Australia faces the risk of recession at the beginning of next year as the Westpac leading index plunged to the lowest in 23 years. The Euro and British Pound remained range-bound in overnight trading. The release of the minutes from the last meeting of the Bank of England headlines the economic calendar in European trading hours.
Key Overnight Developments • Australia At Risk of Recession in 2009, Says Westpac • Euro, Pound Range-Bound in Overnight Trading Critical Levels The Euro stayed range-bound in overnight trading, consolidating in a 40-pip range above the 1.26 level. The British Pound followed suit, oscillating around the 1.4950 mark. Technical positioning points to the likelihood of a bullish correction in both EURUSD and GBPUSD before the dominant bearish trends regain momentum. Asia Session Highlights Australia’s Westpac Leading Index fell -1.0% in September, the lowest in at least 23 years. The reading suggests the annualized growth rate has fallen to a meager 1.1%, a far cry from the average trend level at 3.9% and a dramatic drop-off from last month’s 3.5%. This suggests the economy is on pace to sink into recession for the first time in 17 years. Indeed, Westpac’s chief economist Bill Evans said that there is a “decent risk that the first two quarters of growth in 2009 could be negative.” A separate report showed New Motor Vehicle Sales fell for the fourth consecutive month as the sluggish economy and elusive credit saw consumers shy away from big-ticket purchases. Policymakers have moved aggressively to offer fiscal and monetary stimulus, with the Reserve Bank of Australia slashing borrowing costs by a hefty 2% since September and the government offering A$10.4 billion ($6.8 billion) in handouts. The fiscal approach may prove most effective: Australia has some of the lowest household savings rate among OECD countries, suggesting consumers will actually spend the money being given to them and help boost demand. Meanwhile, it typically takes several months for the effects of rate cuts to filter through the broad economy. Still, traders continue to price in at least 175 basis points in additional monetary easing over the next 12 months. The Australian Dollar was indifferent to the release, with forex traders becoming arguably numb to continuously poor performance from the larger antipodean economy. Euro Session: What to Expect The release of the minutes from the last meeting of the Bank of England headlines the economic calendar in European trading hours. Mervyn King and company had embraced the rhetoric long espoused by perennially dovish MPC member David Blanchflower, moving aggressively to cut borrowing costs by a whopping 1.5%. Yesterday saw inflation slow more than expected in October with the Consumer Price Index falling to 4.5%, down from a 16-year high at 5.2% in the preceding month. This gives the BOE scope to continue to lower rates on the assumption that sluggish growth and sharply lower commodity prices will be enough to contain price growth. With the markets pricing in 100 basis points in additional rate reductions over the next 12 months, traders will be scanning the minutes document for clues about the pace of easing rather than is likelihood. So far, at least the Reserve Bank of Australia has expressed concern with creating entrenched rate cut expectations that would fuel continued depreciation of the domestic currency and stoke inflation, opting for a “big bang” approach to get monetary stimulus out of the way quickly. The same considerations could very well be at work for the BOE, with the British Pound down over 25% since mid-July. To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.