The Euro oscillated higher overnight, retaking the 1.41 level. Pound mirrored Euro price action, pushing above the 1.76 mark. The UK Trade Balance report stands out as the single noteworthy release amid a variety of second-tier releases set to print in European trading hours. On balance, forex traders have seen little follow-through on economic data releases in recent weeks and are likely to get more of the same as price action continues to be guided by broad trends in risk sentiment.
[B][U]Key Overnight Developments[/U]
• Japanese Producer Prices Collapse in August on Cheaper Oil
• Growth Estimate Points to First UK Recession Since 1991
• Australian Consumer Confidence Higher on Rate Cut Expectations[/B]
[B][U]Critical Levels
[/U][/B]
The Euro oscillated higher overnight, retaking the 1.41 level. DailyFX Senior Currency Strategist Jamie Saettele sees a retracement through 1.4428 as indicative of a larger advance. Support is seen at 1.4042, with resistance at 1.4222. Sterling mirrored Euro price action, pushing above the 1.76 mark. Resistance now stands at 1.7708, with support found at 1.7506.
[B][U]Asia Session Highlights[/U][/B]
The [B]NIESR Estimate of Gross Domestic Product [/B]sank further into negative territory, showing the UK economy contracted -0.2% in the three months to August. The think tank also revised down its estimate for the three months to July to -0.1%. The reading suggests that the UK will descend into recession for the first time since 1991 by the end of this year. The Bank of England is expected to step in with rate cuts by the fourth quarter of this year and continue lowering borrowing costs until rates reach 4.00% (100 basis points below current levels) in the third quarter of 2009.
Japan’s wholesale prices collapsed in August as the [B]Corporate Goods Price Index[/B] contracted -0.1% versus a revised 2.2% in the preceding month. The result marks the first monthly decline in nearly a year. The drop comes courtesy of the rapid selloff in crude oil and other key commodities. To date, crude has fallen 31% since the peak at $147/barrel in mid-July. The release bolsters the case of the Bank of Japan, where policy makers have opted to keep borrowing costs at 0.50% even as headline inflation soared. Bank officials argued that commodity-led jumps in the price level had not produced dreaded second-round effects (like wage inflation) and so the focus of policy had to remain on economic growth. Indeed, the world’s second-largest economy is dangerously close to an official recession having seen GDP growth wither -0.6% in the second quarter. Bond yield forecasts call for the Bank of Japan to keep borrowing costs unchanged through most of next year, with a 25 basis point hike coming in the fourth quarter.
The [B]Trade Balance[/B] saw the surplus shrink further in July, albeit less so than expected, printing at 232.2 billion yen versus 252.1 billion in June. The metric continued to be distorted as higher fuel costs in the reference period inflated import volumes. The broader[B] Current Account[/B] metric (which includes cross-border capital flows in addition to trade in goods and services) saw the surplus decline further in the year to July, contracting -17.3%. The annualized reading declined for 5 consecutive months as stagnating demand in Japan’s key export markets withers amid the global economic slowdown. While the surplus improved on a monthly basis, economists generally consider these changes to be too volatile to be indicative of trends in cross-border trade patterns.
[B]Westpac Consumer Confidence[/B] rose again in September, gaining 7.0% having scored a massive 9.1% in August. As before, positive momentum is being driven by markedly lower petrol prices and the prospect of a continuing rate cuts from the Reserve Bank of Australia.
[B][U]Euro Session: What to Expect
[/U][/B]
The UK Trade Balance report stands out as the single noteworthy release amid a variety of second-tier releases set to print in European trading hours. Expectations call for marginally smaller monthly deficits in July than in the preceding month, though this will hardly derail the downward-sloping annualized trend. Further, there is considerable room for a downside surprise following yesterday’s disappointing Industrial Production figures. That metric fell -1.9% in the year to July versus -1.4% expected. As we had noted in yesterday’s report, global economic slowdown has taken its toll on demand both domestically and in key European export markets. If the metric indeed improves the uptick will likely come by way of lower import volumes as UK consumers cut back spending. To be sure, this scenario is remote as the collapse in crude will not be readily visible in July figures, with import volumes still likely to reflect buoyant commodities.
On balance, traders have seen little follow-through to economic data releases in recent weeks as price action continues to be guided by broad trends in risk sentiment. Robust optimism following the government takeover of mortgage lenders Fannie Mae and Freddie Mac gave way today on news that Korea Development Bank rejected another deal to buy a large stake in major US investment bank Lehman Brothers. The news saw Wall St close in the red while Asian equity indices opened substantially lower. Forex traders could be in for significant volatility in the coming days as the specter of a collapse at a major institution continues to threaten financial markets.
[B][U]Related Articles[/U][/B]
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To contact Ilya regarding this or other articles he has authored, please email him at <[email protected]>.[/I]