Dollar, Yen Decline as Australian PM Resignation Lifts Stocks in Asian Trade

Key Overnight Developments

• New Zealand Economic Growth Slows as Consumption Falters
• Japan’s Trade Surplus Narrows as Exports Fall on Stronger Yen
• Australian PM Rudd Steps Down, Deputy PM Gillard to Take Over

Critical Levels



The Euro and the British Pound advanced in overnight trade, adding 0.2 percent apiece against the US Dollar as Australian mining shares led Asian stocks higher after Prime Minister Kevin Rudd stepped down amid rising unpopularity linked to a proposed “Resource Super Profits Tax”. We remain flat EURUSD and GBPUSD.

Asia Session Highlights



New Zealand’s Gross Domestic Product figures printed in line with expectations, with the economy adding 0.6 percent in the first quarter, down from a revised 0.9 percent increase in the three months through December 2009. Details of the report proved ominous: private consumption growth slowed dramatically, adding 0.2 percent to mark the smallest increase in a year; meanwhile, government spending added 1.7 percent – the most since the second quarter of 2009. Business investment was a notable bright spot however, adding 0.9 percent to register the first increase in three quarters.

Still, with net exports set to remain a negative drag on growth and consumption likely to remain lackluster after the government’s latest budget introduced plans to raise the sales tax for the first time since 1989, the outlook for future performance (and thereby RBNZ rate hikes) seems shaky. While the budget also includes provisions to cut the corporate tax rate, weak spending at home will mean a reliance on foreign demand, which also faces considerable headwinds as China – a key driver of the rebound in exports over recent months – steps up efforts to slow its buoyant economy amid fears of asset bubbles and runaway inflation. In fact, the US stands alone among New Zealand’s top trading partners as relatively impervious to slowing Chinese demand considering it runs a trade deficit with the East Asian giant, leaving over 35 percent of foreign demand (spread across Australia, Japan, and China itself) exposed either directly or otherwise. On balance, traders remain sanguine for the time being, with a Credit Suisse gauge of rate hike expectations suggesting New Zealand will lead the G10 with 136 basis points in tightening over the next 12 months, although it remains to be seen if this is sustainable as the economy’s vulnerabilities become increasingly apparent.

Japan’s Trade Balance surplus shrank more than economists expected, coming in at 324.2 billion yen in May as exports slowed, rising 32.1 percent from the previous year to mark the smallest annualized increase in five months. Shipments to China, the key driver of overseas sales as Japan began to emerge out of the worst downturn since the Second World War in the aftermath of the global credit crunch and subsequent recession, added just 25.3 percent to mark the smallest increase since November of last year. The outcome underscores Japan’s vulnerability should foreign demand diminish, particularly as a stronger Yen weighs on the competitiveness of the nation’s goods on global markets. Indeed, the currency gained 6.7 percent in trade-weighted terms in May, the most in 19 months.

Related Articles: Australian Prime Minister Steps Down, Deputy PM to Take Over

Euro Session: What to Expect



With nothing of note on the economic calendar, risk sentiment is likely to remain as the primary driver of currency market price action in European hours. On balance, the path of least resistance seems to favor risk aversion as markets digest discouraging cues from the US economy including a decidedly dovish statement from the Federal Reserve and a hefty drop in home sales. Traders are increasingly viewing US performance as the bellwether of the global recovery at large with the EU hamstrung by a debt crisis, Japan still struggling with deflation, and China willfully pulling the brakes on its buoyant economy. US Durable Goods figures to be released late into the session promise further downward pressure on risk appetite, with expectations pointing to a decline of 1.4 percent, the first negative reading in six months and the largest one in eight.

For real time news and analysis, please visit http://www.dailyfx.com/real_time_news

To receive future articles by email, please contact Ilya at ispivak@dailyfx.com