Euro Open: Will Switzerland Follow the EU into Recession?
Japan’s Merchandise Trade Balance saw the surplus shrink further in July, registering at 91.1 billion yen versus 235 billion expected and 138.6 billion in the preceding month. Australia’s New Motor Vehicle Sales contracted -4.1%, the worst reading in 24 months. Forex traders will be focused on the wealth of Swiss data set to hit the tape in European trading. Acute deterioration in top EU countries threatens to spill over into the mountain nation as the regional bloc is the destination for nearly 60% of all Swiss exports.
Key Overnight Developments
• Japanese exports surge in July as shipments to China rise 16.8%
• Australian vehicle sales shrink -4.1% as the economy continues slowing
The Euro advanced higher, reaching as high as 1.4790 and building momentum for a test of the 1.48 level. DailyFX Chief Strategist Jamie Saettele expects the Euro to correct to 1.5000 before an eventual decline to 1.4431. Sterling saw some initial upside in early Asian trading but fell sharply lower towards the 1.86 mark late into the session. Support is seen at 1.8512 with resistance at 1.8786 and 1.9034.
Asia Session Highlights
Japan’s Merchandise Trade Balance saw the surplus shrink further in July, registering at 91.1 billion yen versus 235 billion expected and 138.6 billion in the preceding month. The contraction in the trade surplus came courtesy of a spike in imports: inbound shipments rose at the fastest pace in two years at an annualized rate of 18.2% on higher oil prices. However, exports surged 8.1% having fallen -1.8% in the last release, the largest drop in seven years. Exports to Asia surged 12.7%, with China leading the way seeing outbound shipments rise 16.8%. By comparison, exports to the EU rose just 4.1% and those to the US fell -11.5%. This comes on the heels of yesterday’s JPMorgan report saying China will introduce a fiscal stimulus package in the near term.
All this adds up to very good news for Japan: the external sector is a major driver of growth for the world’s second largest economy, which inched closer to recession having seen GDP shrink -0.6% in the second quarter. The top question going forward will be whether Japan can sustain such favorable trade results as the world economy decelerates. Slowing global demand will not leave China unscathed, and it remains to be seen if their hunger for Japanese goods will remain as robust after the Olympic Games are over.
Australia’s New Motor Vehicle Sales contracted -4.1%, the worst reading in 24 months. The result is yet another reminder that the economy is slowing. Recent commentary from the Reserve Bank of Australia suggest the bank is preparing to cut interest rates in the near term, with the market currently pricing in 100 basis points of monetary easing to put interest rates at 6.25% in the next 12 months.
Euro Session: What to Expect
Switzerland’s June Retail Sales figure is expected to see receipts growing at an annualized 3.3%. May saw a sharp uptick to 7.4% as the Euro2008 soccer championship co-hosted by Switzerland and Austria brought strong growth in electronics (23%), beverages (12.5%), and leisure goods (15.6%). A moderation in June would help the Swiss National Bank realize their expectations of a slowdown towards the second half of 2008 to bring inflation back within the target range. Switzerland has been relatively resilient in the face of the global economic slowdown. With unemployment at the lowest level since 2002, retail activity could remain well-supported.
That said, acute deterioration in top EU countries will not go unnoticed – the regional bloc is the destination for 60% of all Swiss exports. Indeed, the Trade Balance is expected to see the surplus shrink from 2.41 billion francs in June to 2.0 billion in July on slowing outbound volumes. Producer Price Index figures are seen printing at 4.6% in July, a new 18-year high. The metric tends to lead Consumer Prices as firms pass on higher input costs via a higher purchase price for the final product. Quarterly price level readings are already well on pace to surpass the SNB’s forecast of a top at 2.75% in the three months to June, putting pressure on the central bank to act on rates at September policy meeting. Another strong decline in the August edition of the ZEW Survey of analyst sentiment would help policymakers justify the on-hold posture: July yielded -76.9, the lowest reading in at least 2 years.
UK Retail Sales are expected to print at a meager 1.8% in the year to July, the slowest in over 2 years. The pace of sales growth slowed a whopping 72% in June as consumers took stock of the sagging economy and prepared for the leaner period ahead by drastically cutting spending. An estimate from the British Retail Consortium (BRC) put July sales at 1.7% in a release last week. That said, the Bank of England is unlikely to act on rates in the near term. As pointed out by DailyFX Currency Strategist Terri Belkas, the minutes of the last monetary policy meeting suggest “the BOE will seek to leave rates steady, rather than raise rates. While overnight index swaps may be pricing in over 75bps worth of rate cuts within the next 12 months, these moves may not occur until 2009.”
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