Euro / US Dollar Supported Overnight - More Gains Ahead? (Euro Open)

Key Overnight Developments

• Australian Economic Growth Drops to Lowest in 8 Years
• New Zealand Commodity Prices Fall Again, Threatening Export Sector


Critical Levels 



The Euro tested higher in overnight trading, reaching 1.2740 before settling back near the 1.2700 mark. Conversely, the British Pound traded sideways in a narrow 70-pip range.


Asia Session Highlights 



Australia’s Gross Domestic Product disappointed expectations, adding 0.1% in the three months through September versus forecasts calling for a 0.2% increase. The annualized result registered as predicted at 1.9%, down from 2.7% in the year through the second quarter. This puts the pace of economic expansion at the slowest in 8 years. The Reserve Bank of Australia moved to slash borrowing costs by a whopping 3% since early September to check the slide in growth. However, yesterday RBA Governor Glenn Stevens suggested rate cuts are over for the time being even as he lowered borrowing costs by another 100 basis points. Stevens said that “a major easing in monetary policy…together with spending measures announced by the Government and a large fall in the Australian dollar” will support demand over the year ahead.

The ANZ Commodity Price Index fell -7.2% in November to nearly match the largest decline ever recorded at 7.4% that registered in October. The prices of New Zealand’s commodity exports have fallen now fallen for four consecutive months as spreading economic slowdown trims global demand. The largest drop was seen in the price of dairy products (-12.3%), New Zealand’s top export category. Overall, commodity prices have lost -21.2% since peaking in July. Continued weakness could offset the recent boost to exports from a weaker New Zealand dollar that saw the trade deficit shrink in October. The export sector makes up 30% of the economy and its decline could substantially slow the rebound out of the current recession plaguing the smaller antipodean nation. The Reserve Bank of New Zealand is expected to do its part to help things along later this week, with expectations calling for a massive 1.50% interest rate cut. 


Euro Session: What to Expect 



Euro Zone Retail Sales headline the economic calendar in the forthcoming session, with expectations calling for a -0.4% decline in October to suggest that receipts fell -1.5% from that time last year. This will mark the fifth consecutive monthly decline in the annualized reading as the increasingly sluggish economy and erratic financial markets spook consumers and cool spending. Indeed, recent reports saw consumer confidence in the region sink to the lowest levels since 1994. The European Central Bank is expected to throw more money at the problem, with markets pricing in Jean-Claude Trichet and company to shave at least 0.50% off benchmark interest rates at a meeting later this week.

On balance, the data is unlikely to prove eventful for EURUSD traders with its implications currency bloc's economy likely to have already been priced into the exchange rate. The US Dollar’s recently close correlation with global stock performance suggests that risk appetite will continue to dominate as the catalyst for directional momentum. We saw EURUSD retake the 1.27 level in New York trading today as Wall St rebounded. Looking closer, we see that yesterday's selloff matched a perfect 50% retracement of the 11/21-11/28 rally. Should today’s bounce see continuation, it could signal a larger rebound in risky assets and thereby boost the Euro against the greenback.


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