Key Overnight Developments
• UK Consumer Confidence Tops Forecasts But Outlook Remains Bleak
• Australian Dollar Plunges Despite Improved Retail Sales, Trade Balance
• Rumors Hint Stress Tests to Show Bank of America Needs Most Capital
The Euro slipped -0.6% against the US Dollar, reaching as low as 1.3247. The British Pound followed suit, shedding 0.7% to test below the 1.50 level once again.
Asia Session Highlights
UK Consumer Confidence unexpectedly surged to register at 50 in April from 41 in the previous month according to the Nationwide Building Society (economists had forecast a reading at 42). Details of the survey reveal that while 80% of respondents would characterize the current environment as “bad”, in line with the average result over the previous 6 months, the spread between those expecting worse and those expecting better economic conditions in the future shrank to just 6%, the smallest margin at least since September. Further, the number of respondents that reckon economic conditions will remain the same in the immediate future surpassed that of those expecting the worst is still ahead for the first time in at least 7 months. On balance, this is not as good as it sounds: the status quo is far from rosy considering the UK economy shrank at an annual pace of -4.1% in the first quarter and is forecast to shed -4.4% in the three months through June. Ominously enough, the data revealed that a 68% of respondents see insufficient available jobs today and 62% expect this to remain the case going forward. The jobless rate is seen topping 8% in 2009 and reaching as high as 9.4% in 2010.
The Australian Dollar tumbled against its US counterpart, testing as low as 0.7337, despite seemingly positive surprises in March economic data. Retail Sales surged 2.2% from the previous month, four times more than economists expected, while the Trade Balance surplus printed at A$2.5 billion versus forecasts calling for a A$1.7 billion result. The details of the reports reveal a far grimmer reality than the headline figures would suggest. The jump in retail activity in and of itself likely owed to fiscal stimulus: the government has provided every Australian with A$950 in cash handouts since March. The breakdown in spending patterns is quite telling: department store and apparel sales raced higher, adding 13.2% and 6.4% from the previous month; meanwhile, discretionary spending (food, eating out) as well as bigger-ticket items (household goods) remained conspicuously tame. This suggests that Australians chose to spend their stimulus money to stock up on relatively more durable essentials (like clothing) but eschewed larger purchases and optional expenses, hinting that the handouts were seen as a one-off income boost, reflecting expectations of lower spending power in the months ahead and painting a bleak picture of consumer sentiment. The outlook on consumption was made even darker considering the improvement in trade figures came as imports fell on weak demand for foreign-made products rather than robust overseas sales. Indeed, inbound shipments shrank -0.38% in the year to March, the first contraction in 5 years. The fact that this happened even as the local currency advanced, boosting Australian’s purchasing power, makes things all the more negative.
Fears that today’s Australian releases are representative of a larger global trend revealing the recent improvements in headline economic indicators mask continued weakness weighed on risky assets, boosting the US Dollar. Confidence was eroded further as rumors that Bank of America is the most undercapitalized of the 19 major institutions undergoing stress tests, raising questions about the durability of any sustainable economic recovery amid continued turmoil in the financial sector. The MSCI Asia Pacific Index fell 0.5% and US equity index futures slipped 1%.
Euro Session: What to Expect
Euro Zone Retail Sales are expected to add 0.1% in March, suggesting the annual pace of decline moderated to -2.6% from -4.0% in the previous month. Any improvement will likely owe to a slew of fiscal stimulus packages put in place across the region to boost growth amid deepening recession. That said, a downside surprise is not out of the question as unemployment continues to rise, trimming disposable incomes and encouraging precautionary saving. Indeed, German retail sales unexpectedly fell during the same period, driven by similar considerations. Leading indicators continue to point to contraction in retail activity across the region, albeit at a slowing pace: Bloomberg’s Retail PMI, a survey of purchasing executives designed to gauge firms’ bets on future economic growth, remained firmly in contractionary territory both in March and April. The EU Commission’s latest economic forecast for the common market expects unemployment will rise to a staggering 11.5% next year, suggesting any near-term improvements in consumer spending are likely to be short-lived.
Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar Rises on Australian Economic Data, Stress Test Rumors (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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