Euro Market Open

Euro Gains on US Dollar as China Stimulus Plan Boosts Risk Appetite (Euro Open)

Monday, 10 November 2008 04:57:28 GMT  |  Ilya Spivak, Currency Analyst

The Euro started the trading week on a high note, racing up over 100 pips as risk appetite rebounded following China’s announcement of a 4 trillion yuan ($586 billion) fiscal stimulus plan to jump-start growth in the world’s fourth-largest economy. October’s UK Producer Price Index dominates the economic calendar in European hours.

Key Overnight Developments

• G20 Calls for Rate Cuts, Government Spending To Check Global Recession
• China To Spend 4 Trillion Yuan to Boost Economic Growth
• RBA Slashes GDP Growth Forecasts, Signals More Rate Cuts


Critical Levels 



The Euro started the week on a high note, racing up over 100 pips to pause within a hair of the 1.29 level. The British Pound followed, reaching as high as 1.5883 before settling near 1.5820. Technical positioning points to a near-term upward correction in the Euro and the Pound before both pairs see the dominant bearish trends regain momentum.


Asia Session Highlights 



The G-20 forum of industrialized and developing economies said they were prepared to act “urgently…to restore and maintain financial stability and support global growth” in a statement following a meeting of the countries’ finance ministers in Sao Paolo, Brazil. The statement urged countries to use “all their policy flexibility, [including] monetary and fiscal policy.” The meeting set up to lay the groundwork for a summit of the G-20 heads of state set to take place on November 15th in Washington, DC. Most major monetary authorities have already embarked on a campaign of aggressive rate cuts, with the latest being a coordinated 0.50% reduction from the Bank of England, Swiss National Bank, and European Central Bank last week. The International Monetary Fund has said that the US, Japan and the Euro Zone will all see their economies contract next year, the first simultaneous recession since the Second World War.

China announced a 4 trillion yuan ($586 billion) fiscal stimulus plan to jump-start growth in the world’s fourth-largest economy. The funds amount to nearly a fifth of China’s 2007 Gross Domestic Product. The first 100 billion yuan are marked for the current quarter, with the total sum to be used no later than then end of 2010. Funds will initially go towards building low-rent housing, infrastructure in rural areas, roads, railways and airports. China contributed 27% to total global economic growth last year, a share greater than any other nation. Global financial markets cheered on the announcement: Japan’s Nikkei and Hong Kong’s Hang Seng benchmark stock indices added over 5% and US equity index futures were up nearly 2% in overnight trading. The US Dollar slipped against the Euro in keeping with the impressive over-90% correlation between EURUSD and the MSCI World Stock Index that we identified last week. The close relationship was forged at the height of the credit crunch as investors fled from traditionally risky assets (high-yielding currencies, stocks, commodities) to seek haven in dollar-denominated US Treasury Bonds. 

The Reserve Bank of Australia Quarterly Monetary Policy Statement saw the Glenn Stevens and company slash the 2008 economic growth forecast to 1.5% (from 2.0%) and the 2009 forecast to 1.75% (from 2.5%). The bank said it has been forced to make “unusually large” interest rate reductions and will be “seeking to strike the appropriate balance between avoiding an unduly sharp weakening in demand and the need for inflation to fall back.” Markets are pricing in a 75-100 basis point rate cut when the bank meets on December 2nd.


Euro Session: What to Expect 




UK data dominates the economic calendar in European hours, with October’s Producer Price Index (PPI) expected to see output prices down -0.5% to bring the annualized growth rate down to 7.4%, the lowest since April. Because changes in firms’ production expenses are reflected is the price tag for their final goods, PPI is seen as a leading indicator for the direction of consumer price inflation. Slowing price growth will allow the Bank of England to continue to lower borrowing costs as Mervyn King and company scramble to lift the economy out of soon-to-be confirmed recession. The markets are pricing in at least a 0.25% interest rate cut at the bank’s next policy meeting on December 4th, with 225 basis points in easing over the next 12 months.

More red ink is expected for Euro Zone data, with continued contraction in Industrial Production in Italy and France as global demand dwindles amid worldwide economic slowdown. Last week saw Germany’s industrial output shrink four times faster than expected, printing at -2.1% in the year to September versus forecasts of a -0.5% result.

Switzerland’s SECO Consumer Climate indicator is expected to see sentiment fall to -25 in October, the lowest in five years. Deteriorating domestic spending does not bode well for the mountain nation as overseas demand suffers from looming recession in the European Union. Switzerland sends 60% of its exports to the regional bloc.


Related Articles:

Forex Trading Weekly Forecast - 11.10.08


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

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