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The US Dollar reversed early overnight losses for a net flat result against the Euro and the British Pound ahead of the European trading open. Seesawing price action closely followed Asian stock exchanges, initially rising on an optimistic US Fed Beige Book survey but giving up gains as China's first-quarter GDP underperformed expectations.

Key Overnight Developments

• NZ Manufacturing Contracts for 11th Consecutive Month in March
• UK Annual Retail Sales Fell in March on Jobs Outlook, Says BRC
• US Dollar Reverses Early Losses as China GDP Weighs on Stocks

Critical Levels

04-16-09

The Euro initially extended NY-session gains against the US Dollar, testing as high as high as 1.3268 before tumbling -0.5% to yield an effectively flat result ahead of the London trading open. The British Pound followed a similar dynamic, testing as high as 1.5068 before reversing course late into the session. Seesawing price action closely followed Asian stock exchanges - shares initially rose as the US Fed's Beige Book survey revealed sings that economic turmoil is moderating but the gains were erased after China's first quarter GDP grew less than expected, adding 6.1% (versus forecasts calling for a 6.2% increase).


Asia Session Highlights

New Zealand manufacturing sentiment improved a bit in March according to Business NZ, a lobby group, as their Purchasing Managers Index rose to 40.7 from 38.9 in the previous month. On balance, the shallow uptick is unlikely to be of lasting significance: the metric remained below the boom-bust 50 level for the 11th consecutive month, suggesting business activity was still contracting through March, albeit at a slower pace. Further, the metric has been treading water below 42.6 since hitting a record low at 35.1 in November of last year, suggesting a meaningful rebound is far from assured by the March result.

In the UK, the BRC Retail Sales Monitor revealed transaction values declined -1.2% in the year to March. The metric has fallen in 9 out of the past 10 months. BRC director Stephen Robertson said Customers are still worried about jobs and their own finances - so they're keeping spending under tight control. The unemployment rate ticked up to a 10-year high at 4.3% in February and is expected to average as high as 7.3% this year. Job losses are likely to weigh on disposable incomes, discouraging consumption and weighing on overall economic growth. A survey of economists conducted by Bloomberg forecasts total output will shed -3.6% in 2009.

Euro Session: What to Expect

The final revision of the Euro Zone Consumer Price Index is expected to confirm the annual inflation rate slowed to 0.6% in the year to March, the lowest since the introduction of the Euro. A survey of economists conducted by Bloomberg suggests deepening recession will see the currency bloc's economy will shrink by a full -3.0% this year, threatening to put inflation into negative territory. Despite the dour outlook, the European Central Bank cut interest rates less than economists expected earlier this month, although bank president Trichet did say that rates had not reached the lowest limit and revealed that the Governing Council intends to decide on further non-standard measures at our next monetary policy meeting.

Tumbling inflation is also to be noted in Switzerland where Producer and Import Prices are expected to shrink at annual pace of -2.4% in March. The reading suggests continued downward pressure on consumer prices (the headline inflation gauge) after CPI slipped into negative territory for the first time in 5 years to print at -0.4% in the year to March. Weakening domestic conditions will add to external downward pressure on price growth: a survey of economists conducted by Bloomberg suggests that the economy will shrink -2.5% this year, the most since 1975, threatening to entrench deflation expectations. This stands to commit the mountain nation to a long-term stagnation as consumers and businesses perpetually put off spending and investment to wait for the best possible bargain. Although the central bank had previously committed to a very aggressively dovish stance including quantitative easing and currency market intervention, the latter part of the plan may now be off the table considering commitments made at the recent G20 summit in London.

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