bio1

Euro Zone Trade Deficit to Widen as Global Demand Falters (Euro Open)

Friday, 17 October 2008 05:21:42 GMT  |  Ilya Spivak, Currency Analyst

Although the Euro is unlikely to see support from economic data in the coming session as Euro Zone trade figures are expected to show a wider deficit, technical positioning suggests the single currency could end the trading week on a higher note against the US dollar.

Key Overnight Developments

• Fed's Rosengren Says US Economic Growth To Return Next Year
• Japan Service Demand Hits 6-Month Low in August
• US Dollar Finds Resistance, Near-Term Weakness Likely


Critical Levels 



The Euro consolidated around the 1.3450 level in overnight trading. While intraday ranges have seen sharp swings in value, the net effect has produced little directional momentum as EURUSD consolidates in a wide 400-pip range. Sterling saw little traction, consolidating below the daily high near 1.7350. Technical positioning suggests the US dollar may soften to end the trading week: the US Dollar Index, an average of the greenback's value against six major currencies, looks to have found resistance.


Asia Session Highlights 



Japanese demand shrank in August as the Tertiary Index fell -1.4%, the worst reading in 6 months. The world's second-largest economy is now formally in recession having seen overall economic growth print negative in the first and second quarters of this year. Consumers are acting accordingly, trimming back spending in preparation for the leaner period ahead. Wage growth has been on a steep downtrend since the beginning of the year, easily outpacing any savings that consumers are seeing from sliding crude oil prices from mid-July. On balance, the Yen exchange rate has largely decoupled from shaky Japanese fundamentals to fall in with trends in risk sentiment. Indeed, the VIX Index measure of volatility is currently 83% inversely correlated with EURJPY.

Boston Federal Reserve President Eric Rosengren offered a much more optimistic tone his colleagues earlier this week. While Rosengren said that there was “little doubt” that the malaise of in the credit markets had started to drag down the overall economy, he suggested that recent monetary and fiscal efforts should revive economic growth next year. Yesterday, Vice Fed Chairman Donald Kohn offered a far less rosy outcome, saying that a prolonged period of cautious lending will probably impair growth for another year. Comments from Governors Janet Yellen and James Bullard were both definitively dour: Bullard said that the probability of a recession has “risen substantially”; Yellen was more blunt, saying the economy “appears to be in a recession [already].”


Euro Session: What to Expect 



The Euro Zone Trade Balance report is expected to show the deficit widen to -5.5 billion euro in August from -2.3 billion in the preceding month. Germany’s trade balance saw the surplus shrink in August while France posted a wider deficit as slowing global demand depressed export volumes. The same dynamic will likely be at work for the broader EZ reading. Indeed, stock markets have seen wild volatility and crude oil has rapidly sunk to test as low as $70/barrel as investors grapple with the onset of global recession in the coming months.


Related Articles:

Forex Technicals: The Day Ahead, October 17
Dollar and Carry Rebound As Risk Settles, but Underlying Problems Remain (Forex Video)


To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars