Dollar Sold as Risk Appetite Recovers Ahead of US GDP Report
Key Overnight Developments
The Euro and the British Pound soared 0.8 and 0.5 percent respectively against the US Dollar as stocks pushed higher in Asian trade, sapping demand for the safety-linked currency. We remain short EURUSD at 1.4881.
Asia Session Highlights
New Zealand’s Trade Balance showed a surplus of NZ$161 million in the year to April, the first positive reading since July 2002, as exports surged the most in over a year while imports fell for the second consecutive month. Overseas sales added 9 percent from a year ago – the most since March 2009 – while inbound shipments declined 0.2 percent over the same period. Shipments to South Korea, Taiwan and China led the increase, with more of the same likely ahead with a survey of economists polled by Bloomberg calling for growth the three East Asian economies to broadly outpace that of the G10. Exports account for close to 30 percent of New Zealand’s economy, with continued firmness here promising to boost growth as well as the outlook for monetary tightening. Indeed, a Credit Suisse gauge of interest rate expectations calls for the RBNZ to add 147 basis points to benchmark borrowing costs over the next 12 months, the most among its major counterparts. That said, an index tracking the price of New Zealand’s top export commodities on global markets compiled by ANZ Bank has moved in lock-step with the MSCI World Stock index – a proxy for risk sentiment – hinting that any substantial downturn in confidence across the world’s financial markets could meaningfully undermine the island nation’s terms of trade.
Meanwhile, Japan’s Trade Balance surplus narrowed to 742.3 billion yen in April from a revised 952 billion in the previous month as a 3.4 percent upswing in imports outpaced a 2.3 percent gain in exports. Looking past month-to-month volatility however, the report seemed broadly encouraging as annualized overseas sales added 40.4 percent, topping economists’ expectations and marking the fifth consecutive increase. As with New Zealand, shipments to Asia led the increase and promise to continue doing so as the region’s top economies outpace their G10 counterparts. That said, Japan’s trading terms are also sensitive to investors’ sentiment, with a flare-up in risk aversion likely to drive the Yen higher as traders unwind carry trades financed cheaply in the low-yielding currency, making the country’s exports more expensive relative to its competitors.
Euro Session: What to Expect
The docket of scheduled event risk looks fairly tame, with traders likely to focus on the second revision of US Gross Domestic Product figures set to cross the wires late into the session. Expectations suggest output growth will be upgraded to reflect an annualized 3.4 percent expansion in the first quarter, up from the 3.2 percent gain reported in the first round of preliminary figures. Even more encouraging, the increase is expected to be driven by an upward revision to private consumption growth, hinting that the foundation for a sustainable recovery is taking firming in the world’s largest consumer market. Asian stock exchanges and US equity index futures soared ahead of the release, with the latter trading higher in excess of 1 percent, hinting at buoyant risk appetite heading into European hours that promises to weigh on the safety-linked US Dollar and Japanese Yen.
Preliminary German Consumer Price Index figures are expected to show the annual inflation rate accelerated to 1.2 percent in May, the highest in 17 months. The outcome is unlikely to stir much of a reaction however with price growth well below the European Central Bank’s 2 percent target level and policymakers surely in no position to raise rates given the sovereign credit meltdown on the currency bloc’s southern periphery. In fact, the central bank moved ahead with its own version of quantitative easing earlier this month.
Elsewhere on the calendar, first-quarter Swiss Employment figures and May’s UK CBI Distributive Trades survey of retail activity are set to cross the wires.
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