Forex Traders Sell US Dollars as Stock Markets Rack up Gains (Euro Open)

Key Overnight Developments

• UK Economy Shrinking at Fastest Rate in 18 Years, Says NIESR
• Japanese Data Continues to Disappoint, Signal Deepening Recession
• Australian Consumer Confidence Surges on RBA Rate Cuts
• Euro, British Pound Push Higher Against US Dollar


Critical Levels 



The Euro recovered bullish momentum in overnight trading, adding close to 100 pips against the US dollar throughout the session. Traders appear poised to re-test the intraday high at 1.30. The British Pound followed suit, rushing past the 1.48 mark. The latest technical outlook points to near-term gains for EURUSD and GBPUSD before the longer-term down trends are resumed.


Asia Session Highlights 



Japanese data continued to reflect deepening recession for the world’s second-largest economy. The Domestic Corporate Goods Price Index saw wholesale price growth slow to 2.8%, the slowest in nearly a year. The metric has shown producer inflation slow over 62% since peaking in August as commodities tumbled and global economic activity turned increasingly sluggish. Machine Orders fell 15.5% in the year to October, the fourth consecutive month of decline, as demand for Japanese goods evaporates. Earlier this week saw the Current Account surplus shrink -56.5% as exports lost -7.3% in the year to October, the largest drop in 7 years.

The NIESR Gross Domestic Product estimate suggested the UK economy shrank a full percentage point in the three months through November, the largest drop since 1990. The accompanying statement sounded ominous, saying the government needs to “urgently” address the scarcity of bank credit and warning that “further interest-rate reductions are unlikely to have much effect.” A Bank of England report showed lending fell -29% in October alone to register at the lowest levels in 15 years. Banks have closed their doors to prospective borrowers, hoarding cash as they try to rebuild balance sheets damaged by financial market loses. Still, the markets are pricing in 25-50 basis points in additional rate cuts from Mervyn King and company over the next 12 months.

Adding a bit of silver lining to the session’s docket, Australian data surprised impressively to the upside as Westpac Consumer Confidence surged 7.5% in December, boosted by aggressive RBA interest rate cuts that took borrowing cots down a whopping 3% just since early September. Aggressive monetary easing also helped to thaw domestic credit markets: Home Loans and Investment Lending both registered impressive gains in October. However, traders may not see much follow-through as it becomes clear that the Reserve Bank has shifted gears to neutral. 


Euro Session: What to Expect 



A busy economic calendar lies ahead in European trading hours but traders are unlikely to see anything that does not fit with themes already priced into exchange rates. French Industrial Production is set to show output declining at the fastest rate in over 15 years to print down -4.0% in the year to October. Manufacturing Production is seen falling -4.5% in the same period, the worst since early 2002. The analogous reading for Italy is set to show industrial output fell -5.0%, while the final revision of Gross Domestic Product is expected to confirm the economy shrank -0.9% in the three months through September.

Switzerland’s ZEW Survey of investor sentiment may rebound in December having printed at -88.5 in the preceding month: the metric has closely followed its German counterpart (showing a correlation of over 80% in recent months), which surprised markets with an improvement yesterday. The relationship makes sense: Switzerland is intimately tied to the European Union via trade relationships, sending over 60% of their exports to the common market. Germany is the European Union’s largest economy and often sets the pace for the overall trajectory of the regional bloc.

On balance, risk trends remain the dominant force driving forex price action. Asian stock markets registered substantive gains in overnight trading and US index futures are up well over 1% ahead of the opening bell in Europe, suggesting capital will continue to flow out of safe haven assets and pressure the US Dollar lower.


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