Euro, British Pound in Play with Packed Economic Calendar (Euro Open)

The Euro and the British Pound corrected higher in overnight trading having sold off sharply in the US trading hours. A busy session looms ahead with UK Trade Balance and German ZEW Survey economic data set to be released in European trading hours.

Key Overnight Developments

• Japan Current Account Shrinks on Strong Yen, Weak Demand
• Australian Business Confidence Sinks to Lowest in 11 Years

Critical Levels

The Euro corrected higher in overnight trading having sold off sharply in the US session, re-establishing its position above the 1.27 level. Sterling also mounted an impressive rebound, launching higher to clear 1.56 once again. Technical positioning points to a near-term upward correction in the Euro and the Pound before both pairs see the dominant bearish trends regain momentum.

Asia Session Highlights

Japan’s Current Account printed modestly higher than forecast, issuing a 1.49 trillion yen surplus in September versus 1.40 trillion expected. More tellingly, the surplus shrank -48.8% since a year ago as dwindling global demand crimped export growth. The stronger Yen has not helped matters either, making Japanese goods comparatively more expensive for foreign buyers while encouraging domestic consumers to import rather than buy locally manufactured items. The inbound shipment bill was also inflated by higher oil prices, up 31% in September from a year before even as crude retreated from July’s peak at over $147/barrel. All told, imports shot up 32.7% on the year (the second-largest gain in over 10 years) while exports added a meager 2.1%. The trade surplus (which excludes cross-border business in services and investment income from overseas investments) issued the biggest annualized drop in 6 years. The Eco Watchers Survey revealed merchant sentiment was the lowest in at least 8 years in October, pointing to continued deterioration in consumer spending even as export volumes tumble. The two releases paint a dire picture of the world’s second-largest economy, with policymakers running out of options as interest rates reach a meager 0.30%. Fiscal stimulus could be hit-or-miss given the Japanese consumer’s infamous proclivity to favor saving over spending, with murmurs of intervention in the currency market to suppress the Yen surely starting to make the rounds among officials.

Australian Business Confidence fell to the lowest level in at least 11 years and the worst on record according to National Australia Bank, printing at -29 in October versus -8 in the preceding month. Aggressive interest rate cuts from the Reserve Bank of Australia failed to stem the slide in sentiment even as Governor Glenn Stevens slashed borrowing costs by a full percentage point in October. There is indeed little reason for a rosy outlook as global demand evaporates while business credit remains elusive. Interestingly, the response from forex markets was fairly muted as AUDUSD moved just 35 pips lower on the announcement, remaining firmly in the range established in the second half of the New York trading day. It seems traders are already pricing in the worst-case scenario for the Australian economy, with overnight index swaps pointing to 75-100 basis point cut when the RBA meets again on December 2nd.

Euro Session: What to Expect

In the UK, September’s Trade Balance is set to improve from the preceding month with the deficit expected to shrink -8% from a year before having widened 15% in the year to August. The result will likely come courtesy of the cheaper British Pound: the sterling fell a staggering -10.6% in third quarter, making British goods comparatively cheaper for overseas buyers and boosting exports all the while UK consumers lose purchasing power and opt for domestically made rather than imported products.

Germany’s ZEW Survey of investors’ sentiment is expected to remain at -63.0 in November, the second lowest reading in at least 17 years. The broader Euro Zone version of the survey is seen printing at -60.5, marginally better than October’s -62.7 result but still within a hair of the lowest readings since the series’ inception over 8 years ago. The European Commission expects the economic growth in the currency bloc to print at a meager 1.20% in 2008, down 54% from the previous year and the lowest in five years. Things are expected to get even worse in 2009 with the economy expanding a barely noticeable 0.5%. The European Central Bank will continue trying to kick-start the economy with monetary stimulus: traders are pricing in a rate cut of 25-50 basis points when Trichet and company meet on December 4th.

To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com