The Euro and the British Pound May are in focus with back-to-back interest rate announcements from the European Central Bank and the Bank of England headlining the economic calendar. While neither policymaking body is likely to act on benchmark borrowing costs, significant changes in quantitative easing policy could stir heavy volatility.
[U][B]Key Overnight Developments[/B][/U]
[B]• Japanese Corporate Profits, Investment Tumble on Overseas Demand
• Australian Trade Balance Unexpectedly Falls Into Deficit in April
• NZ Commodity Price Report Shows Currency Gains Threaten Recovery[/B]
The [B]Euro[/B] recovered a bit of ground overnight after heavy losses in New York trading hours, adding as much as 0.4% against the US Dollar. The [B]British Pound[/B] diverged from the single currency, slipping as much as -0.8% ahead of the opening bell in Europe.
[U][B]Asia Session Highlights[/B][/U]
Japan’s [B]Capital Spending[/B] fell -25.3% in the first quarter, the largest drop in at least seven years. Annual profits fell by a staggering -69.0%, with [B]profit-to-sales ratio[/B] falling to just 1.4%, the lowest in at least 8 years. Profit margins for electronics and car manufacturers suffered the greatest losses, shrinking -6.9% and 7.1% respectively, on dwindling overseas demand. Lackluster investment in expanding or improving production capacity suggests firms are expecting a sluggish global rebound from the current downturn. This worldview is likely to translate into tepid hiring, weighing on consumption and keeping the lid on economic growth.
Australia’s [B]Trade Balance[/B] fell into deficit for the first time since July 2008 in April, showing a –A$0.09 billion deficit after posting a revised A$2.3 billion surplus in the previous month. Economists had forecast a A$1.7 billion result ahead of the release. Exports fell -11.3%, the most in at least 6 months, while imports shed -1.7%. Shipments to China fell for the first time since November 2008, losing -14.8%. RBA Governor Glenn Stevens has repeatedly expressed optimism about Chinese economic growth, noting that exports to the south-Asian giant will help Australia weather the current global downturn. Revenues from overseas sales of coal and iron ore, the country’s top export commodities, fell -17.7% and -21.1% respectively.
Although the economy unexpectedly grew in the first quarter, details of the report suggested that much of the result was owed to aggressive fiscal stimulus, raising concerns about the sustainability of such performance in the months ahead. Tellingly, Australian Treasurer Wayne Swan noted that his country was yet to feel the full impact of the global recession, alluding to expectations that overseas demand would continue to fall from current levels. The International Monetary Fund has forecast that world trade volumes will shrink -11.0% in 2009 and grow by a meager 0.6% in 2010.
New Zealand’s [B]ANZ Commodity Price Index[/B] revealed that world prices for the country’s top exports rose for the third consecutive month in May, adding 2.7% from the previous month. Prices for dairy, New Zealand’s top export commodity, rose 5% to register the biggest gain in at least 7 months. Most critically, prices measured in terms of the New Zealand Dollar fell for the third consecutive month, the increase in global prices is accounted for by a stronger local currency rather than improved overseas demand. A stronger currency will weigh on exports (which account for 30% of total output) and hamper the economy’s ability to recover, making New Zealand’s goods comparatively less competitive.
[U][B]Euro Session: What to Expect[/B][/U]
Interest rate announcements from the European Central Bank (ECB) and the Bank of England (BOE) headline the economic calendar in the forthcoming session. Looking first at the ECB, traders will be most anxious to see the details of unconventional stimulus measures announced at the last meeting in May. So far, ECB President Jean-Claude Trichet has only said that the bank would move forward on a scheme to “purchase euro-denominated covered bonds issued in the euro area,” saving the details of the plan for this go-around. On balance, the ECB has been notably more reserved than most of its major counterparts in offering monetary stimulus. Such waffling may see the Euro punished as the markets price in a longer path to recovery as well as the political implications of inaction. Indeed, grumbling electorates are increasingly likely to entertain calls to free national monetary capabilities from the ECB’s “measured approach” as recession deepens and unemployment levels rise, threatening the very existence of the currency union itself.
Turning to the BOE, chances for any further easing are virtually nil with benchmark borrowing costs already at just 0.50%. To that effect, the real question will be whether Mervyn King and company will expand their standing quantitative easing (QE) programs. Policymakers unexpectedly boosted their QE efforts by 50 billion pounds – another increase so soon after the last expansion would speak volumes about the bank’s perception of the headwinds facing the economy and could substantially weigh on the British Pound.
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