special reports

Euro Keeps US Dollar on the Defensive, Threatens 1.45 (Euro Open)

Thursday, 18 December 2008 05:56:31 GMT  |  Ilya Spivak, Currency Analyst

The Euro remained well-bought against the US Dollar in overnight trading, rising as high as 1.4492 as bulls seem determined to test the critical 1.45 level. A busy session lies ahead in European trading hours, but the Euro Zone Trade Balance may prove the most interesting item on the docket: expectations see trading terms deteriorate -62.5% from a year ago, casting a dark cloud over the long-term Euro outlook.

Key Overnight Developments

• New Zealand Business Confidence Unexpectedly Improves
• Euro Keeps Pressure on the US Dollar, Nearing 1.45


Critical Levels



The Euro remained well-bought against the US Dollar in overnight trading, rising as high as 1.4492 as bulls seem determined to test the critical 1.45 level. The British Pound also gained against the greenback, cementing a hold above 1.55 and spiking as high as 1.5614.


Asia Session Highlights



New Zealand’s NBNZ Business Confidence improved, registering at -35 in December versus -43 in the preceding month. The exports component managed a bit of improvement, likely owing to the rapid depreciation of the New Zealand dollar. Although 35% of businesses still expect deterioration in the economy over the next 12 months, RBNZ Governor Alan Bollard has said that he sees the economy resuming growth in the second half of 2009 and backed off explicit promises of further rate cuts.


Euro Session: What to Expect



It is doubtful that Switzerland’s November Trade Balance will be encouraging as global slowdown trims demand for Swiss goods. The mountain nation relies heavily on exports, with overseas shipments amounting to a whopping 59% of overall gross domestic product. Swiss exporters count on the US, UK and the top three Euro Zone economies for over half of their demand. Deteriorating conditions across these markets mean cross-border sales growth is likely to continue to trend lower, eating away at the trade surplus. A separate report is set to show that Retail Sales added a meager 2.0% in the year to October, down sharply from the 6.4% registered in the preceding month. This makes sense: Industrial Production fell to just 0.7% in the year to the third quarter, the lowest in nearly four years; The reading intimately tied to the aforementioned weakness in overseas demand considering machinery, chemicals and metals are Switzerland’s top export commodities; Export-oriented businesses are slowing output and will cut capacity, meaning job loses and depressed consumer spending. Official government estimates from the State Secretariat for Economic Affairs (SECO) released earlier this week suggest the Swiss economy heading for its worst recession since 1991 and promised a second fiscal stimulus package worth 650 million francs.

In the Euro Zone, the Trade Balance is expected to show a deficit of -4.5 billion euro in October, suggesting trading terms deteriorated 62.5% over the preceding year. A widening trade deficit will put downward pressure on the Euro in the medium to long term: if imports outpace exports, this means there is a net outflow of Euros which invariably floods the market with currency and drives down its value. By contrast, the US Current Account deficit narrowed more than economists expected in the third quarter as import volumes followed commodity prices lower while exports gained. On balance, this sets a bearish tone for the EURUSD in the medium to long term if the dynamic carries forward. Germany’s IFO Survey of business confidence is at least in part supportive of this scenario, with sentiment expected to register at 84.0, the lowest in at least 17 years and the worst on record. Weak overseas demand explains a good measure of firms’ pessimism, bolstering the argument for greater trade gaps and a falling single currency. Domestic conditions are also far from rosy with consumer confidence at the worst in over 3 years and annualized Retail Sales shrinking for the fifth consecutive month in October.

The UK does not fare much better than the continent as the pace of Retail Sales slows to 1.0% in the year to November, the slowest in nearly three years. Receipts growth has collapsed a whopping 75% since May and is likely to continue lower as the economy continues to slow. Economists predict GDP will shrink -1.2% and unemployment will top 7% for the first time in 11 years next year.


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

Resources

• free demo account
• forex courses
• open an account
• real time news
• free webinars