FOREX: Japan Enters Recession, NZ Dollar Gains on Budget Surplus Outlook

The Japanese Yen underperformed as the economy slipped into recession in the first quarter while the New Zealand Dollar rose following a rosy set of budget projections.

Overnight Headlines

• Japan Enters Recession as Economy Shrinks in the First Quarter
• NZ Dollar Outperforms on Government's Budget Surplus Outlook

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.4084	1.4330
GBPUSD	1.6016	1.6274

The Euro was little changed in overnight trade, rising to test above 1.43 to the US Dollar in the first part of the session as Asian stocks followed Wall Street higher to weigh on safety-linked demand for the greenback but promptly erasing the advance as shares reversed course in the aftermath of Japan's GDP figures (see below). The British Pound mirrored the single currency, rising toward the 1.62 figure but failing to hold ground ahead of the opening bell in Europe. We are looking for EURUSD and GBPUSD selling opportunities and remain long USDJPY.

Asia Session: What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
23:01	GBP	Nationwide Consumer Confidence (APR)	43	46	45 (R+)
23:50	JPY	Gross Domestic Product (QoQ) (1Q)	-0.9%	-0.5%	-0.8% (R-)
23:50	JPY	Gross Domestic Product Annualized (1Q)	-3.7%	-1.9%	-3.0% (R-)
23:50	JPY	Gross Domestic Product Deflator (YoY) (1Q)	-1.9%	-1.8%	-1.6%
23:50	JPY	Nominal Gross Domestic Product (QoQ) (1Q)	-1.3%	-0.7%	-1.1% (R-)
23:50	JPY	Housing Loans (YoY) (1Q)	2.7%	-	3.2%
1:00	AUD	Consumer Inflation Expectation (MAY)	3.3%	-	3.5%
1:30	AUD	Average Weekly Wages (QoQ) (FEB)	1.0%	1.2%	1.4% (R+)
1:30	AUD	Average Weekly Wages (YoY) (FEB)	3.8%	3.8%	3.9%
2:00	NZD	New Zealand Releases Annual Budget	-	-	-
4:30	JPY	Industrial Production (MoM) (MAR F)	-15.5%	-	-15.3%
4:30	JPY	Industrial Production (YoY) (MAR F)	-13.1%	-	-12.9%
4:30	JPY	Capacity Utilization (MoM) (MAR)	-21.5%	-	2.9%
5:30	JPY	Nationwide Department Store Sales (YoY) (APR)	-1.5%	-	-14.7%
5:30	JPY	Tokyo Department Store Sales (YoY) (APR)	-5.5%	-	-21.5%

Currency markets were relatively quiet in overnight trade, with the New Zealand Dollar outperforming after the Finance Minister Bill English said in the annual Budget that the government will return to surplus by June 2015, easing sovereign debt fears that have plagued the island nation, prompting ratings agencies Standard and Poor's and Fitch to put to downgrade their credit outlooks to “negative” in November 2010 and July 2009, respectively. The currency rose as much as 0.9 percent against its top counterparts.

Japanese Gross Domestic Product figures showed the country entered into recession as the economy shrank 0.9 percent I the first quarter having slumped 0.8 percent in the three months through December 2010. The outcome had little immediate impact on the Japanese Yen despite the worse-than-expected outcome considering a generally dismal print was widely expected considering the island nation suffered its worst earthquake on record during the period in question. The disaster took a heavy toll on economic activity, shuttering businesses and disrupting export deliveries. Still, the currency would go on to underperform as bearish momentum built throughout the session.

Euro Session: What to Expect

GMT	CCY	EVENT	EXP	PREV	IMPACT
8:30	GBP	Retail Sales ex Auto Fuel (MoM) (APR)	0.8%	0.2%	Medium
8:30	GBP	Retail Sales ex Auto Fuel (YoY) (APR)	2.2%	0.9%	Medium
8:30	GBP	Retail Sales inc Auto Fuel (MoM) (APR)	0.8%	0.2%	Medium
8:30	GBP	Retail Sales inc Auto Fuel (YoY) (APR)	2.5%	1.3%	Medium
9:00	EUR	Italian Current Account (€) (MAR)	-	-6337M	Low
9:00	CHF	ZEW Survey (Expectations) (MAY)	-	8.8	Low
10:00	GBP	CBI Trends Selling Prices (MAY)	-	36	Low
10:00	GBP	CBI Trends Total Orders (MAY)	-9	-11	Low

UK Retail Sales headline the calendar in European hours, with expectations calling for core receipts (excluding auto fuel) to rise 2.2 percent in the year through April, marking the strongest outcome in three months. While encouraging, the release is unlikely to prove particularly supportive for the British Pound.

Echoing concerns raised in an analogous release from the BRC, an outsized year-on-year increase this time around seems to substantially owe to a particularly weak result in April 2010, where retail conditions were marred by uncertainty ahead of the UK general election and which didn't include Easter holiday spending, as this year's numbers will. An unexpected drop in the Nationwide Consumer Confidence gauge reported overnight will do little to stem skepticism.

Sizing up sentiment trends, stock index futures tracking key European bourses are well into positive territory ahead of the opening bell, but this likely follows the corrective bounce on Wall Street rather than a genuine reversal of recent weakness. Indeed, as noted in our weekly fundamental trends monitor, “markets don't move in straight lines and some fits and starts [are] to be expected” as the emerging risk-averse trend centered on the unwinding of bets dependent on cheap QE2 funding ahead of the program's June expiry runs into short-term bargain hunters.

Meanwhile, futures tracking the S&P 500 are essentially flat, pointing to indecision after the rebound heading into yesterday's FOMC minutes release. With that outcome proving to be largely a non-event as expected, the larger risk-negative trend established over the past two weeks looks ready to resume, giving the US Dollar scope to resume its advance against the major currencies.

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