Key Overnight Developments
• New Zealand Retail Sales Tumble Most in Nearly Two Decades in Q1
• Euro Slightly Lower, British Pound Range-Bound in Overnight Trading
The Euro trended gently lower in overnight trading, shedding -0.2% against the US Dollar. The British Pound oscillated in a narrow, 34-pip range above the 1.5210 level.
Asia Session Highlights
New Zealand Retail Sales unexpectedly fell in March, shedding -0.4% and upsetting economists’ expectations of a 0.5% advance. Inflation-adjusted sales tumbled -2.9% in the three months to March, the sixth consecutive quarter of losses and the largest decline in at least 19 years. Retail activity is likely to remain subdued in the months ahead: unemployment has surged to the highest in over 6 years and the latest data on business confidence suggests a majority of firms expect conditions to deteriorate over the next 12 months, meaning hiring is likely to remain tepid for the time being. Indeed, a survey of economists conducted by Bloomberg reckons the jobless rate will register above 6% in both 2009 and 2010. This will trim disposable incomes for those out of work and encourage precautionary saving for those that are still employed, weighing on spending.
Euro Session: What to Expect
The Euro may see substantial selling pressure with a large dollop of dour economic data set to cross the wires in European trading hours. Preliminary estimates of Germany’s Gross Domestic Product are set to show that the Euro area’s largest economy shrank for the fourth consecutive quarter in the three months to March to bring the annual pace of contraction to a shocking -6.0%. The analogous reading for the Euro Zone as a whole is set to show that the region’s economy shed a whopping -4.1% in the year to the first quarter. Reasonably enough, the unprecedented scope of the current downturn has weighed on price growth, with the Euro Zone Consumer Price Index to show that the annual inflation rate remained at a record-low 0.6% in April.
The fallout from the dour data will be compounded by the European Central Bank’s lackadaisical approach to providing the necessary stimulus to revive growth. Although ECB President Jean-Claude Trichet announced that the bank would move forward on quantitative easing with a scheme to “purchase euro-denominated covered bonds issued in the euro area,” details of the program (and thereby its actual commencement) have been delayed at least until the next policy meeting on June 4th. Such waffling may see the single currency punished as traders price in a longer path to recovery as well as the political implications of inaction: grumbling electorates are increasingly likely to entertain calls to free national monetary capabilities from the ECB’s “measured approach” as recession deepens, threatening the very existence of the currency union itself.
Looking beyond the Euro, the forthcoming data may prove to weigh on risk appetite across financial markets. Collectively, the Euro Zone is the second-largest economy after the United States, accounting for 15-20% of global demand (depending on whether one looks at nominal or PPP-adjusted GDP measures). This means makes a forceful rebound in worldwide economic growth unlikely as long as the currency bloc continues to lag. To that effect, a sharp contraction in Euro Zone GDP may weigh heavily on the markets’ recent optimism, driving stock markets lower and boosting safe-haven currencies like the US Dollar and the Japanese Yen.
Separately, Switzerland’s Retail Sales will push lower in March having tumbled -3.8% in the year to February, the most in over 5 years. Consumer confidence has sunk to the lowest since 2002 and UBS has reported that their leading consumption gauge remains well below its long-term average despite a shallow upswing in March and said the outlook for the coming 3-4 months is becoming “increasingly gloomy”. A growing deflationary threat is likely to compound the dour consumption outlook: producer and import prices fell more than economists expected in April, suggesting consumer prices will continue lower after having printed in negative territory in both March and April. If expectations of falling prices become entrenched, retail activity could slip into long-term stagnation as consumers perpetually put off spending to wait for the best possible bargain. It remains to be seen if the Swiss National Bank is able to stave off this dire scenario with aggressive monetary measures including quantitative easing and currency market intervention.
Written by Ilya Spivak, Currency Analyst
Article Source - Euro, Risk Appetite Threatened with German and EZ GDP to Record Deep Losses (Euro Open)
What is Forex?
The foreign exchange market (Currency, Forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. Forex transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when world over countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.
Today, the Forex market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. According to Euromoney's annual Forex Poll, volumes grew a further 41% between 2007 and 2008.
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