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Currency Market Analysis

Jul 16, 2019 | Currency Market Analysis

Global Themes

Inflation is the litmus test

Kiwi hits a three month high but June quarter CPI critical today

The New Zealand Dollar hit a fresh three month high above the 0.67 handle overnight as the combination of US Dollar weakness and better than expected Chinese data helped improve global risk sentiment. In particular NZD/JPY performed well, leaping up another half percent as all three major US stock indices set record opening prices last night. Expectations for a Fed rate cut at month end are being cheered by markets and NZD/USD has been the main global benefactor, up around 2% from this time a week ago.

But all that is at risk today when local June quarter consumer price inflation is released at 10:45am. Expectations are for a 0.6% increase in prices, or 1.7% in annualised terms. We will also be watching for the release of the RBNZ’s preferred core measure, the sectoral factor model print at 3pm. The previous read there was 1.7%. As previewed yesterday we see these releases as a major risk for New Zealand Dollar pairs, many of which currently sit right near their 200 day moving averages. Technically that gives us a sign that we can see significant volatility, with a stronger print surging the currency higher and a weaker print likely to erase some of the last week’s gains. We’re more concerned about an undershoot, but either way we’re expecting a decent half cent move this morning.

Chinese growth lowest in 27 years

Slowing domestic growth, trade wars impact economy

Industrial production and retail sales numbers out of China yesterday were better than expected and that boosted both the Aussie and Kiwi Dollars, given our close ties to China as a major export destination for local goods. However GDP for the June quarter came in at 6.2%, and while that met forecasts it’s still the lowest growth rate seen in China in 27 years. Sure if New Zealand was growing at that rate Finance Minister Grant Robertson might receive a knighthood, but this has been the growth engine of the world for the last quarter of a century, and as the old saying goes, when China sneezes the world catches a cold.

Call us cynical but we wonder if part of the US-China trade war is a convenient distraction from decelerating growth in both countries. Ironically it’s also blamed for some of the slowdown, and with China walking the tight rope between stoking domestic demand but looking to avert another housing bubble, good industrial production and retail numbers might be cheered by markets now, but ultimately allow the People’s Bank of China to pause on fresh stimulus. In the medium term that and the 27 year low on Chinese growth are likely to be a drag on both the Australian and New Zealand Dollars.

RBA minutes due today

US retail sales tonight

Aside from our inflation print today, the Reserve Bank of Australia release minutes from their meeting earlier this month, where they slashed the overnight cash rate to a record 1% low. The overwhelming sentiment from the RBA since has been that they will pause on any further cuts for now, and should we get a weak local inflation print backed up by a confirmation of this near term RBA bias, then NZD/AUD can tumble back into the 0.94s later today.

Tonight we get another look at the US retail sector with June sales figures due. Expectations are for just a 0.1% monthly increase, and with the bar set so low the risk of a stronger result would seem reasonable, and that could pressure NZD/USD lower tonight.

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