The Reserve Bank of Australia spent a record-breaking 3.15 billion to intervene in the forex market and support the value of its currency. Japanese exports dropped by the largest amount in nearly seven years, pushing the Trade Balance into deficit. Switzerland’s Trade Balance could surprise to the upside if imports follow the sharp uptick in October’s retail sales.
Key Overnight Developments • Japanese exports sink to record low in October • Australia spent record 3.15 billion to prop up currency Critical Levels The Euro kept to a tight range around the 1.25 mark in overnight trading having fallen nearly 350 pips from US session lows. The British Pound followed suit, collapsing from a high just shy of 1.5250 to settle in a range some 300 pips lower around the 1.4950 level. Asia Session Highlights Japan’s Trade Balance fell back into deficit last month, showing a trade gap of -63.9 billion yen versus expectations of a 73.6 billion surplus. The dismal result came on the back of a staggering -7.7% drop in exports from a year earlier. Most tellingly, exports to China and the broader Asian region turned negative for the first time in 6 months as the spreading global slowdown punctures the last pockets of consumer demand around the world. Japan was confirmed to be in recession when growth fell for the second consecutive quarter in the three months through September. From a policy perspective, Japanese leaders are short on available options: monetary policy has little scope with interest rates already at a meager 0.30% and fiscal stimulus could be hit-or-miss given the Japanese consumer’s infamous proclivity to favor saving over spending. On balance, this likely means that murmurs about intervention in the currency market to suppress the Yen and boost exports are starting to make the rounds among officials. The Bank of Japan is set to announce monetary policy this week. The Reserve Bank of Australia revealed that they spent a whopping A$3.15 billion to prop up the Australian Dollar in October. This is easily the largest one-month intervention ever recorded. Earlier this week, minutes from the RBA’s last policy meeting revealed that Glenn Stevens and company are concerned that continued currency depreciation will stoke inflation, opting for a “big bang” approach to easing borrowing costs to avoid entrenched rate cut expectations. Euro Session: What to Expect Switzerland’s Trade Balance is expected to show the surplus shrank to 1.28 billion francs in October from 1.44 billion in the previous month. Exports are likely to suffer deteriorating demand from the Euro Zone: countries in the currency bloc are the destination for 60% of all Swiss outbound shipments. The Euro Zone has been confirmed to be in it’s first-ever recession since the introduction of the single currency after the economy shrank for the second consecutive quarter in the three months through September. Imports may offer some room for an upside surprise: Retail Sales unexpectedly surged 6.4% in October, hinting at a possible uptick in inbound shipments. UK Retail Sales are expected to fall -0.9% in October to bring the annualized growth rate to 1.4%, the lowest in nearly 3 years. The release will offer continued confirmation of deeply stagnating economic conditions, with confirmation of a recession more a matter of time rather than likelihood. Indeed, GDP growth registered at nil in the second quarter and fell -0.5% in the three months through September. Consumer price inflation fell to 4.5% from a 16-year high earlier this week, giving the Bank of England scope to continue lowering borrowing costs. Overnight index swaps are pricing in between 100-125 basis points in additional easing over the next 12 months. German Producer Prices are seen falling -0.7% in October to bring the annualized rate to 7.3%, down a full percentage point from the previous month’s result. The metric turned lower after peaking along with commodity prices in mid-July. Easing inflationary pressure gives the European Central Bank additional room to lower interest rates, with expectations calling for a 0.50% cut at the bank’s meeting in December and at least 125 basis points in easing over the next 12 months. To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.