Forex markets have apparently moved past risk aversion as credit markets began to thaw and US authorities announced a grandiose plan to recapitalize the banking system. Traders have taken a step back to re-assess the fundamentals, with fears of broadly slowing economic growth again in focus.
Key Overnight Developments • Japan Posts Largest-Ever Trade Deficit as Global Demand Falters • Fed’s Yellen, Bullard Allude to US Recession Critical Levels The Euro slipped a bit lower to consolidate below the 1.36 level in overnight trading. The British Pound saw little traction, oscillating in a choppy 77-pip range around the 1.74 mark. Asia Session Highlights Japan’s Current Account surplus shrank for the sixth consecutive month in August, with the trade side of the equation showing the largest deficit ever at -236.0 billion yen as annualized import growth (20.2%) far outstripped that of exports (0.9%). The world’s second-largest economy, now formally in recession after GDP shrank in the first half of this year, is highly dependent on overseas purchases to drive economic growth. Indeed, slowing demand in the US, Europe and China saw the final revision of Industrial Production down -6.9% in the year to August, the worst in at least four years. Having moved past the announcement of a grandiose US plan to recapitalize the banking system, traders are apparently taking a step back from the euphoria of recent days as credit markets being to thaw to re-assess the fundamentals. Fears of broadly slowing economic growth emerged again, with Asian stock markets down 1.5% on average and oil prices pushing below $79/barrel on expectations of weak demand. Comments from Federal Reserve Governors Janet Yellen and James Bullard didn’t help matters as both alluded to recession in the United States. Bullard said that the probability of a recession has “risen substantially”; Yellen was more blunt, saying the economy “appears to be in a recession [already].” Euro Session: What to Expect The final revision of Germany’s Consumer Price Index is expected to see headline inflation at 2.9% in the year to September. The pace of price growth has slowed 12.1% since topping out in mid-July. The broader Euro Zone Consumer Price Index is expected to print at 3.6% in the year to September, the lowest in four months. Acute economic slowdown and sharply lower oil prices are expected to continue pushing inflation toward the ECB target of 2%, opening the door for continued monetary easing. The ECB cut benchmark borrowing costs 50 basis points last week as the world’s top central banks attempted to engineer a thaw in frozen credit markets. While the market is pricing in rates to remain on hold at the next meeting, Jean-Claude Trichet and company are seen lowering rates by a full percentage point over the next 12 months. In the UK, the ILO Unemployment Rate is seen rising to 5.6% in the three months through August, a reading equivalent to the highest since May 2000. The aforementioned return to focus on macroeconomic fundamentals could see forex price action remain tame in European hours as traders wait for the US Retail Sales release late into the session. As reported by DailyFX Strategist Terri Belkas, the metric holds potential for a significant downside surprise that could catalyze near-term Dollar selling pressure. This would be in line with our expectation of a near-term retracement of dollar strength before interest rate expectations return to the forefront and the long-term bullish trend resumes. Related Articles: Forex Market to See Near-Term US Dollar Weakness (Candlestick Weekly) US Dollar / Risk Relationship Breaking Down? To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.