The US Dollar reversed initial losses against the Euro and the British Pound ahead of the opening bell in London as stock markets slumped on a World Bank announcement calling for the first global recession since World War II. Overnight data saw the Japan post the largest Current Account deficit since 1986. Switzerland’s unemployment data and the Euro Zone’s Sentix Investor Confidence reading are on tap in European hours.
Key Overnight Developments
• Japan's January Current Account Deficit Largest Since 1986
• Euro, British Pound Fail To Sustain Gains Against US Dollar
• Japanese Merchant Sentiment Extends Rebound in February
Critical Levels
Traders initially bought the Euro in overnight trading, with EURUSD testing as high as 1.2727 after ECB board member Juergen Stark said lowering interest rates too far wouldn’t remedy the financial crisis and pushing rates too low may backfire. The single currency failed to sustain bullish momentum however, slipping -0.6% from the inter-session high ahead of the opening bell in London. The British Pound followed a similar dynamic, initially rising to test as high as 1.4183 but giving back the gains late into the session. The greenback was boosted as capital fled from risky assets, sending Asian stock markets down 1% after the World Bank said 2009 will see the first global recession since World War II. For complete analysis of all the major currency pairs, please see the latest weekly technical outlook report.
Asia Session Highlights
Japan’s Current Account deficit widened much more than economists expected, showing a gap of -172.8 billion yen versus forecasts of -15.3 billion, the largest monthly shortfall in at least 23 years and the first negative print since 1996. Sagging exports accounted for much of the decline as the global recession crushed demand for Japanese products. Outbound shipments fell 46.3% from a year earlier. A report covering the trade portion of the release revealed that shipments to key markets shrank by unprecedented margins, with exports to the US down -52.9% and those to Europe and China lower by -47.4% and -45.1%, respectively. Dwindling overseas sales have pushed Japanese companies to cut back production capacity and boosted unemployment, weighing on consumption and depressing economic growth. On balance, some hope may lay ahead if the recent decline in the Japanese Yen is to be sustained, helping to encourage overseas sales by making Japanese goods cheaper for foreign buyers. The currency has slipped 10.6% since January, lifting sentiment in the manufacturing sector.
A separate report showed Japanese merchant sentiment improved in February, with the Eco Watchers Survey rising to 19.4 from 17.1 in January. The reading set an all-time low at 15.9 in December. The housing component of the metric saw the largest improvement, rising 6.8% from the previous month. Still, the metric is down a whopping -42.3% from a year ago so calling a definitive rebound seems premature.
Euro Session: What to Expect
Switzerland’s seasonally adjusted Unemployment Rate is expected to rise to 3.1% in February from 2.9% in the previous month, the highest in over 2 years. The global downturn has weighed on demand in key export markets (most notably the Euro Zone), pushing companies to cut back output and lay off workers. The economy is now in recession having shrank -0.3% in the fourth quarter and -0.1% in the three months to September. The KOF Leading Indicator has dropped to a record low, reinforcing a downward trajectory for the economy in the coming six to nine months.
Turning to the Euro Zone, the Sentix Investor Confidence reading is expected to print at -38.0 in March, down from -36.1 in the previous month. The reading represents the difference between positive and negative responses in a survey of 2900 institutional and private investors and analysts about the economy’s trajectory of the forthcoming six months. The metric rebounded in January from a record low at -42.3 in December on news of early elections in Germany but deepening recession has since turned sentiment back to the downside. The International Monetary Fund expects the currency bloc’s economy to shrink 2% through 2009, the first full-year contraction since 1993.
To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.
