The Euro is little changed ahead of the opening bell in Europe: the single currency would slip as low as 1.2689 overnight but has since recovered back into the 1.2730-40 area. Euro Zone and German CPI readings are forecast to drop to multi-year lows in the upcoming session, putting the onus on the ECB to act before the common market slips into deflation.
[B][U]Key Overnight Developments[/U]
• Japanese Recession Deepens But Cheaper Yen Offers Hope
• UK Consumer Confidence Holds Near Record Low in February
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Critical Levels[/U][/B]
The [B]Euro[/B] is little changed ahead of the opening bell in Europe: the single currency would slip as low as 1.2689 overnight but has recovered back into the 1.2730-40 area. The [B]British Pound [/B]has spent the Asian market session confined to a narrow 40-pip range below the 1.43 handle. For complete analysis of all the major currency pairs, please see the latest weekly technical outlook report.
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[U]Asia Session Highlights[/U]
[/B]Signs of deepening recession continue to abound in Japanese economic data. The pattern is a familiar one: dwindling export demand has pushed Japanese companies to cut back manufacturing capacity and boosted unemployment, weighing on consumption and shrinking the economy. [B]Industrial Production[/B] fell a staggering -30.8% in the year to January; [B]Household Spending[/B] shed-5.9%, the most in over 2 years; and [B]Retail Trade [/B]shrank for the fifth consecutive month. Although the [B]Jobless Rate[/B] backed off last month’s high to print at 4.1% in February, the ratio of available jobs to seeking applicants fell to 0.67 from 0.73 in the previous month, the largest drop in 17 years. This suggests the improvement in the headline figure came as disenchanted workers gave up looking for a job and dropped out of being counted in the labor force (defined as the sum of the working and those actively trying to find employment). Although Prime Minister Taro Aso announced a plan to spend 400 billion yen to create 250k new jobs over three years, the scheme failed to get enough support in the opposition-controlled upper house of parliament to make funding accessible. Sluggish economic activity has weighed on inflation, bringing the [B]Consumer Price Index[/B] to 0.0% in the year to January and threatening a return to deflation just around the corner.
Manufacturing sector confidence offered a solitary bit of hope amid the gloom as [B]Nomura/JMMA Manufacturing PMI[/B] ticked higher for the first time in six months, printing at 31.6 in February from a record low at 29.6 registered in January. The improvement likely comes on the heels of a drop in the Yen, helping producers dependent on foreign demand by making Japanese goods comparatively cheaper for overseas buyers. Indeed, the currency has fallen -11.3% since peaking in late January. Perversely, the overwhelming magnitude of the economy turmoil plaguing Japan at present may well be its saving grace in that it has eroded the link between the Yen and risk sentiment. If the current decline has staying power, it may well lay the foundation for an eventual recovery for the world’s second-largest economy.
In the UK, [B]Consumer Confidence[/B] ticked nominally higher to -35 in February from -37 in the preceding but remained within a hair of the record low at -39 according to GfK, a market research agency. Importantly, GfK itself said that it expects a whopping 40% of British mortgage holders to be in negative equity by the end of this year (meaning the value of the loan is greater than the value of the underlying home). The shift would be disastrous for consumer spending and would only be compounded by further unemployment growth as the recession deepens. According to forecasts by the International Monetary Fund, the UK faces the worst contraction among the G7 nations. Bank of England policymaker David Blanchflower predicted that 3 million people will be unemployed by the end of 2009.
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[U]Euro Session: What to Expect[/U]
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The [B]Euro Zone Consumer Price Index[/B] is set to fall -0.8% in January to bring the annual pace of inflation to 1.1%, the slowest in nearly a decade. Meanwhile, preliminary estimates of [B]Germany’s February CPI[/B] put the metric at an annualized 0.8%, the lowest in 5 years. The downward pressure on price growth can only expected to intensify as the recession gripping the common market deepens. The European Commission expects the collective Euro Zone economy will shrink -1.9% through 2009, a record low since the introduction of the single currency.
While this seemingly makes for an ideal environment to slash borrowing costs, overnight index swaps price in the likelihood that the [B]European Central Bank[/B] will shift to neutral after reducing rates by 0.50% in March. Such as decision would take as given that economic activity will at worst find a stable bottom through this year, averting a slide into deflation. If the downturn lasts longer than currently expected however, the ECB may find itself forced to play catch-up having been noticeably less aggressive than other major central banks in easing monetary conditions. Indeed, a survey of economists conducted by Bloomberg already suggests the Commission’s forecast is a bit too rosy, calling for the economy to contract -2.2% this year. The implications for the Euro are decidedly bearish: the ECB has diligently built up expectations that rates will stabilize at 1.50%; an unexpected dovish shift is likely to put significant selling pressure on the currency as traders scramble to price in a new yield outlook.
In Switzerland, the [B]KOF Leading Indicator[/B] is expected to set a new record low at -0.93 in February, down from -0.87 in the preceding month. The metric is a composite of six leading indicators designed to show the trajectory of the economy in the forthcoming six to nine months. Expectations call for total output to shrink -2% through 2009, the worst performance since 1975.
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To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.[/I]