The US Dollar rose to test above multi-year resistance to start the trading week as Asian stock exchanges fell close to 4% on fears of deepening global recession. The Euro Zone Consumer Price Index headlines the economic calendar in European trading hours.
[B][U]Key Overnight Developments[/U]
• Australian Manufacturing Shrinks at Record Pace in February
• Japan’s Annual Vehicle Sales Fall 32%, Most Since 1980
• US Dollar Broadly Higher as Stocks Tumble on Asian Exchanges[/B]
[U][B]Critical Levels[/B][/U]
The [B]Euro[/B] gapped down at the weekly trading open and dropped below the 1.26 level against the US Dollar. The [B]British Pound[/B] followed suit, testing as low as 1.4177. The US Dollar was boosted by capital fleeing from risky assets as Asian stock exchanges slumped close to 4% on fears of deepening global recession, rising to test above key multi-year resistance levels. For complete analysis of all the major currency pairs, please see the latest weekly technical outlook report.
[U][B]Asia Session Highlights[/B][/U]
Australia’s [B]AiG Performance of Manufacturing Index[/B] fell to 31.7 in February, suggesting activity in the sector is shrinking at the fastest pace since recordkeeping began in 1992. The reading suggests that companies will continue to cut back production and shed jobs as global demand dwindles, trimming disposable incomes to discourage spending and weigh on overall economic growth. Indeed, the trade balance has narrowed sharply on falling exports of coal and iron ore while the unemployment rate jumped to 4.8% in January to register the largest monthly increase since February 2001. The barrage of dour data is making it increasingly likely that Australia will follow other top economies into recession in 2009. For their part, the [B]Reserve Bank of Australia[/B] is likely to cut interest rates again later this week as policymakers struggle to keep the larger antipodean economy afloat. Overnight index swaps see the markets pricing in a 25 basis point reduction to bring borrowing costs to 3.00%.
In Japan, [B]Vehicle Sales[/B] tumbled an unprecedented -32.4% in the year to February, the lowest since records began in 1980. The reading reflects dwindling demand for Japanese export goods that has pushed companies to cut back manufacturing capacity and boosted unemployment, weighing on consumption and shrinking the economy. On balance, some hope may lay ahead if the recent decline in the Yen is to be sustained, helping to encourage overseas sales by making Japanese goods cheaper for foreign buyers. The currency has slipped over 9% since peaking in January, lifting sentiment in the manufacturing sector.
[U][B]Euro Session: What to Expect[/B][/U]
The initial estimate of the [B]Euro Zone Consumer Price Index[/B] is set to print at 1.0% in the year to February, down from 1.1% in the previous month. While the weight of deepening recession on price growth has certainly been dramatic, it is important to note that an upside surprise is possible this time around. Last week, we saw estimates of German CPI tick higher than forecast in February (1% vs. 0.8% expected), which may push the overall EZ figure higher. Importantly, the validity of the German result is suspect: the estimate is derived from regional CPI results from six German states, four of which reported technical problems in February and will recalculate their findings. This means that traders are unlikely to pay much attention if tonight’s reading should come in higher. On balance, the trajectory in Euro Zone inflation is certainly pointing lower as the European Commission expects the collective regional Zone economy will shrink -1.9% through 2009, a record low since the introduction of the single currency. The European Central Bank is expected to cut interest rates by 50 basis points to 1.50% later this week.
Looking to the UK, [B]Net Consumer Credit[/B] and [B]Mortgage Approvals[/B] are both expected tick marginally higher in January. However, it is unlikely that these readings mark the beginning of any sustained improvement in consumer lending. Market research agency GfK reported last week that a whopping 40% of British mortgage holders to be in negative equity by the end of this year (meaning the value of the mortgage loan is greater than the value of the underlying home). Separately, the [B]Purchasing Manager Index[/B] is set to show that sentiment in the manufacturing sector fell in February. Similar results are expected in analogous metrics for the construction and services industries, pointing to more job cuts, weaker spending, and a deeper slump in economic growth. GDP fell -1.9% in the fourth quarter, the largest drop in over 17 years, while the International Monetary Fund has said that the UK faces the worst recession among the G7 nations. The Bank of England is set to announce monetary policy later this week, with mixed expectations likely to create substantial volatility for the British Pound.
Trends in risk sentiment continue to favor [B]US Dollar[/B] upside: Asian stock exchanges lost as much as -3.8% and US equity index futures are down -1.4% on fears of deepening global recession. Should risky assets remain under pressure in European trading, the greenback is likely to sustain upward momentum.
[I]To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.[/I]