Key News

• The British economy shrank in the first quarter at its sharpest rate in 30 years.  (Reuters)

• The Munich-based Ifo Institute's business climate index rose to 83.7 from a revised 82.2 in March and exceeded the consensus estimate for a rise to 82.3. (MarketWatch)
• Spain's unemployment rate rose to 17.4 percent in the first quarter, more than double the European Union average, as the global recession ravages an economy that was once one of the region's strongest performers. (Bloomberg)

Key Reports (WSJ):
8:30 a.m. Mar Durable Goods Orders: Previous: +3.4%.
10:00 a.m. Mar New Home Sales: Previous: +4.7%.

Quotable

"What if everything is an illusion and nothing exists? In that case, I definitely overpaid for my carpet."

                              Woody Allen

FX Trading - Far from over!
This falls into the category that it ain't over till it's over!

Oliver Weeks & Alina Slyusarchuk, Morgan Stanley:

"The pain of maintaining currency pegs across the Baltics remains huge and, in our view, has only ever looked bearable given a quick and credible exit strategy (euro entry). Previously, vast current account deficits have adjusted in line with the disappearance of private sector financing, but at the cost of extraordinary collapses in demand. Real domestic demand contracted by 14.8%Y in Estonia in 4Q08, and the pace of decline continues to accelerate. Real retail sales in February in Estonia, Latvia and Lithuania were down 19%, 27% and 21%Y, respectively. Industrial output is down 30%, 25% and 16%, respectively. We still think that it would prove more expensive for foreign banks to withdraw than to stay and absorb losses. However, any return of private sector credit is clearly a distant prospect as housing bubbles deflate and defaults multiply. Devaluations among trading partners have stabilized for now, but the challenge of regaining export competitiveness in the current global environment remains daunting (see also Eastern Europe Economics: Peripheral Risks, March 6, 2009). In Latvia's case, only 23% of exports are to Euroland and a third is with countries, from Sweden to Ukraine, that have seen major FX depreciation against the EUR - so far negating the impact of wage declines. Lithuanian shoppers continue to flock to Poland. Official policy across the region remains one of 'internal devaluation', restoring competitiveness through wage and price adjustment. While Baltic workers and voters are highly flexible by international standards, the cuts this will require are extreme, and already proving hard to deliver. Political commitment to quick euro entry remains strong, but the distributional impact of choosing wage cuts over devaluation - putting more of the burden on workers than corporates - may prove politically difficult to sustain, writes

William Pesek Bloomberg:

"China is run by smart policy makers. Premier Wen Jiabao may well be right when he says China's stimulus efforts have shown "better-than-expected" results. In a world devoid of growth anchors, it would be nice to see China pick up more slack.

"It's less clear that China can beat the system, so to speak. No emerging economy has avoided a financial crisis that has sent growth reeling and markets plunging. An argument can be made that China's stimulus efforts today, at the core of which is a 4 trillion-yuan ($586 billion) package, are sowing the seeds for a bad-loan crisis."

Steve Hochberg and Peter Kendall, Elliott Wave

"Despite gold bugs' insistence that an imminent surge is at hand, gold's countertrend rally high remains $1007.20 on February 20th.  The target for the currency decline is below $680.  Silver too made a countertrend rally high at $14.68 (Feb 23).  The current decline from this extreme should eventually draw prices beneath $8.39.  The uptrend in the US Dollar Index should carry well beyond 89.62 high on March 4."

US Dollar Index (black line) vs. Gold (red line) Monthly: 

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