NZD better bid as core inflation rises
The New Zealand dollar surged unexpectedly on Tuesday morning with NZD/USD hitting $0.6841, the highest level since July 7th. However, the day had badly start for the Kiwi as headline inflation, which was released a few hours earlier, came in below expectation, printing at 1.5%y/y, compared to forecast of 1.6% and 1.1% in the previous quarter. In the following hours, the release of the core gauge shed a completely different light on inflation development. The RBNZ’s sectoral factor model gauge increased 1.7%y/y in Q2 (1.6% in the previous quarter), while non-tradable inflation increased 2.5% (2.3% in the previous quarter).
It could be surprising to see a 0.85% appreciation of the Kiwi against the greenback as inflation is still within the 2%+/-1% target range. However, speculators are massively short NZD. Indeed, according to the latest Commitment of Traders (COT) report, speculators’ net-short positions represents more than 50% of total open interest. Given the fact that the upside surprise in core inflation could translate into a more hawkish tone from the RBNZ, speculators have started to take profit and reduce their short exposure. Given this extreme positioning, the unwinding of short positions should continue and would help the Kiwi recover some ground.
NZD/USD has been testing the 0.6673-0.6781 support area for the last two weeks. The closest resistance stands at 0.6859 (high July 9th), then the next one can be found at 0.6922 (high from June 25th). Given the sharp appreciation of the last few hours, a period of consolidation seems most likely. In the medium-term, we expect the Kiwi to continue grinding higher as speculators continue to unwind their short positions and the RBNZ starts shifting its tone.
EU and China confirm their willingness to deepen strategic partnership
Donald Tusk, President of the European Council, and Jean-Claude Juncker President of the European Commission, recent travel to Beijing for the 20th EU-China summit in Peking was largely worth it. Both delegations confirmed their common view with regard to free trade, multilateralism and international order, mentioning that reforms need to be undertaken.
As the Trump administration intensifies trade sanctions against both economic forces, China and EU affirm their concerns of the measure and support joint effort to balance its impact. Despite writing orienting the summit towards an attempt to build an “anti-US alliance”, the statement needs be amended.
Indeed, as the impact of tariff measures impact both nations differently due to distinct exporting industries to the US and import measures would necessarily concern different products, joint actions would not necessarily be effective. Instead, both nations confirmed the view that targeting the US as a threat is at the very opposite of an EU – China cooperation.
During the summit, EU and China leaders agreed a joint statement concerning foreign and security reinforcement, modernization of WTO rules, common support on climate change by signing a joint Memorandum of Understanding on Circular Economy ahead of COP24 summit in December 2018 and hold a common view with regard to Middle East (i.e. Syria, Iran) and the North Korean nuclear issue.
As the US – Russia summit in Finland ended on a poor note on Trump side due to disappointing response with regard to Russian meddling in US 2016 elections, the USD is plummeting against major pairs. The USD/CNY is losing ground, currently trading at 6.6798 and expected to approach yesterday lows along 6.670.
