A deepening recession moved the Reserve Bank of New Zealand to cut interest rates for the first time since 2003, putting benchmark borrowing costs at 8.00%. The Kiwi dollar responded sharply, dropping 82 pips in the first 10 minutes following the release and continuing lower overnight. European trading promises volatility with a busy calendar in the day ahead. All eyes will be on the German IFO Survey as expectations call for the lowest reading since 2005.
Key Overnight Developments
• RBNZ Surprises, Cutting Rates 25bp to 8.00%
• Japanese Trade Surplus Shrinks as Exports Tumble
Critical Levels
Having breached near-term support in US hours, the Euro retraced a bit towards the 1.57 mark overnight. DailyFX Technical Strategist Jaime Saettele favors a long-term bullish bias as long as price remains above 1.5611, aiming for a sustained break above the 1.60 mark to target 1.6325. Support is seen at 1.5611. Sterling remained largely range-bound having slipped back below the 2.00 level late in the New York session. Support is seen at 1.9875, while resistance stands at 2.0150.
Asia Session Highlights
A deepening recession moved the Reserve Bank of New Zealand to cut interest rates by 25 basis points, putting benchmark borrowing costs at 8.00%. This is the first RBNZ rate cut since 2003. The accompanying release cited greater-than-expected risks to growth and tightening international credit conditions as primary catalysts for the decision. Borrowing a page from Australia's playbook, Governor Alan Bollard said that monetary policy has been "reasonably tight for some time, and is now restraining activity and medium-term inflation pressures." Bollard added that although recent spikes in oil and food prices will bring inflation to a peak near 5% this year, the slowing economy will act to bring price pressure to target levels in the medium term. Shaping expectations in a typically candid fashion, Bollard concluded by saying that "provided that the outlook for inflation continues to improve and there is no excessive exchange rate depreciation, we would expect to lower the OCR further." The Kiwi dollar responded sharply, dropping 82 pips in the first 10 minutes following the release and continuing lower overnight.
June’s Japanese Merchandise Trade Balance dealt a crushing blow to the idea that countries will be able to decouple the US slowdown by replacing American demand with that from emerging markets. The metric saw the trade surplus shrink to just ¥138.6 billion versus expectations of ¥506.0 billion. The result owed to a -1.7% decline in exports, the first net loss since 2003. While there was no surprise that exports to the US eased for a tenth consecutive month (falling -15.4%), the data revealed sharp declines in shipments to Europe (-11.2%) and to Asia (1.5% in June vs. 8.1% in May). Exports to China slowed to 5.1% from 12.2% in the preceding month. Declines in demand from emerging markets seemed only a matter of time: commodity prices along with buoyant home-grown economies have bid up prices levels, bringing on a sweeping trend of monetary tightening. Higher interest rates have depressed consumption, including that of goods imported from Japan. Given its reliance on the export sector to drive economic growth, current trends suggest Japan will be in a slump for some time to come.
Euro Session: What to Expect
European trading promises volatility with a busy calendar in the day ahead. A slew of second-tier business confidence releases from the Euro-Zone’s top three economies will culminate with July’s edition of Germany’s IFO Survey. June saw sentiment contract to the lowest in two years as rising oil prices erode disposable incomes all the while a stronger Euro crimps export demand. Expectations calling for more of the same this time around are likely to be validated as New Orders and Retail Sales from the 15-nation bloc has markedly deteriorated in recent weeks. A survey of analysts conducted by ZEW, a non-profit research institute, saw analysts’ sentiment collapse to the lowest level since 1992 in July.
The Euro-Zone Current Account is expected to improve a bit, with forecasts calling for a deficit of -€6.0 billion versus a sharp decline of -€9.2 billion in the preceding month. France was the only country in the EZ’s top three to show improvement in the current account in May as a widening deficit in the trade component was offset by gains in revenues and services. On balance, both Germany and Italy saw their current account readings deteriorate in the same reference period, leaving the door open for a downside surprise.
UK Retail Sales will likely decline further, with expectations calling for annualized growth to print at 4.4% June versus 8.1% in May. An economic slowdown led by the deepening housing slump coupled with rising oil and food costs brought June’s Consumer Confidence to the lowest in four years. This makes it quite reasonable that consumers tightened their belts last month, taking retail activity readings lower.
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