The Euro remained under selling pressure in overnight trading while the Pound oscillated in a wide 55-pip range around the 1.75 level. Overnight data brought surprises as the Reserve Bank of New Zealand cut interest rates by a greater-than-expected 50 basis points while Australia’s economy added nearly three times more jobs than expected. The docket is noticeably bare in European trading hours, with price action likely to fall in with risk sentiment again.
[B][U]Key Overnight Developments
[/U]
• Australians Expect Lower Inflation in September
• RBNZ Surprises, Cuts Interest Rates by 50 basis points
• Australian Employment Change Beats Expectations, Jobless Rate Falls
[U]Critical Levels[/U][/B]
The Euro remained under selling pressure in overnight trading, reaching as low as 1.3932 before consolidation settled in around the 1.3950 mark. DailyFX Senior Currency Strategist Jamie Saettele sees a retracement through 1.4428 as indicative of a larger advance into the 1.48-1.50 area. Support is seen at 1.3870 with resistance at 1.4119. Sterling oscillated in a wide 55-pip range around the 1.75 mark. Support stands at 1.7419, while resistance is found at 1.7629.
[U]
[B]Asia Session Highlights[/B][/U]
[B]The Reserve Bank of New Zealand[/B] surprised the markets today, cutting interest rates by 50 basis points versus the expected 25bp decrease. Bank Governor Alan Bollard was candid as usual, saying “We’re in a loosening mode [and] and we’ve got room to move.” The central bank thinks the economy likely shrank -0.2% in the second quarter and will contract -0.3% in the three months to October. Index swaps suggest benchmark rates will shed another 125 basis points in the next 12 months.
Australian [B]Consumer Inflation Expectations[/B] eased to 4.4% in September from 4.9% in the preceding month. Forecasts for price growth have eased 25.4% having peaked in July as crude oil prices reached a record $147/barrel. Inflation expectations have eased on slowing economic activity at home and abroad as well as sharply lower fuel prices. The Australian economy has apparently managed to avoid the dreaded “second-round” effect where expectations of higher prices in the future cause employees to demand higher wages and thereby lock in inflation until job contracts can be renegotiated. Indeed, expected hourly wage changes ticked lower in all but one of the surveyed sectors. Easing upside pressure to both real and expected inflation levels will allow the Reserve Bank of Australia to continue with hits campaign to cut interest rates and support economic growth. Bond yield forecasts call for rates to decline 75 basis points to bring benchmark rates to 6.25% by the second quarter of 2009.
The labor market offered some positive news: Australian [B]Employment Change[/B] figures saw the economy add 14.6k jobs in August. Expectations called for an increase of 5.9k after the economy added 18.7k jobs in July. The Unemployment Rate fell to 4.1% from 4.3% in the preceding month. The uptick reveals continued strength in the mining sector as companies expanded capacity to meet Chinese demand for coal and iron ore. That said, firms dependent on domestic demand are likely to cut jobs as economic growth falters. Indeed, GDP grew at the slowest rate in 5 years in while consumer spending fell to the lowest since 1993 in the second quarter. Rosy labor figures may reverse course into the second half of the year as China feels the sting of the global slowdown and mining demand begins to cool. Reserve Bank of Australia Governor Glenn Stevens has said that “The rate of employment growth will slow. It is starting to do that already.” The bank chief expects the jobless rate to rise “a bit” over the course of next year.
[U][B]Euro Session: What to Expect[/B][/U]
The docket is noticeably bare in European trading hours. Germany’s [B]Wholesale Price[/B] Index is expected to see inflation fall -0.2% in August to an annualized growth rate of 8.6%. The release would mark the first downtick in the metric in over a year, driven by the sharp selloff in crude oil prices. Easing inflationary pressure gives the ECB room to cut interest rates following news earlier today that the European Commission lowered their forecasts for economic growth. GDP expansion was revised to 1.3% from 1.7% in 2008. Last week saw the European Central Bank revise down their growth estimates, calling for GDP to expand between 1.1 to 1.7 percent in 2008 and 0.6 to 1.8 percent in 2009. The bank also noted that downside risks to the outlook were “particularly high”.
On balance, price action likely to fall in with risk sentiment again. Marginal gains on Wall St after Lehman Brothers surprised with better-than-expected quarterly earnings failed to carry over into overnight trading as Asian equity indices slumped on renewed risk aversion. As we mentioned earlier this week, increasing concerns about the stability of the financial markets and the looming specter of global recession has seen investors move their money into cash. Considering the interest rate outlook for 2009, it makes sense that the cash of choice was the US dollar.
[B]Related Articles:[/B]
Forex Technicals: The Day Ahead, September 11
New Zealand Dollar Pulls Back As RBNZ Slashes Rates to 7.5%, Bollard Remains Dovish
[I]To contact Ilya regarding this or other articles he has authored, please email him at <[email protected]>.[/I]