade balance data revealed that imports from Germany, the Asian country’s largest Euro-Zone trading partner, grew 3.5% in June while shipments from Italy rose 8.0%. Much of this is likely to be reflected in the broader trade balance figure of the 16-nation area.

Written by Luis Gil, DailyFX Research
Article Source - Euro Drops to Key Support as Risk Aversion Hits Currency Markets (Euro Open)