The Kiwi dollar came under selling pressure overnight, following the release of New Zealand’s employment data for Q2. Even though the unemployment rate ticked down as expected, the labor force participation rate dropped significantly, missing its forecast for an uptick. This implies that the number of unemployed people may have fallen, but that was probably owed to a decline in the total number of people looking for work. As such, these are likely downbeat news for RBNZ officials, who meet next week to decide on policy. Coming on top of the decline in the CPI rate for Q2, which now lies notably below the RBNZ’s own forecasts, we believe that these soft data are enough to keep the Bank from turning hawkish anytime soon.
In case the RBNZ appears less optimistic on the economy next week, or if it revises down its economic forecasts, the latest pullback in NZD could continue as investors push further back their expectations for the timing of a rate hike by the Bank. That said, our favorite proxy for exploiting further NZD weakness is EUR/NZD, given that we expect the euro to keep performing well as opposed to the greenback, which may continue bleeding, perhaps even more than the Kiwi. Finally, we should note that on Monday, ahead of the RBNZ’s policy meeting on Thursday, the Bank will release its 2-year inflation expectations for Q3. This is a critical indicator that has prompted policy action in the past, and thus it could set the tone for the Bank’s meeting.
NZD/USD fell below the support (now turned into resistance) barrier of 0.7460 (R1) overnight, to stop slightly above the key hurdle of 0.7400 (S1). The price structure on the 4-hour chart continues to suggest a short-term uptrend and as such, we would treat the overnight slide as a corrective phase for now. If the bulls manage to take control near the 0.7400 (S1) zone, we would expect them to aim for the 0.7460 (R1) line, where a clear break may open the way for another test near 0.7575 (R2).
Zooming out to the daily chart, we see that the 0.7400 (S1) hurdle acted as the upper bound of the long-term sideways range that was in place from the 3rd of June 2016 until the 20th of July 2017. Thus, as long as the rate is trading above that hurdle, the medium-term outlook remains positive as well. A dip below that line is needed to change the outlook back to flat, while a break below 0.7330 (S2) may be the trigger point for larger declines within the aforementioned range.
Oil tumbles on reports of rising OPEC production & inventories
Oil prices pulled back yesterday, following several reports that OPEC’s production rose in July, despite May’s output-cut deal. This suggests that either some countries pumped more than what was agreed in May, or the nations that were exempted from that deal (Libya and Nigeria) continued to raise their production. On top of that, the weekly US API data showed that inventories rose, which added further fuel to WTI’s slide. Today’s official EIA inventory data could also be pivotal for the near-term path of oil.
Looking ahead, we believe investors will focus on how well OPEC and non-OPEC members comply with their agreed quotas. In this respect, a meeting in Abu Dhabi on Monday may attract attention, as OPEC and non-OPEC officials are expected to discuss why some members are falling behind in their pledges to cut production.
WTI tumbled yesterday after it hit resistance at 50.35 (R2). Nevertheless, the slide was stopped near the crossroads of the 48.40 (S1) support and the upper bound of the downside channel that contained the price action from the beginning of February until the 27th of July. This makes us believe that there is the prospect for a rebound from that key support zone. A break back above 49.20 (R1) would confirm the case and is possible to set the stage for another test near the 50.35 (R2) area. Having said that though, we remain mindful with regards to the establishment of a healthy long-term uptrend. We believe that any further gains may be capped by the 51.00-55.00 range, where we believe US shale producers may be attracted to increase production.
Today’s highlights:
During the European morning, we get the UK construction PMI for July and the forecast is for the index to have declined, albeit slightly. In Eurozone, the PPI for June is due out.
From the US, we get the ADP employment report for July, two days ahead of nonfarm payrolls. The forecast is for the private sector to have added 185k jobs, notably more than the 158k in June. Such a solid print could heighten speculation that Friday’s NFP may also meet its forecast of 183k and thereby, reverse some of the dollar’s latest losses. Having said this though, we have to sound a note of caution. Even though the ADP print is the only major gauge of the NFP, the correlation between the two figures has fallen notably in recent months.
We have two speakers on the agenda: Cleveland Fed President Loretta Mester and San Francisco Fed President John Williams.
NZD/USD
Support: 0.7400 (S1), 0.7330 (S2), 0.7260 (S3)
Resistance: 0.7460 (R1), 0.7525 (R2), 0.7560 (R3)
WTI
Support: 48.40 (S1), 47.55 (S2), 46.85 (S3)
Resistance: 49.20 (R1), 50.35 (R2), 51.50 (R3)
