Euro Zone Current Account Deficit to Threaten Currency

Euro Zone Current Account Deficit to Threaten Currency in Coming Months (Euro Open)

The Euro Zone Current Account report headlines the economic calendar in the coming session, with all signs pointing to a sixth consecutive monthly decline in annualized trading terms. Economists forecast that 2008 will mark the first year in seven that the Euro Zone will see a trade deficit, putting downward pressure on the value of the region’s currency.

Key Overnight Developments

• New Zealand Recession Deepens as Economy Shrinks Again in Q3

• Euro, British Pound See Muted Price Action Ahead of Holiday

Critical Levels





The Euro inched higher in thin, pre-holiday trading, reclaiming a bit of the ground lost in New York hours to test above the 1.40 level. The British Pound was confined to a well-defined 40-pip range below 1.4850.

Asia Session Highlights






New Zealand’s Gross Domestic Product data showed that economy shrank for the third consecutive quarter in the three months to September, dropping -0.4% to bring the annualized growth rate into negative territory for the first time in 10 years (-0.1%). The current downturn is clearly deepening: The jobless rate has soared to the highest in 5 years and retail sales activity has fallen to the lowest since 1998. Still, RBNZ Governor Alan Bollard has said that he sees the economy resuming growth in the second half of 2009 and backed off explicit promises of further rate cuts. The new government of Prime Minister John Key is not so optimistic, saying last week that expansion may not resume until 2010. Key had pledged to cut taxes by NZ$4.4 billion ahead of November’s election. Traders are pricing a 50-75 basis point cut when the RBNZ announces policy in January.

Euro Session: What to Expect

The Euro Zone Current Account may see a bit of improvement in October: the trade balance portion of the report released last week swung back into positive territory in the same period after three consecutive monthly deficits. Importantly, the improvement in the headline figure was driven by a -4.6% drop in imports rather than vibrant overseas shipments. Indeed, exports fell -2.5%. The month-to-month volatility in trade figures makes looking an annualized numbers much more telling: despite the monthly improvement, trading terms deteriorated a hefty -78% in October from a year before. In fact, this marked the sixth consecutive month that the currency bloc’s trade position has registered large, double-digit drops from the same time in 2007. Indeed, economists forecast that 2008 will mark the first year in seven that the Euro Zone will see a trade deficit. Expectations extend to call for another deficit in 2009. This implies long-term downward pressure on the exchange rate: the deficit causes a net outflow of Euros which invariably floods the market with currency and drives down its value.

The UK Current Account is expected to show a quarterly deficit of -11.9 billion pounds in the three months through September, a 25% improvement from a year before. The 12-month rolling change in UK trading terms has shown improvement since the beginning of last year. The change reflects the a weakening British Pound: the sterling lost an average of 7.28% and 25.8% in 2007 and thus far in 2008, respectively. The final revision of the third-quarter Gross Domestic Product reading is expected to confirm the economy shrank -0.5% in the three months to September. Economists expect the economy to contract by 1.0% in the fourth quarter to confirm the UK is in recession.

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