Dollar Gains on China Trade Data, May Pull Back Before FOMC Minutes

Talking Points

• US Dollar, Yen Rise as Chinese Trade Data Weighs on Stocks in Asian Trade
• Focus on UK Industrial Production, EU-27 FinMin Meeting in Europe Hours
• S&P 500 Futures Hint at Risk-Off Mood But Dollar at Risk Pre-Fed Minutes

The US Dollar and Japanese Yen advanced overnight as Asian stocks declined, boosting demand for the go-to haven currencies. The selloff followed a disappointing set of Chinese Trade Balance figures. While the headline surplus expanded, the report showed imports grew at an annual pace of just 6.3 percent in June compared with 11 percent expected and 12.7 percent in May. The result weighed on the outlook for Asian growth considering many of the region’s economies count on China as the leading source of cross-border demand. The Australian and New Zealand Dollars underperformed, sliding as much as 0.5 each against the greenback.

The economic calendar is relatively quiet in European hours, with UK Industrial Production figures headlining the docket. Expectations call for output to decline 2.1 percent in the year to June. Such an outcome would mark the 15th consecutive month of contraction, meaning it is unlikely to offer investors much that has not been amply priced in already. Meanwhile, EU Finance Ministers are due to meet in Brussels, although traders are unlikely to get much out of the sit-down that did not already emerge in the narrower sit-down of Eurozone finance chiefs yesterday. Most significantly, that meeting opened the door for Spain to receive the first €30 billion of its banking bailout by the end of the month.

On the sentiment front, S&P 500 stock index futures are pointing lower, hinting at continued risk aversion in the coming hours. While this argues for continued US Dollar gains as haven flows continue to pour into the benchmark currency, the greenback appears vulnerable to a pullback ahead of Wednesday’s release of minutes from June’s Federal Reserve monetary policy meeting. In the aftermath of Friday’s disappointing US jobs report, markets are likely pining for stimulus once again. For their part, Ben Bernanke and company are unlikely to wholly dismiss the possibility of QE3 for fear of spooking financial markets, meaning the door for more aggressive accommodation is likely to be kept open for now (at least rhetorically). That may encourage traders holding risk-off bets to book profits ahead of the release on the risk that the outcome is perceived is dovish and sends risky assets higher.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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