US Dollar Rebounds Sharply as China's Trade Data Disappoints (Euro Open)

The US Dollar rebounded violently having lost ground through much of the overnight session after China’s trade surplus narrowed much more than expected, sharpening fears of deepening global recession and sending capital back into safe-haven assets. German producer prices and UK trade data are on tap in European hours.

Key Overnight Developments

• UK Economy Shrank at Record Pace in Quarter Through February, Says NIESR
• Japan’s Machine Orders Plunge on Weak Overseas Demand
• Australian Consumer Confidence Stable, Investment Lending Plunges
• China’s Trade Surplus Plummets, Boosting US Dollar Against Major Currencies

Critical Levels

The Euro and the British Pound rose with Asian stock markets through much of the overnight trading as risk appetite was encouraged as Citigroup promised a record profitable quarter. However, the greenback rebounded violently late into the session as China’s Trade Balance showed a surplus of just $4.8 billion versus $28.3 billion expected, sharpening fears of deepening global recession and sending capital back into safe-haven assets.

Asia Session Highlights

Australian Consumer Confidence was nearly unchanged following large drops in January and February, falling -0.2% in March as survey respondents’ outlook on the economy in the coming five years improved by a whopping 15.2%. The uptick owes to the expected effects of steep interest cuts and two fiscal injections, which RBA Governor Glenn Stevens recently said would “provide significant support to domestic demand over the period ahead”. Importantly, the metric is very volatile and it is premature to say that a definitive rebound in consumer spending is upon us. Lower borrowing costs are apparently not helping spur businesses to seek funds and expand capacity: Investment Lending plunged -3.8% in January, sinking economists’ expectations for a positive 3.5% result.

Japan’s Machine Orders fell -3.2% through January to bring the annual pace of decline to a staggering -39.5%, the worst on record and the lowest in at least 29 years, on evaporating foreign demand. The current account showed the largest deficit since 1986 in the same period after shipments to key markets shrank by unprecedented margins, with exports to the US down -52.9% and those to Europe and China lower by -47.4% and -45.1%, respectively. On balance, some hope may lay ahead if the recent decline in the Japanese Yen is to be sustained, helping to encourage overseas sales by making Japanese goods cheaper for foreign buyers. The currency has slipped over 10% since January, lifting sentiment in the manufacturing sector.

The UK economy shrank at a pace of -1.8% in the three months through February according to the NIESR GDP Estimate, the lowest reading for the metric since January 2002. The International Monetary Fund has predicted that the UK will see the deepest recession of all the G7 nations. In an effort to check the downturn, the Bank of England cut rates to a record-low 0.50% and signaled it would pursue quantitative easing. The policy could prove profoundly inflationary and drive down the British Pound if the central bank does not drain the excess liquidity with rate hikes fast enough when the recovery is in sight. The risks are to the downside considering policymakers’ recognition of a rebound tends to lag behind its actual beginning.

New Zealand Prime Minister John Key announced a new scheme to help encourage companies to retain employees, saying the government will subsidize workers to take one paid day off every two weeks. Key said that he believed it was “as many jobs as we can, while we can” and expressed hope that “by reducing hours, employers will be able to retain their workforce and be better equipped to respond when economic circumstances improve.”

Euro Session: What to Expect

German Producer Prices are set to drop -0.1% in January to bring the annual pace of wholesale inflation to 3.4%, the lowest in a year. The reading foreshadows continued downward pressure on consumer prices (the headline inflation metric) as manufacturers pass on lower production costs by way of cheaper finished items. Deepening recession saw the European Central Bank cut interest rates to a record low 1.50% even alluded to the possibility of quantitative easing, saying it would study “additional non-standard measures”. Overnight index swaps suggest the ECB will remain on hold for the time being, giving the single currency an advantage against the commodity bloc (Australian, Canadian, and New Zealand dollars) where the easing cycle is expected to continue. The implications of yield expectations on the outlook against the US Dollar and the British Pound are murkier: the Fed and the BOE are both expected to hike rates over the coming year as the economic downturn begins to lose momentum, but the magnitude of priced-in increases (39 and 56 basis points, respectively) would still put borrowing costs below those of the ECB assuming Trichet holds at 1.50% as expected through the same period. On balance, it seems the Euro is unlikely to be much of a beneficiary from a possibility of higher overall interest rates a year from now as deep economic turmoil continues to keep the market’s focus on safety rather than return.

In the UK, the Trade Balance deficit is set to widen to -3.7 billion pounds in January on shrinking global demand for British products. Manufactured goods are the UK’s top export sector and data released yesterday revealed industrial production fell to a record low in the same reference period. An upside surprise is feasible, however, as imports bear the brunt of rising unemployment, weak consumer confidence and the falling British Pound.

Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar Rebounds Sharply as China's Trade Data Disappoints (Euro Open)
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Forex Turnover

Forex Turnover
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
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