The UK Trade Balance report headlines the economic calendar in European hours, with the rapid depreciation of the British Pound expected calling to help the deficit to narrow in November. Overnight data saw Japan's current account surplus narrowed more than economists expected while New Zealand business confidence fell to the lowest in nearly 23 years.

Key Overnight Developments

* New Zealand Business Confidence Falls to 23-year Low
* Japanese Exports Shrink on Falling Demand, Rising Yen
* UK Annual Retail Sales Fell 3% in December, Says BRC

Critical Levels

The Euro extended loses in overnight trading, testing the 1.33 level. The British Pound consolidated in a narrow, well-defined range above 1.4750 after dropping below the 1.48 mark early into the session

Asia Session Highlights

New Zealand's NZIER Business Opinion Survey saw confidence fall to -64 in the fourth quarter, equal to the lowest reading in nearly 23 years. The reading shows that 64% of companies polled for the survey expect the economy to deteriorate over the next 6 months. The market is currently pricing in a 1% cut when the Reserve Bank of New Zealand announces rates at the end of the month as policymakers scramble to check deepening recession.

Japan's Trade Balance registered a greater-than-expected deficit in November at 93.4 billion yen. The broader Current Account measure (which includes cross-border capital flows in addition to trade in goods) shrank to 581.2 billion yen. The surplus has contracted 65.9% from a year earlier as slumping economic performance around the world trimmed demand all the while an appreciating Yen made Japanese goods comparatively more expensive. Indeed, exports fell 26.5% in annualized terms. The Japanese Yen rose 29% through 2008 against an average of the world's top-traded currencies. Although Japanese officials have not been as vocal about the exchange rate since USDJPY began to rise in mid-December, traders are likely to see renewed calls for intervention in the forex market the pair resumes its down trend. We sold USDJPY at 92.48 targeting 84.25.

In the UK, the BRC Retail Sales Monitor showed receipts fell -3.3% in the year to December, showing three consecutive months of loses for the first time since the metric was introduced in 1995. The RICS House Price Balance survey showed that 73% of those polled reported falling property costs. The negative wealth effects of declining home values are likely to push retail sales lower still. Private consumption is the single largest component of overall economic growth, suggesting the UK downturn is set to deepen. A survey of economists conducted by Bloomberg suggests Gross Domestic Product will shrink 1.4% through 2009

Euro Session: What to Expect

The UK Trade Balance report headlines the economic calendar in European hours, with expectations calling for the deficit to narrow in November to -£7.5 billion. The rapid depreciation of the British Pound is likely to be a key contributor, making UK products substantially cheaper for overseas buyers and boosting exports. Indeed, Sterling lost 3.26% against the Euro and 2.87% against the US Dollar in November. Cumulatively, the US and the Euro Zone account for well over 60% of all UK cross-border sales. Meanwhile, imports have likely declined as consumers cut back spending on both domestic and foreign-made products. Last week, we saw consumer confidence fall to a record low as economic growth turned sluggish, sending unemployment higher all the while tumbling home values and stock prices produced large negative wealth effects