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)

• Euro Held Back As CPI Raises Specter Of Ongoing ECB Rate Cuts
• Japanese Yen Torn Between Questionable Safety, Recession Reminders
• Canadian Dollar Takes Lead On Com Bloc With GDP Numbers

Dollar Rally Cut Short As Risk Evaluated And Data Disappoints

It was bound to happen – especially with substantial event risk drawing so close. The three-day rally that pulled the US dollar up from its two-and-a-half month lows was finally put off its pace Wednesday as currency traders gauged their exposure to the events due in the days ahead (G20 meeting and NFP release ) while once again taking stock of consequential data crossing the economic docket.

With little more than 36 hours to go until the Group of 20 leaders convene in London, traders are still trying to discern which currency is best positioned to benefit from a positive outcome and which offers the greatest level of protection from a crushing disappointment. While the dollar can weather both scenarios given certain consequences, the focus and uncertainty on the US, its dollar and policies make it a risky bet. We have outlined the situation over the past few days; but circumstances are ever-changing and policy makers are taking advantage of the market’s and media’s attention to air their demands, tout their efforts and offer their forecasts ahead of the gathering. There was yet another round of this grandstanding today. Reflecting the resistance building in the Euro Zone, French Finance Minister Christine Lagarde said the country’s representatives would walk out of the April 2nd meeting if their “deliverables” are not met. While this was largely focused on beneficial, regulatory changes; it is nevertheless telling of the attitude that these officials will take to a conference that has historically fallen short in developing policy.

Along, different lines Japanese Prime Minister Taro Aso has perhaps shown his lack of confidence in a global solution by announcing he has set his ministers to work to develop a third reiteration of financial stimulus by mid-April. This is a reasonable effort however considering the likelihood that officials will be able to come to an agreement over a one-day meeting and with respect to forecasts for global growth. The World Bank lowered its growth forecast for 2009 down to a 2.1 percent slump while the OECD projected a 4.3 percent plunge for its 30 member group along with expectations for 36 million unemployed within the G7 by the end of 2010. With all this under consideration, we have to remember that the US is the world’s largest economy and likely has the most to gain from global coordination. Should the world’s largest economies work together to correct some of the underlying, global problems, it could more surely lead to positive results and remove the defacto responsibility that the United States has taken to correct a world-wide problem in addition to its own troubles. And, lest we forget, there is the Russian and Chinese proposal for a new world reserve currency. If this suggestion is shot down, it could still hurt the dollar by stalling discussion on other topics.

When everything is said and done, the G20 meeting could have a substantial and lasting impact on the dollar’s future - but so too will the more mundane data that continues to cross the wires. The indicators released this morning reminded market participants that the worst of the recession has not passed us. Topping the docket this morning, the Conference Board consumer confidence report ticked higher for its March reading; but not enough to make up for that fact that it is just off a record low. Americans saw employment and conditions deteriorating to new lows through the month, but were slightly less pessimistic about the future. This is likely due to hope placed in the government’s efforts to date, but such influence through general data has not yet been confirmed. The S&P/ CS housing market inflation report was more straightforward on its negative bias with its 25th contraction on year-over-year data to a record low. Looking ahead to tomorrow, ISM manufacturing and construction spending data will redefine growth forecasts; but we should also take count of the preliminary jobs data ahead of Friday’s NFPs.

Euro Held Back As CPI Raises Specter Of Ongoing ECB Rate Cuts

We were reminded today that there is more event risk on Thursday than just the G20 meeting. For the euro, there is an event that can carry just as much market moving potential and ultimately provided a clearer sense of direction: the ECB rate decision. Still a day away, we were reminded by of the pending policy announcement by around of key data that will no doubt factor into President Trichet and company’s decision. Further diminishing the argument that inflation is a realistic concern for the medium-term time frame the central bank monitors, the Euro-Zone CPI flash estimate for March cooled to a 0.6 percent pace of year-over-year growth – its slowest pace on record. And, while inflation was subtracted from the equation, the intensity of the Euro Zone’s recession was leveraged. Germany, Europe’s largest economy, reported joblessness jumped 69,000 through the current month for the worst contraction in four years and fifth consecutive increase. With the unemployment rate rising to a nine-month high 8.1 percent, it is hard not to forecast a deepening recession for Europe and the need for further easing from the ECB.

Japanese Yen Torn Between Questionable Safety, Recession Reminders

Yen traders have historically ignored Japanese economic data because the currency was playing a larger role in the FX market (recently as a funding currency for the carry trade or a safe haven). Ever since the 4Q GDP numbers rocked confidence in the currency’s ability to offer shelter from the financial torrent though, we have seen a greater interest in fundamentals. Today’s flow reminded investors that Japan is not immune to the global financial and economic crisis; and moreover that it stands to perhaps suffer far more than many of its large counterparts. From a wide range of data, the consumer was one of the key focuses. The jobless rate rose to a four-year high 4.4 percent through February while household spending dropped for a 12th consecutive month and income contracted at its fastest pace in five years. The other highlight was factory activity. The first quarter Tankan figures generated significant surprise. The confidence gauge for manufacturers fell to a record low according to the survey owing to the severe domestic recession and plunge in export demand. This report led to an immediate 125 pip drop in USDJPY.

Canadian Dollar Takes Lead On Com Bloc With GDP Numbers

Over the past few weeks, the approach of the Group of 20 meeting has led FX traders to focus on the most liquid currencies and more vocal members of the assembly. However, we should not overlook the opportunities and threats within the commodity bloc. Considered to be two of the strongest economies in the global rout, both Canada and Australia showed there is always reason to doubt today. From Canada, January GDP dropped 0.7 percent to maintain the longest recession on recent record and print the worst year-over-year contraction since 1991. The Aussie dollar responded to RBA Deputy Governor Battellino’s forecasts for negative growth over 2009 and a round of concerning data. Private credit growth slowed to its worst pace since 1994 while retail sales dropped the most since July of 2000.

Written by John Kicklighter, Currency Strategist
Article Source - Dollar Rally Cut Short As Risk Evaluated And Data Disappoints