Euro Selling to Resume as German IFO Declines, Risk Aversion Returns

Key Overnight Developments

• Japanese Exports Fall for Fifth Month, Threaten Recovery
• Euro Rebounds, Pound Little Changed in Overnight Trade

Critical Levels

The Euro corrected higher in overnight trade, adding 0.2 percent against the US Dollar. The British Pound was little changed. We remain short EURUSD and flat GBPUSD.

Asia Session Highlights

Japan’s Merchandise Trade Balance surplus unexpectedly widened to 804.2 billion yen in July, trouncing expectations for a contraction to 466.3 billion. Looking past month-to-month volatility in the headline figure however, the figures look far from rosy as annualized export growth slowed for the fifth consecutive month to 23.5 percent, the slowest since December 2009. More of the same is likely ahead amid increasingly ominous signs of a broad-based slowdown in global demand in the second half of the year. Indeed, the Baltic Dry Index of international trade activity fell to the lowest in 15 months in July while JPMorgan’s Global PMI gauge showed worldwide economic activity grew at the slowest pace since February over the same period. Exporters face further headwinds in a stronger currency as carry trade liquidation pushes the Japanese Yen to 15-year highs. Japan’s rebound in the aftermath of the 2008 meltdown has relied heavily on exports, and a slowdown here clearly bodes ill for the economy’s performance going forward.

Euro Session: What to Expect

Germany’s IFO Survey of business confidence amounts to the only bit of scheduled event risk in European hours. Forecasts call for the closely watched forward-looking Expectations component to decline in August after hitting a 16-year high in the previous month, an outcome that seems reasonable with the onset of headwinds from the EU’s debt-reduction efforts increasingly close at hand. Furthermore, as in Japan, Germany’s rebound in the aftermath of the 2008 meltdown has been driven by overseas sales.This amounts to bleak outlook going forward as the global economy losses step in the second half of the year.

Turning to sentiment, US stock index futures are well off their Asia-hours highs in early European trade, trading cautiously in positive territory but lacking clear cues of a recovery in risk appetite. US Durable Goods Orders and New Home Sales figures will be closely watched late into the session to set the near-term trajectory.

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