US Dollar Surges as China Backtracks on 'Super-Sovereign Currency' Comments (Euro Ope

The US Dollar surged in overnight trading after China backtracked on last week’s call for a ‘super-sovereign’ currency, saying their foreign exchange reserve policy was “quite stable” and easing fears of looming diversification away from the greenback. A tame economic calendar is likely to yield to risk trends in European hours.

[U][B]Key Overnight Developments[/B][/U]

[B]• New Zealand Trade Deficit Narrows as Imports Fall Most in 16 Years
• Japanese Retail Trade Stalls in May on Rising Unemployment
• US Dollar Surges as China Backtracks on ‘Super-Sovereign Currency’[/B]

[U][B]Critical Levels[/B][/U]

The [B]US Dollar [/B]surged in overnight trading after China’s central bank chief Zhou Xiaochuan said his country’s foreign exchange reserve policy is “quite stable”, alluding to the fact that the world’s largest holder of US Treasuries will not be diversifying away from the greenback for the time being. China’s call for a ‘super-sovereign’ currency weighed on USD last week. The Euro tested as low as 1.4002 while the [B]British Pound[/B] touched 1.6450 ahead of the opening bell in Europe.

[U][B]Asia Session Highlights[/B][/U]

New Zealand’s [B]Trade Balance[/B] deficit narrowed more than was expected in May, shrinking to -NZ$3.04 billion from -NZ$4.1 billion in the previous month. Economists had forecast a -NZ$3.64 billion result ahead of the release. The improvement came as imports tumbled -20.7% from a year prior, the largest decline in over 16 years. The unemployment rate has surged to 6-year high at 5%, discouraging consumption, including that of imported goods. The result reinforces the dynamic we noted last week as first quarter current account figures crossed the wires, painting a picture of weak consumer demand that is made all the more ominous in the context of a 17.6% currency appreciation in the four months through May that would reasonably be expected to boost New Zealanders’ purchasing power of foreign goods. Private consumption accounts for 62.3% of overall economic growth and continued weakness in domestic spending makes it unlikely that the smaller antipodean nation can mount a meaningful recovery from the current downturn in the near term. Indeed, GDP shrank more than economists expected in the first quarter, contracting at the fastest pace in over three decades.

Japanese [B]Retail Trade [/B]came to a standstill as expected in May after adding 0.6% in the previous month. In annual terms, receipts shrank at a rate of -2.8% for the second consecutive month, stalling a rebound from a record low at -5.7% recorded in February. The unemployment rate has advanced to the highest in over 5 years, weighing on disposable incomes and trimming spending. More of the same is likely in the months ahead as lackluster global demand keeps output levels low and labor forces lean. Indeed, minutes from the last Bank of Japan policy meeting saw policymakers note that consumption is likely to remain weak as the “employment and income situation becomes increasingly severe.”

[U][B]Euro Session: What to Expect[/B][/U]

[B]Euro Zone Economic Confidence[/B] figures are expected to tick up in June, though as we have noted previously, some recovery in sentiment is to be expected as governments’ fiscal efforts filter into the broad economy; the big question at this stage is whether growth is sustainable after stimulus cash dries up. This suggests the Euro is likely to look past the data docket with near-term price action taking directional cues from trends in risk appetite, with EURJPY and EURUSD still 83% and 88% correlated with the MSCI World Stock Index, respectively.

Turning to the UK, [B]Net Consumer Credit[/B] is set to remain at 0.3 billion pounds in May, unchanged from the previous month, while [B]Mortgage Approvals[/B] grow by 46k, extending a rebound from record lows in November 2008 for the sixth month. The upswing may prove little more than a correction, however: Rightmove Plc reported last week that house prices fell for the first in five months in June as banks raised borrowing costs in anticipation of a stabilizing global economic environment, hinting that credit growth will stumble in the months ahead. Barring a sharp deviation from expectations, British Pound price action is unlikely to dwell too deeply on these releases, focusing on cues from stock and commodity markets to set directional momentum.

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