Forex Investment and Currency Trading

Eurozone Wednesday’s data releases confirmed that April has seen a significant decline in business and consumer confidence, while inflation surprised on the downside compared to initial expectations. According to the European Commission index, the business climate index declined to 0.44 in April from a downward revised 0.79 in March. Consumer confidence was unchanged at -12. The overall economic confidence index fell to 97.1 from 99.6. As for inflation, the Euro area HICP inflation rate was 3.3% yoy, down from 3.6% in March. Country-specific data show that inflation fell most sharply in Germany, but it also declined in Spain, Belgium and Italy. Meanwhile, there are signs that the labor market is also getting less buoyant, as the Eurozone unemployment rate in March was unchanged at 7.1%. German unemployment fell by 7k in April, less than the 30k expected by the market, probably a payback for the unexpected strength in the previous winter months. On the whole, while the inflation rate could edge up in May due to higher fuel prices, the overall macroeconomic picture looks more benign than it did only two weeks ago, and market expects the ECB to tone down its hawkish rhetoric.

UK GfK consumer sentiment fell to its lowest level since the recession of 1992, at -24 in April from -19 in March, with the expectations for the economic outlook over the coming 12 months dropping further from -32 to -38. The Nationwide house prices index also fell much more than expected at -1.1% mom in April, pushing the annual rate to -1.0%, the first negative yoy reading since March 1996. A soft housing market and weakening consumer demand suggest continued GBP underperformance. Nonetheless, the BoE remains concerned about elevated inflation, suggesting a gradual rate cut approach. Market continues to expect a 25bp cut in June, with rate reaching 4.0% by early 2009. However, it is not completely ruled out an earlier move in May if there are significant declines in the manufacturing and, in particular, the services PMIs.

Switzerland KOF indicator fell much more than expected to 1.20 in April, with March revised down to 1.40 from original 1.54. The recent sharper deterioration in the leading indicators (KOF and PMI) suggests that the financial market crisis and global growth slowdown are taking their tolls on the Swiss economy.

Norway Retail sales unexpectedly fell by 0.4% mom in March against expectations for a +0.4% mom gain, from +1.7% in February. As a result, the annual rate moderated sharply to 3.3% — the slowest pace since April 2006 — from 5.6% in February. Higher borrowing costs and rising inflation are hurting consumers’ purchasing power, however Stats Norway noted that the impact of early Easter holiday made the March reading more uncertain than usual. Credit growth remained very elevated, but slowed slightly more than expected to 13.9% yoy in March from 14.2%. Data on the weak side of expectations failed to put a sustainable softer tone on the NOK. With oil still at elevated levels and a slight hawkish tilt in the Norges Bank’s statement in April, NOK will remain an outperformer.

Japan Market no longer expects a June BoJ rate cut, and now attach a probability of 60% for no policy rate change this year and a probability of 40% for a 25bp rate cut in September. A rate hike is not likely until April 2009. Although weakness of the latest economic data including industrial production and housing starts suggest sharp economic slowdown in 2Q-3Q 2008, near-term inflation is likely to be higher than earlier expectations. While the Policy Board is increasingly concerned about downside risks to the economy, most members of the Board will probably reserve a rate cut option for an emergency. As expected, the BoJ Policy Board left the overnight rate target unchanged at 0.50% by a unanimous vote, and in its semiannual outlook report the Policy Board virtually shifted to a neutral stance from a tightening bias. The report removed the expression of “gradual interest rate adjustments” (that is, hikes). The report stated that it is not appropriate to show a specific policy direction given considerable uncertainty, pointing out the need to judge whether downside risks to the economy will materialize or not. Governor Shirakawa stated that the Bank is clearly laying emphasis on downside risks in FY2008 growth forecasts. The Policy Board essentially expects trend-pace growth for both FY2008 and FY2009 (April-March), with growth slowdown in 1H FY2008 to be followed by reacceleration. As expected, the Policy Board’s central forecast of real GDP growth for FY2008 has been set at 1.5% (revised downward from 2.1% as of October 2007). However, the central forecast now represents either the low end of the Bank’s potential growth estimate range or the mid-point of such a range, as the BoJ marginally downgraded the low end of its potential growth estimate range, which is either around 1.5% or 1.5-2.0%. Previously, the Bank said that the potential growth range was 1.5-2.0%. The central real GDP growth forecast has been set at 1.7% for FY2009. Central forecast of core CPI inflation (excluding fresh food) was set at 1.1% for FY2008 (revised upward from 0.4%) and at 1.0% for FY2009, slightly higher than expectations.

Australia Private sector credit rose by 0.8% mom in March (+0.6% mom in February), in line with the consensus expectation, taking the yoy growth rate down to 14.9% yoy from February’s 15.4% yoy. According to the Housing Industry Association, March new home sales fell by 6.0% mom to the lowest in seven months, following a 5.3% mom drop in February. The rate on the September 2008 bank bill futures contract dropped by 4bp to 7.83%.

NZ Building permits declined by 9.1% mom in March following a 6.6% mom drop in February. Excluding apartments, building approvals plunged by 13.7% mom in March following a 3.1% mom drop in February. The NBNZ business confidence index rose modestly from -57.9 in March to -54.8 in April but remained well below February’s -43.9. The rate on the September 2008 bank bill futures contract slipped by 2bp to 8.52%.