The Euro may continue to fall in European trading hours as another drop on Wall St weighs on risk sentiment while a heavy dollop of dour economic data points to deepening recession. The overnight session saw New Zealand’s trade deficit narrow as imports shrank -0.9% while Australia’s leading economic index fell for the fourth consecutive month.
Key Overnight Developments
• New Zealand Trade Deficit Narrows as Imports Shrink
• Australian Leading Index Falls for Fourth Straight Month
Critical Levels
The Euro consolidated daytime loses in overnight trading with prices confined to a narrowing range below 1.2750. The British Pound followed suit, oscillating in a 60-pip range around 1.4260.
Asia Session Highlights
New Zealand’s Trade Balance deficit narrowed to –NZ$5.48 billion in the year January, down from –NZ$5.62 billion in the previous month. The reading printed substantially better than economists predicted: preliminary forecasts had called for the gap to widen to –NZ$5.75 billion. The improvement in the headline figure came as deepening recession weighed on spending and eroded domestic demand more so than overseas sales. Indeed, although exports added just 3.0%, imports actually shrank -0.9% to NZ$3.36 billion, the lowest in 19 months. Yesterday, the Reserve Bank of New Zealand lowered forecasts for inflation and economic growth and said unemployment will average over 6% for the two years from the first quarter. Bolstering the dour outlook, NBNZ Business Confidence saw sentiment fall to -41.2 on a -29.1% drop in the employment outlook, reversing most of last month’s uptick to -35.This suggests spending is likely to remain sluggish for some time, giving scope for the trade shortfall to narrow further. From a long term perspective, this gives the New Zealand Dollar an advantage against the currencies of those countries where the trade deficit is likely to continue to widen, setting the stage for appreciation against the likes of the Euro and the Japanese Yen. Separately,
The Conference Board’s Australian Leading Index dropped -0.9% in December, the fourth consecutive month in negative territory. The index has fallen 2.3% from six months before. Major peaks or troughs in the index tend to precede key turning points in the economy. Indeed, the data is beginning to initial signs of topping out after trending higher since the last recession in 1990-91. A significant decline in the complimentary Coincident Index (whose major turning points tend to appear around the same time as in the overall economy) would confirm that the Leading metric is showing a true peak rather than a temporary correction. In any case, the markets see the central bank as well enough convinced of the perilous state of the economy to continue cutting interest rates: overnight index swaps see traders pricing in at least a 0.25% reduction when the Reserve Bank of Australia announces policy on March 3rd. The Australian Dollar is one of the few major currencies whose central bank has not yet completed the latest easing cycle, keeping a firm lid on any meaningful appreciation for the time being.
Euro Session: What to Expect
Germany’s recession is expected to continue to deepen, with the economy shedding another 60 thousand jobs to bring the Unemployment Rate to a 9-month high of 7.9%. Reasonably enough, job losses will weigh on spending, pushing GfK Consumer Confidence lower to 2.0 in March from 2.2 in the preceding month. Sluggish economic activity is expected to continue to put downward pressure on inflation, with preliminary estimates of the Consumer Price Index set to show the metric slipped to 0.8% in the year to February, the slowest pace in 5 years. Looking at the broader Euro Zone, sentiment readings are expected to set new record lows with Economic Confidence and the Business Climate Indicator dropping to 68.7 and -3.20, respectively.
While this seemingly makes for an ideal environment to slash borrowing costs, overnight index swaps price in the likelihood that the European Central Bank 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 central banks in easing monetary conditions.
To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.
