The Euro saw little momentum, ranging in familiar territory above 1.46. The British Pound consolidated daytime loses around the 1.84 mark. A busy European calendar coincides with mounting uncertainty about a final agreement on the US rescue plan for financial markets and the largest bank failure in US history, opening the door for a volatile session to close the week.
Key Overnight Developments
• New Zealand In Recession As Economy Shrinks in the Second Quarter
• Japanese Inflation Slows in September, Core Prices Print Flat
• Negotiations Break Down on US Financial Market Rescue Plan
• Regulators Seize Washington Mutual, JPMorgan Buys Out Deposits
Critical Levels
The Euro saw little momentum, ranging in familiar territory above 1.46. Support is found at 1.4521, with resistance lined up at 1.4729. Sterling consolidated daytime loses around the 1.84 mark. Support is seen at 1.8227, with resistance at 1.8590.
Asia Session Highlights
New Zealand’s economy shrank for a second consecutive quarter in the three months to July, putting the island nation formally into recession. Quarterly Gross Domestic Product fell -0.2% to bring annualized growth to 1.0%, the lowest in 2 years. The release only confirmed what had been a working assumption of New Zealand’s monetary authorities: RBNZ Governor Alan Bollard has already slashed interest rates by 75 basis points over the last two policy meetings and the market is pricing in an additional 150bps in monetary easing over the next 12 months. To that effect, the New Zealand dollar actually rose about 70 pips after the release because quarterly growth declined less than economists had forecast.
The pace of Japanese inflation slowed in September as the Consumer Price Index printed at 2.1%, down from 2.3% in the preceding month. That prices grew at all owed squarely to lingering price pressures from record commodity prices over the summer. Indeed, the core reading which excludes feed and energy stalled at 0.0%. Headline consumer prices are likely to decrease substantially into the second half of the year as sharply lower crude oil filters into the broad economy. The Bank of Japan has been adamant in asserting that their primary focus remains sagging economic growth rather than inflation. To that effect, bond yields forecast interest rates to remain unchanged until at least the fourth quarter. The world’s second largest economy has slipped into recession a negative GDP reading in the second quarter. Yesterday, we saw the Trade Balance fall into deficit on dwindling exports while the newly appointed Finance Minister Shoichi Nakagawa announced the possibility of fiscal stimulus, saying the government will consider cutting taxes and increasing spending.
Just when a final deal was within reach, US lawmakers fell short of securing agreement on the Treasury Department’s $700 billion rescue plan to shore up the financial markets. Congressional leaders worked late into the night with Treasury Secretary Henry Paulson to finalize provisions only to have efforts dashed by Republican members of the House of Representatives who said the plan would mean too much of a commitment of taxpayers’ money and too great of an intrusion into private enterprise. The dissenters circulated an alternative proposal, whereby the government would insure unstable financial institutions rather than outright buying their holdings of problematic assets. Meanwhile, regulators stepped in to seize Washington Mutual in what marks the biggest bank failure in US history. JPMorgan Chase & Co., the third-largest US bank, stepped in to buy Washington Mutual’s deposits for $1.9 billion.
Euro Session: What to Expect
A busy European calendar coincides with mounting uncertainty about a final agreement on the US rescue plan for financial markets, making for a volatile session to close the week. Preliminary estimates of Germany’s Consumer Price Index are expected to see the metric decline -0.2% on a monthly basis to bring inflation to 2.8% in the year to September, the lowest in 5 months. As the largest economy in the Euro Zone, Germany is a fairly indicative of the direction of overall prices in the currency bloc. According to DailyFX research, changes in German CPI have explained 72.6% of the changes in the overall Euro Zone CPI reading since the introduction of the single currency in 1999. We reckon a drop to 2.8% in Germany would bring Euro Zone annualized inflation down by about 0.8% in September. This would put prices significantly closer to the ECB’s target 2% and possibly open the door for an interest rate cut. As it stands, bond yields forecast the first 25 basis point cut in the first quarter of 2009 with 50bps more in easing over the course of next year.
Final revisions of France’s Gross Domestic Product are expected to confirm that the economy shrank -0.3% in the second quarter. This would see annualized growth at 1.1% and put the Euro Zone’s number-two economy within a hair of recession. Indeed, economists’ forecasts call for annualized growth at 0.5% in the three months to October.
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To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.
