Economic data is likely to take a back seat to oil prices in European trading. The docket is not particularly eventful, with most releases likely to reinforce existing macroeconomic themes. Meanwhile, US futures markets are holding a special trading session today ahead of tomorrow’s Labor Day bank holiday to address the looming threat from hurricane Gustav to oil production facilities in the Gulf of Mexico.
Key Overnight Developments • Oil breaks above $116/barrel on Hurricane Gustav fears • Sterling Falls Sharply in Overnight Trading • Australian Current Account Deficit Narrows on Export Growth Critical Levels The Euro briefly rallied at the weekly trading open, testing above 1.47 before collapsing sharply below 1.4650. DailyFX Senior Currency Strategist Jamie Saettele expects the Euro to correct to 1.4980-1.5080 area before the down trend resumes. Near-term support is seen at 1.4564, with resistance at 1.4743. Sterling fell sharply lower, losing its grip on the 1.81 level. Support is found at 1.8002, with resistance at 1.8076. Asia Session Highlights Australia’s Current Account Balance saw the deficit contract sharply in August, issuing a shortfall of –A$12.7 billion versus –A$19.4 billion in the previous month, marking the first improvement in the metric over in almost 2 years. The improvement was driven by a 22.9% uptick in imports on strong Chinese demand for Australian coal and iron ore exports. China has been an important driver for economic growth for economies across Asia and the Pacific, but the top question going forward will be whether this is sustainable as the world economy decelerates. Slowing global demand will not leave China unscathed, and it remains to be seen if their hunger for Australian goods will remain as robust now that the Olympic Games are over. Euro Session: What to Expect Switzerland’s SVME-Purchasing Managers Index is expected to inch lower in August as businesses begin to weigh up the effects of a prolonged slump in European demand for Swiss exports. The mountain nation sends 60% of its outbound shipments to European Union countries, which recent metrics have shown to be buckling in the face of the broader global economic slowdown. Domestic demand is also loosing its ability to support growth as Retail Sales printed at a very modest 0.7% in June versus 7.4% in the preceding month. In the Euro Zone, the final revision of August's Purchasing Manager Index figure is expected to remain below the “boom-bust” 50 level at 47.5, the second-lowest level since the beginning of the data series. Analogous readings from Germany and France, the top two economies in the 15-nation bloc, are also expected to remain unchanged. The combined economy of the Single Currency area shrank -0.2% in the second quarter and a severe downturn in recent data points to the likelihood of a confirmed recession with another negative result in the three months to September. Entrenched weakness has been reflected in interest rate expectations, with forecasts based on bond yields shifting going into this week to favor 25-basis-point cut by the first quarter of 2009. As recently as last week, the markets were not pricing in a cut until the second quarter. The UK is expected to see the industrial sector contract further with the Manufacturing Purchasing Manager Index declining to 44.1 in August from 44.3 in the preceding month. For their part, the Bank of England is expected to address withering economic growth with a rate cut as soon as the fourth quarter of this year, with a total of 75 basis points in monetary easing expected over the next 12 months. On balance, economic data is likely to take a back seat to oil prices in European trading. The docket is not particularly eventful as most releases are likely to reinforce existing macroeconomic themes. Meanwhile, US futures markets are holding a special trading session today ahead of tomorrow’s Labor Day bank holiday to address the looming threat from hurricane Gustav to oil production facilities in the Gulf of Mexico. Refineries operated by Valero Energy Corp., ConocoPhillips, Marathon Oil Corp. and Exxon Mobil Corp. have already been shut down. The Gulf of Mexico accounts for 26% of US oil production, and a major disruption could substantially bid up crude and drive the dollar lower against the spectrum of major currencies. To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.