Euro Extends Gains against the US Dollar - Will IFO Survey Slow Momentum? (Euro Open)

Key Overnight Developments

• Australian Producer Prices Jump on Depreciating Currency
• NAB Business Confidence Rebounds From Record Low in December
• Euro, British Pound Extend Gains Against the US Dollar


Critical Levels



The Euro retained upward momentum in overnight trading, breaking past the 1.32 level against the US Dollar. The British Pound followed suit, rising to re-take the 1.40 mark.

Related Article: Euro Rises Against US Dollar, Breaks Near-Term Resistance Eyeing 1.34


Asia Session Highlights



Australia’s Producer Price Index grew significantly more than was expected in the fourth quarter, adding 1.3% in the three months through December to bring the annualized wholesale inflation rate to 6.4%, the highest in at least 8 years. The rapidly depreciating Australian Dollar eroded firms’ purchasing power, inflating production costs and causing them to pass on the added expenditure to buyers of the finished items. The Australian Dollar fell -19.5% through 2008 against a trade-weighted basket of the world’s top currencies. Although the data foreshadows some upward pressure on consumer prices, overnight index swaps show traders have consistently raised bets on the magnitude of forthcoming interest rate cuts since the beginning of the month. Indeed, the markets now price in 175 basis points in further easing in the next 12 months.

NAB Business Confidence rebounded in December from a record low in the preceding month. A series of aggressive interest rate cuts (totaling 3% since September), a fiscal stimulus package worth A$45 billion, and a sharp drop in oil prices (down nearly 70% to date since peaking in July) all contributed to breathing some life into consumer spending and helping to modestly improve business sentiment. That said, traders may see the effects of these policies losing steam in the months ahead as rising unemployment threatens to weigh on disposable incomes and prompt pre-emptive saving in preparation for the leaner period ahead. Indeed, Westpac Consumer Confidence slipped -2.2% in January, the first decline in three months. However, it is important to note that Australian Treasurer Swan promised additional fiscal spending which may help to support spending if it is implemented.

Related Article: Geithner Sworn In As Obama's US Treasury Secretary


Euro Session: What to Expect



Germany’s IFO Survey is expected to show business confidence slipped to 81.0 in January from 82.6 in the preceding month, the lowest reading to be recorded since the metric was introduced in 1991. Shrinking global demand has sent weighed heavily on exports, eroding trading terms and boosting unemployment as companies cut back production capacity. Indeed, November’s trade surplus was just 9.4 billion euros, the narrowest in 3 years. The Euro Zone’s largest economy is expected to shrink -2.45% through 2009; by comparison, the worst reading in the recent past was the -1.25% decline in 1975. Policymakers have scrambled to boost the sagging economy: German Chancellor Angela Merkel introduced a second fiscal stimulus package totaling 50 billion euros (having already committed 32 billion euros over 2 years) while the European Central Bank cut interest rates by another 0.50%, bringing total easing since early October to 225 basis points. These measures gave a significant lift to the ZEW Survey of investor sentiment, opening the door for the possibility of an upside surprise and giving the Euro additional fuel for a corrective rally after EURUSD surpassed near-term resistance in New York hours.

November’s Euro Zone Current Account reading is also set for release. We have already seen the trade balance portion of the metric sink deeply into deficit as exports fell 4.7%, the most in 8 years, as the global economic slowdown took a toll on overseas demand for European products. The capital side of the equation presents a mixed picture: Euro Zone stock exchanges lost -6.6% on average through November and the single currency slid -0.5% against the US Dollar; that said, long-term Euro Zone bonds added a respectable 4.7%, showing investors did not altogether shun the common market. If the capital side indeed fails to finance the trade gap, this poses a substantial long-term threat for the single currency: a net outflow of money from the regional bloc will make the Euro more abundant in the marketplace and thereby erode its value.

Finally, the UBS Consumption Indicator is likely to continue lower in December. Withering demand from chief export markets has prompted Swiss firms to cut production capacity, pushing unemployment higher and eroding disposable incomes. This, in turn, can be expected to discourage consumption and push the overall economy closer to recession. A survey of economists conducted by Bloomberg forecasts GDP growth will grind to a standstill through 2009.


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