The Euro accumulated over 100bps in gains through overnight trading as equity markets looked to rebound after a week of risk aversion. The first increase in German consumer prices since July, 2008 added further evidence that prices are beginning to stabilize. However, the remainder of the economic docket provided more evidence that the European recession is deepening.
[B][U]Talking Points[/U]
• Japanese Yen: Tests 98.20
• Pound: UK Manufacturing Falls For Ninth Month
• Euro: German Exports Decline
• US Dollar: Wholesale Inventories On Tap
[U]Euro, Pound Finds Support Despite Declining Manufacturing Activity, Bernanke To Testify[/U][/B]
The Euro accumulated over 100bps in gains through overnight trading as equity markets looked to rebound after a week of risk aversion. The first increase in German consumer prices since July, 2008 added further evidence that prices are beginning to stabilize. However, the remainder of the economic docket provided more evidence that the European recession is deepening. Indeed, German exports fell by 4.4% which was the fourth straight month of weakness, which led to an increase in the trade balance to 8.5 billion from 7.3 billion. Meanwhile, French manufacturing fell 4.1% in January bringing the annualized decline to 16.5%. A 15% drop in consumer goods was the main cause of the decline as the deepening recession continues to lead to consumers retrenching.
The Euro’s strong correlation to risk appetite was evident today as the single currency gained despite weak fundamental data and ECB member Lorenzo Bini Smaghi dovish comments. The policy maker stated that “If the (economic) situation worsens, the ECB is ready to reduce rates further, even to zero,” in an interview with German business paper Boersen-Zeitung. This is a departure from the consistent rhetoric from the central bank that a zero interest rate policy wasn’t a possibility. He would go on to say that increased deflationary pressure would be the main cause of such an aggressive move. Although the increase in German prices makes that scenario less likely, a drop in Chinese prices could filter through to the global economy and raise those concerns again. Meanwhile, Bundesbank President Axel Weber is on the worse stating that the German economy is expected to be hit worse than expected by the global downturn which could lead to heavy Euro trading. The 20-Day SMA at 1.2701 has provided resistance again for the euro/dollar which could leave the pair open to a retrace during U.S. trading.
The Pound has regained its footing after whipsaw action following a manufacturing production dropped for a ninth straight month. Activity fell 2.9% in January dragging the annualized rate to -12.8% signaling that the U.K. economy may see a deeper than expected contraction in the first quarter. An 18% drop in metals led the way as the global recession has destroyed demand for raw materials. Sterling is looking to test 1.3900 where a move back above 1.400 cold lead to a test of the 20-Day SMA at 1.4223. However, if we see a reversal in risk appetite then the dismal fundamental data could see a return of recent bearish pound sentiment.
A relatively empty economic calendar will leave dollar price action up to the broader macro trends. Risk appetite has slightly picked up which has weighed on the dollar during overnight trading. Wholesale inventories are due for release and are expected to have declined by another 1.0% in January after a 1.4% decline the month prior. The declining expectations for demand have led to a massive reduction in production which is starting to decrease supplies. As goods increasingly grow scarce and dollars become more plentiful as the government pumps them into the system, the risks of inflation will grow. Therefore, the central bank may need to reverse their recent easing as soon as growth begins to return to avoid historic increases in prices. Fed Chairman is scheduled to speak today on bank regulation and if the markets don’t like what he has to say, it could negatively impact demand for stocks and lead to dollar weakness. Otherwise, current bullish sentiment should lead to dollar weakness as it retraces some of its recent gains.
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To discuss this report contact John Rivera Currency Analyst:[/I] [EMAIL=“[email protected]”][email protected]
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