Euro Market Open

US Dollar, Japanese Yen May Gain in European Trading as Risk Appetite Retreats (Euro Open)

Tuesday, 09 December 2008 06:00:21 GMT  |  Ilya Spivak, Currency Analyst

The US Dollar and Japanese Yen look poised to extend overnight gains with stock index futures down close to 1% ahead of the opening bell in Europe, pointing to receding risk appetite. Japan’s economy contracted more than originally forecast in the third quarter, while Australian business confidence set a new record low.

Key Overnight Developments

• Japan's Economy Contracted More Than Expected in Third Quarter
• Australian Business Confidence Sets New Record Low
• Euro, British Pound Retrace Gains in Overnight Trading


Critical Levels 



The Euro retraced half of the intraday rally in overnight trading, finding support at 1.2855, the 50% Fibonacci retracement of the 1.2744-1.2966 rally. The pair has since turned range-bound between this and the 38.2% level at 1.2881. The correction in the British Pound was more pronounced: sterling retreated to find support just above 1.48, the 76.4% Fib of the intraday run that reached as high as 1.5047. Technical positioning points to the likelihood of a bullish correction in EURUSD and GBPUSD in the near term before broad bearish trends regain momentum.


Asia Session Highlights 



The final revision of Japan’s third-quarter Gross Domestic Product showed the annualized growth rate fell -1.8% in the three months through September, a reading twice worse than originally estimated. Investment and capital formation were both revised lower as firms cut back on capacity on expectations of dwindling demand both at home and overseas. Indeed, yesterday saw the Current Account surplus shrink for the eighth consecutive month while merchant sentiment fell to the lowest ever recorded. As we mentioned then, attempting to revive the exports growth may be one of the few options still in play for policymakers scrambling to kick-start the economy: monetary easing has little scope with rates already at just 0.30% and fiscal stimulus could be hit-or-miss given the Japanese consumer’s infamous proclivity to favor saving over spending. This could lead the way for a return to currency market intervention to suppress the yen, making Japanese exports cheaper in hopes of stoking overseas buyers.

Australia’s NAB Business Confidence printed at a new record low of -30 in November. Sentiment now stands at the lowest level in at least 11 years. Expectations of lackluster demand both at home and abroad have soured firms’ outlook and moved them to cut over nine thousand full-time jobs in October. Economists expect the economy to shed -15k jobs in November to push the unemployment rate to 4.4%, the highest in a year. Forex traders ignored the release, with acute slowdown seeming to already be priced into the exchange rate.

Related Articles: Japanese Yen Threatened by Year-End Capital Flows, Australian Dollar Trading to Follow Global Stock Performance 


Euro Session: What to Expect



Germany’s Current Account is expected to see the surplus shrink to 14.0 billion euros in October, down -27.5% from a year before. Exports are expected to shrink -1.1% as the global economic slowdown erodes overseas demand. Recent data has seen profound decline in manufacturing, Germany’s top export sector, with Factory Orders down -17.3% and Industrial Production down -3.8% in the year to October. The ZEW Survey is expected to print at -57 in December, down from -53.5 in the preceding month. Investor sentiment has seen little traction in either direction since falling to 15-year lows at -63.9 in July. This reflects the dour outlook for the Euro Zone’s largest economy as well as the region as whole: economists expect the 15-nation bloc’s GDP to shrink -0.35% in 2009, the first negative annual result since the single currency’s inception.

In the UK, the Trade Balance is set to issue a wider deficit in October despite the British Pound’s precipitous decline against the Euro and the US Dollar, making UK exports comparatively cheaper for its main trading partners. Indeed, the sterling has lost -34% of its value against the greenback and 18.2% against the single currency to date this year. It seems cheaper goods are not enough to spur demand as spreading economic slowdown has jittery consumers closing their wallets worldwide. Business has responded, trimming capacity and cutting back on labor. Indeed, separate reports are set to show that UK Industrial Production fell -3.2% in the 12 months through October (the lowest in over 5 years) while Switzerland’s Unemployment Rate is expected to tick up to 2.7% (the highest in 9 months).

On balance, the calendar is unlikely to offer any substantive changes to the markets’ priced-in downward trajectory for European economic performance, putting the onus on risk sentiment to drive forex price action. Stock index futures are down close to 1% ahead of the opening bell in Europe while their US counterparts are trading about -0.5% in the red, pointing to abating appetite for risk a return to buying the US Dollar and Japanese Yen.


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

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