Australian, New Zealand Dollars Slump as Asian Stocks Follow Wall St Lower

Key Overnight Developments

• Australian, NZ Dollars Fall as Asian Stocks Follow Wall St Lower
• NZ Trade Surplus Widens as Exports Hit Record High in May
• Japanese Consumer Prices Show Slowest Deflation in a Year

Critical Levels



The Euro declined in overnight trade, down 0.2 percent against the US Dollar as renewed fears about the EU debt crisis weighed on risk appetite and boosted the safety-linked greenback. The British Pound was little changed on the session. We remain flat EURUSD and GBPUSD.

Asia Session Highlights



The Australian and New Zealand Dollars tumbled, down 0.6 and 0.7 percent respectively against their US counterpart as stocks slumped in overnight trade, weighing on the risk-linked high yielders. The MSCI Asia Pacific regional benchmark stock index fell over 1 percent, following a selloff on Wall Street after the spread on Greek credit default swaps rose to a record high, stoking risk aversion amid fears the European debt crisis will derail the global economic recovery.

New Zealand’s Trade Balance surplus widened to NZ$814 million in May from NZ$665 million in the previous month as exports soared to a record high of NZ$4.2 billion. As we discussed yesterday however, the outlook looks less than stellar going forward 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.

Japan’s Consumer Price Index fell 0.9 percent in the year to May, hinting deflation may ease for the second consecutive quarter. Indeed, minutes from the last Bank of Japan policy meeting revealed some members are seeing rising inflation expectations. Still, a Credit Suisse gauge of priced-in expectations shows traders are betting the central bank will remain the most dovish in the G10, with no rate hikes on the horizon for the next 12 months.

Euro Session: What to Expect



With little of note on the economic calendar, risk sentiment is likely to remain as the primary driver of currency market price action in European hours. A defining catalyst is lacking however, making for a clouded outlook heading into the final stretch of the trading week. US equity index futures show little conviction, hinting that consolidation may be in order as markets brace for the G20 summit set to take place in Toronto over the weekend. That said, sharp selloffs across global stock exchanges over the past 24 hours suggest that momentum lies on the side of risk aversion, hinting that the path of least resistance favors gains for the safety-liked US Dollar and Japanese Yen against the spectrum of their major counterparts.

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