The Euro sold off sharply in overnight trading, crashing through 1.43 and slipping below the 1.42 level. Sterling followed the Euro lower, testing below the 1.80 level. Stock markets mounted a decisive rally and the US dollar soared as investors greeted news that the US Fed and Treasury are finalizing a comprehensive solution to current market turmoil.
Key Overnight Developments
• New Zealand Current Account sees record deficit as commodities peak
• Euro, Sterling punished by a resurgent US Dollar in overnight trading
• Stocks, US dollar rallied as investors greeted a comprehensive market rescue plan
Critical Levels
The Euro sold off sharply in overnight trading, crashing through 1.43 and slipping below the 1.42 level. DailyFX Senior Currency Strategist Jamie Saettele sees room for a bullish correction as long as price remains above 1.4071. Near term support is seen at 1.4124, with resistance at 1.4499. Sterling followed the Euro lower on broad US dollar strength, testing below the 1.80 level. A break below this key psychological support eyes the next hurdle at 1.7898. Near term resistance is seen at 1.8272.
Asia Session Highlights
Stock markets mounted a decisive rally and the US dollar soared in what could be a sign that the financial market upheaval seen in recent days is now receding. Investors greeted news that US Treasury Secretary Henry Paulson has been in talks with Congress to fashion a comprehensive solution to dealing with massive loses from bad debt that have brought down Lehman Brothers, forced the sale of Merrill Lynch and Bear Stearns, and forced authorities to prop up Fannie Mae, Freddie Mac, and insurance giant AIG. Paulson has proposed moving the cancerous assets to a dedicated government entity that would then liquidate them. The setup is very similar to the Resolution Trust Corporation that was set up in the 1980s to purge bad mortgages and non-performing real estate assets during the Savings and Loan crisis. Lawmakers expect to have legislation ready by this weekend.
New Zealand’s Current Account sank deeper into deficit in the second quarter, posting a greater-than-expected shortfall of –NZ$3.91 billion. This brought the annualized deficit to a record –NZ$14.97 billion even as prices peaked for New Zealand’s commodity exports. Overseas shipments were held back by a drought that cut into dairy production while oil prices inflated import volumes. Bringing the deficit back into sustainable territory will be a hard-fought battle: the commodities rally has apparently run out of steam in the near term, which will depress exports revenue. The adjustment will have to come at the expense of the New Zealand dollar: the Kiwi will lose value as the RBNZ cuts interest rates, making New Zealand’s exports comparatively cheap all the while reducing domestic consumers’ ability to buy from abroad. Over time, this will help push the Current Account in the right direction, though naturally it will take months if not years to play out. In the meantime, the market is pricing in that benchmark borrowing costs will shed between 125-150 basis points in the next 12 months.
The final revision of Japan’s Leading Index saw the metric marginally lower than initial estimates, coming in at 91.4 in July versus the initially reported 91.6.
Euro Session: What to Expect
The economic calendar is fairly light in European hours, with German Producer Prices the only notable item on the docket. Expectations call for the metric to shed -0.5% in August to bring the annualized growth rate down to 8.3%. This will mark the first down tick in a year, owing primarily to the sharp decline in oil and other commodities. To date, crude has lost over 30% since peaking at over $147/barrel in mid-July. Changes in production costs are reflected in the price of the finished good, meaning producer prices often serve as a reliable indicator of future consumer inflation. To that effect, shrinking producer prices in August likely signal lower consumer prices in the months ahead. We have already seen the pace of consumer price growth slow to 3.3% from 3.5% in August, with further easing adding to the argument that inflation has topped out. This will bolster the case for interest rate cuts from the European Central Bank, with bond yield forecasts calling for easing to begin by the second quarter of 2009.
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To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.
