FOREX: Dollar Soars as Stocks Slump on Oil Rebound, China Export Slump

Overnight Headlines

• US Dollar Soars Amid Risk Aversion as Oil Prices Resume Advance
• Australian Dollar Down on Stocks Drop, Disappointing Economic Data
• China Posts Trade Deficit as Exports Slow to Weakest in 15 Months
• RBNZ Cuts Rates by 50bps, Signals No Further Easing is Expected

Critical Levels

The Euro and the British Pound declined in overnight trade, sliding along with most major currencies as the US Dollar soared amid broad-based risk aversion (see below). We remain short NZDUSD.

Asia Session: What Happened

The US Dollar outperformed in overnight trade, rising 0.6 percent against its top counterparts as stocks slumped in Asian trade, boosting demand for the safety-linked currency. The MSCI Asia Pacific regional benchmark equity index slumped 1 percent as crude oil prices resumed their advance amid escalating violence in Libya, with government forces launching a fresh round of air and artillery strikes as well as offering a $407,000 reward to anyone who arrests the head of the rebel leadership. The WTI crude oil contract added as much as 0.5% percent overnight.

The Australian Dollar underperformed, bearing the brunt of risk aversion as disappointing economic data compounded pressure on the risk-sensitive currency. Prices slumped as much as 0.6 percent as China’s Trade Balance unexpectedly slipped into deficit as export growth slumped to the slowest in 15 months while February’s Australian Employment report showed the economy unexpectedly shed 10.1K jobs in February, marking the first decline since August 2009.

China – itself an export-geared economy – is Australia’s largest trading partner; a drop in its exports foreshadows a decline in its own demand for Australian raw materials (notably coal and iron ore). Indeed, imports from Australia dropped to the lowest in 10 months ($4.5 billion) in February while overall inbound shipments added grew at an annual pace of 19.4 percent, the slowest since October 2009.

The Reserve Bank of New Zealand cut interest rates by 50 basis points to bring the benchmark lending rate to 2.5 percent. Economists and traders alike had expected a 25bps reduction. The New Zealand Dollar took the announcement relatively well however as RBNZ Governor Alan Bollard said current monetary policy accommodation will be removed as rebuilding efforts following the Christchurch earthquake boost growth by 2012, labeling today’s move “pre-emptive”. On balance, the central bank seems to be signaling that no further easing ought to be expected, with markets now pricing in a return to rates at 3 percent within 12 months.

Euro Session: What to Expect

An interest rate announcement from the Bank of England headlines the economic calendar in European hours. While traders are pricing in a slight chance of a rate hike (11 percent), policymakers seem more than likely to remain on hold pending some evidence on how the economy digests April’s onset of another round of fiscal retrenchment as well as the first-quarter GDP result due late next month. Given the central bank’s penchant for not releasing a statement when policy remains unchanged, today’s announcement may prove to be a non-event.

Still, the hawkish shift in the central bank’s posture through February has not gone unnoticed, and the British Pound may remain relatively well-supported despite a flat BOE result as a pickup in Industrial Production underpins hopes that that core growth remains supported and the first rate increase will come through in the second quarter as expected. Output is expected to add 4.2 percent in the year to January, the most in 16 years.

Turning to sentiment, stock index futures are pointing sharply lower, hinting the sour mood from Asia is due to carry forward. Existing headwinds for risk sentiment are being compounded by news that Moody’s downgraded Spain just ahead of the opening bell, saying the cost of supporting the country’s banking sector will top official estimates. The announcement follows a downgrade of Greece earlier this week and reinforces our expectation that sovereign risk will return as a key driver of Euro price action.

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