Com Bloc Dominates Friday’s Docket, New Zealand Dollar Tops Event Risk Next Week

The global economic docket was very light today; but there was still a top market mover for the day: Canadian retail sales. It is hard to forget the massive 5.4 percent drop in the December consumption report last month. After such an aggressive decline, some tempering was inevitable; and that is how the 1.9 percent pick up in January receipts was treated. It was the biggest pickup since July of 2006, with notable increases in auto, food and clothing purchases. Given the trend this data has been through, it will take broader and more significant improvements to generate optimism about Canada’s future.

Looking ahead to next week, an otherwise anemic calendar will be dominated by the typically under-the-radar New Zealand dollar. The top release will be the fourth quarter GDP and current account figures. This is the last of the majors to see its growth numbers; and the forecast isn’t promising. A 1.1 percent contraction through the three month period is expected to slow the annual pace to 2.0 percent – the worst pace since 1991. This will be a critical indicator for the kiwi dollar as the risk appetite wave the currency has shared with its Aussie counterpart is partially based on expectations that the currency is seeing relatively strong growth and rates. The RBNZ hasn’t curbed its cuts; so expectations are high.

Euro, British Pound Lose Momentum Despite Improved Cooperation On Financial Aid

Both the euro and the British pound pulled back through the early morning hours of the US session. However, this retracement wasn’t significant enough to put the massive rallies the two currencies enjoyed over the past two weeks in jeopardy. News out of the region was generally mixed. From the economic docket, the Euro Zone released disappointing industrial production numbers. According to the data, factor output contracted 17.3 percent in the year through January – the most aggressive slump on record. As the regional and global recessions take hold, factories have little choice left but to curb production and fire workers to avoid closing their doors for good. The other market-worthy event risk for the session was news that the EU had reached an agreement to expand aid to its struggling central and eastern neighbors. Though it was not quite the broad bailout of Eastern Europe that Hungary had called for a few weeks ago, leaders agreed to boost funding to the IMF; discuss a loan to Romania (part of their case-by-case bailout effort); and double the credit line to those countries in financial stress to 50 billion euros. Perhaps this is a sign of their openness to negotiate when the G-20 meets two weeks from now.

Foreign Exchange Market Daily Update

The US dollar rally seen yesterday and overnight came to an end as European shares rose and US stock market futures dampened the dollar sentiment. The dollar weakening against a basket of currencies was capped after data showed China's exports in February slid 25.7% from a year earlier, while imports dropped 24.1%. These import and export figures from what is considered an economic powerhouse was a timely reminder on the sickly state of global economic growth, or lack there of.

Recently, news from banks has been one of the factors in guiding investors to shy-away or whet their appetite for riskier assets which push or pull the equity markets. As equity markets perform somewhat better, global risk aversion bid for the dollar may ebb.

The euro strengthened against the dollar touching a two week high overnight, but erased some of those gains after German industry orders fell for the 5th straight month. German manufacturing orders slumped by 8% in January signaling Europe's largest economy may again contract sharply in the first quarter of 2009.

The British pound strengthened against the dollar overnight but most of the gains disappeared in early morning trade. Meanwhile the pound remained near multi-week lows against the euro due to concerns over the UK economy and banking system. Data from the National Institute of Economic and Social Research indicated Britain's economy had shrunk by 1.8% in the three months to February, after falling 1.7% in January. Furthermore, Britain's goods trade gap widened more than expected in January to 7.745 billion pounds from 7.232 billion pounds in December.

The Bank of England will implement its first "quantitative easing" program today by purchasing 2 billion pounds of government bonds. Market players are waiting on signs of the impact of BoE's last ditch attempt to beat off recession by leveling close to 75 billion pounds into the economy. Many are speculating the pound to remain under pressure.

The Japanese yen remains little changed against the dollar. Many analysts had forecasted the yen to strengthen in the next six months but revised their outlook after Japan's economy contracted last quarter by the most in three decades. Since December, the yen has weakened 8.2% against the dollar. With the erosion of Japan's economy, some investors are beginning to question whether the yen deserves the "safe-haven" status.

The Canadian dollar weakened slightly against the US dollar as oil prices dropped. Oil fell below $44 a barrel as evidence for global crude demand declined.

The Australian and New Zealand dollar strengthened against the greenback after initially weakening against the US dollar. As China's exports took a surprising slump, both the Aussie and the kiwi weakened against the greenback. However, those losses were recouped as US stocks rallied.