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Forex, Stock Market Price Action to Remain Linked in the Near Term (Euro Open)

Tuesday, 21 October 2008 05:14:15 GMT  |  Ilya Spivak, Currency Analyst

Forex price action is likely to take its cues from trading in other financial markets with Switzerland’s Trade Balance the only item of significance on the European economic calendar.

Key Overnight Developments

• Rate Cuts Still Ahead as New Zealand Consumer Prices Hit 18-Year High
• Economic Slowdown, Tight Credit Push Australian Car Sales to the Worst in 7 Years


Critical Levels



The Euro was effectively flat in overnight trading, oscillating in a tight range above the 1.33 level. The British Pound crept slowly higher, coming within close proximity of the 1.72 mark.


Asia Session Highlights



New Zealand’s Consumer Prices saw annualized inflation rise to an 18-year high of 5.1% in the third quarter from 4.0% in the three months through June. Food costs led as drivers for the uptick as fruit and vegetable prices spiked a massive 14.2%. The sudden appreciation was mostly seasonal as poor weather conditions held back production. Still, the sharp slowdown in economic growth will likely see inflationary pressure easing. GDP shrank -0.3% in the second quarter and is likely to slow further in the last half of the year. To that effect, the Reserve Bank of New Zealand is expected to slash interest rates by a full 1% at this week’s meeting, followed by an additional 2% in cuts over the next 12 months.

Australian Motor Vehicle Sales remained dismal, shrinking a whopping -8.2% in the year to September. Writing in the Forex Weekly Outlook earlier this week, we noted that vehicle sales would slip as “the economic downturn likely saw a majority of Australians tighten their belts ahead of the lean period ahead, while frozen credit markets probably kept necessary financing away from most of the few that did consider buying a new car.”


Euro Session: What to Expect



Switzerland’s Trade Balance is expected to see the surplus shrink to 1.20 billion francs in September, down from 1.44 billion in the preceding month. This is not surprising: about 60% of all Swiss exports are destined for the European Union and the acute economic slowdown there has likely trimmed demand. Economists expect the pace of Swiss GDP growth to slow by about 50% by the middle of next year. Still, the market is not holding its breath for monetary stimulus: trading in overnight index swaps suggests the Swiss National Bank will remain on hold for the next 12 months. On balance, Swiss Franc price action is likely to fall in with trends in risk sentiment. Indeed, we are currently seeing a staggering -94% inverse correlation between the VIX Index measure of volatility and EURCHF.

On balance, we continue to suspect that price action in the major currencies will be dominated by a correction of recent panic-infused US dollar gains. Stock markets pulled back and the greenback added value today as Fed Chairman Ben Bernanke said recent measures would not ensure a quick economic rebound and suggested additional fiscal stimulus. Still, Wall St ended the day with 413 points in the plus column and Asian exchanges all traded higher overnight as traders price in easing credit conditions. This upward adjustment in stock prices will put near term pressure on the US dollar before long-term fundamentals return to focus and see the buck resume its uptrend.


Related Articles:

Is US Dollar Trading Linked to Stock Performance?
US Dollar Holding Below Critical Resistance - Reversal Potential?



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

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