Aussie Falls Before EU Summit; Kiwi Drops on Trade Data

The Australian dollar weakened against most of its major peers amid speculation a European Union summit beginning tomorrow will fail to produce a lasting resolution to the region’s debt crisis, curbing demand for higher-yielding assets.

The Aussie slid for the second time in three days against the yen before German Chancellor Angela Merkel and French President Francois Hollande confer ahead of the EU gathering. Losses were limited on bets the Reserve Bank of Australia will refrain from lowering its benchmark interest rate next week. New Zealand’s currency, known as the kiwi, was lower against the greenback after data showed the nation’s annual trade deficit in May was the widest in more than two years.

“The market is paring some expectations for something concrete to come out of the EU summit,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “The Aussie and kiwi will remain under pressure.”

The Australian dollar was little changed at $1.0063 as of 3:47 p.m. in Sydney. It slid 0.1 percent to 79.96 yen after gaining 0.4 percent yesterday. New Zealand’s currency fell 0.1 percent to 79 U.S. cents and lost 0.2 percent to 62.77 yen.

The Aussie is headed for a 1.4 percent loss since Dec. 31, while the kiwi has gained 1.7 percent.

The two-day EU summit in Brussels is the first meeting of European leaders since parties supporting a bailout garnered victories in Greek elections on June 17. France and Italy are urging Germany to help end the debt crisis, now in its third year. Italy is due to sell bills today after borrowing costs rose at a debt auction yesterday.

EU Summit

Merkel told lawmakers of her ruling coalition she “doesn’t see” shared debt happening in the euro area, according to Steffen Seibert, her chief spokesman. The chancellor is due to meet her French counterpart in Paris today.

“There’s risk that this will be another summit that will disappoint,” said Forecast’s Lee, who expects the Australian dollar to fall to parity with the greenback this week. “Moving ahead, there may be more contagion to other euro-zone countries. Market sentiment will be fragile.”

Demand for the kiwi was damped after Statistics New Zealand said today that imports exceeded exports by NZ$805 million ($636 million) in the 12 months ended May 31. That compared with a revised NZ$557 million shortfall in the year through April.

RBA Forecast

Reserve Bank of Australia officials will keep the overnight cash-rate target at 3.5 percent when they meet on July 3, according to all estimates in a Bloomberg News survey of economists.

“The RBA has made some steep cuts in the last couple of months, which have generally been passed on to the retail market, and I think they will hold fire for now,” said Derek Mumford, a director in Sydney at Rochford Capital, a currency risk management company. “We could see the Aussie back above $1.01 in the next couple of days, but any gains will be capped at $1.02 to $1.0250.”

Interest-rate swaps data compiled by Bloomberg show traders see a 56 percent chance policy makers will keep the benchmark rate unchanged next week. That’s up from a 40 percent probability seen on June 20. Traders expect the RBA to cut the rate to a record 2.75 percent by November, the data show.

Australia’s bonds declined as Asian stocks rallied following a report from China Securities Journal that China may introduce “more proactive” policies to ensure stable growth. China is Australia’s biggest trading partner.

Australia’s 10-year government bond yield rose four basis points, or 0.04 percentage point, to 2.97 percent. The MSCI Asia Pacific Index of stocks gained 0.9 percent.

“At the moment we’re in a period of policy response,” Richard Grace, chief currency strategist and head of international economics at Commonwealth Bank of Australia in Sydney, said in an interview on Bloomberg Television. “During that period, the Aussie dollar can somewhat outperform, particularly against the crosses.”

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