Second-quarter inflation data from New Zealand was surprisingly strong. The analyst consensus had pegged the q/q inflation change at 0.7% but the actual number came in at 1.3% while the yearly inflation change was confirmed at 3.3%. This has increased the speculations of the timetable and the speed of interest rate changes the RBNZ needs to make. Some banks are suggesting the Kiwi central bank will have three rate hikes by the end of this year. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
Investors seem to be worried about the potential impact of the Delta variant and are buying the US Treasuries as a safe-haven play. At the same time, the Fed has signalled that it will not make quick moves when it comes to tapering its asset purchases and the Fed Chair Powell keeps on repeating the mantra about inflation being transitory.
This combination of covid fears induced bond-buying and the dovish signalling from the Fed pressures the dollar yields and supports rate sensitive markets, like gold and technology stocks. Gold and Nasdaq futures are up by 3.59% and 1.65% for the month of July respectively. The 10-year US Treasury yield dropped to 1.302% after making a near-term low of 1.250% last week.
The price of oil dropped again in yesterday’s trading (-2.02%) as traders expect the compromise between the Saudis and the UAE to bring from supply to the market. This pressures the price as the traders are at the same time looking to the Autumn period, when the US driving season is over and the virus pandemic could again start picking up speed.
The Dow Jones Industrial Average (+0.15%) was the only US index that managed a slight gain yesterday while the S&P 500 (-0.33%), the Nasdaq (-0.70%) moved lower. The S&P 500 was weighed by the energy (-1.40%), the technology (-0.82%) and the communication services (-0.71%) sectors. The biggest gainers in yesterday’s trading among the TIOmarkets equity CFDs were AIG (+3.58%), USB (+3.21%), HON (+2.21%), JD (+1.87%) and DHR (+1.75%). The biggest downside moves among our stocks were seen in BIIB (-6.79%), WDC (-4.43%), NVDA (-4.41%), EOG (-4.36%) and ALXN (-3.27%).
The weekly unemployment claims came in at a slightly higher level than expected by the analysts (360K, 350K expected, 386K prior) but the downward trend continued which obviously is a positive sign for the US economy. The New Zealand inflation data was confirmed at significantly higher levels than the analysts had anticipated (1.3%, 0.7% expected). The NZDUSD pair reacted positively and is up approximately 0.4% for the day. The next main macroeconomic announcements are the US retail sales figures and the University of Michigan consumer sentiment. For more information and details see the TIOmarkets economic calendar here.
Market update: after the bullish CPI news from New Zealand our NZDCAD idea makes even more sense. The price action in the pair is still in line with the earlier expectations. Even though NZDCAD traded below the 0.8781 support yesterday, the daily close above this critical level was a bullish factor and after today’s inflation news the pair is trading significantly higher. Today’s high of 0.8839 is only 0.14% away from the next significant resistance level at 0.8852. The pair is trending higher and would need to close decisively below 0.8667 would negate the bullish technical indications. The key S&R levels in NZDCAD are 0.8596, 0.8667, 0.8781 and 0.8852.
Market update: Bank of England’s Saunders caused a flurry of buying in GBPUSD yesterday as he said that it may become appropriate fairly soon to withdraw some stimulus. This buying was thwarted fairly soon though and the pair has since traded lower. It was our view yesterday that as long as cable stays above the 1.3800 support we have bullish potential in this market. Yesterday’s quick sell-off and no follow-through buying after the comments from Saunders it looks, however, that the risk of downside price action has increased. To negate this we would need to see strong buying from levels near the 1.3800 support level and then a decisive break above the nearest resistance at 1.3909. The key support and resistance levels are at 1.3731, 1.3800, 1.3909 and 1.4000
Macro Drivers for the USD
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The FED||The Fed has now changed the tune and is moving away from the ultra-accommodative monetary policy. Currently, the expectation is that the first-rate hike would take place in the second quarter of 2022.|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus and the Biden administration is negotiating with the Senate Republicans to introduce a $1.2 trillion infrastructure stimulus plan.|
|Yields||After trending higher since the beginning of August 2020, the Treasury yields have been moving lower since March 2021. All in all, the yields and interest rates are extremely low on both nominal and real basis.|
|Employment||Even though the June NFP report came in better than anticipated (+850K) the total is still 6.8 million jobs lower than at its peak in February last year. However, the Fed has said earlier recently that believes that the US is on a path to a very strong labour market as indicators of activity and employment continue to improve.|
|Inflation||The year on year headline CPI change for June was 5.4% (4.9% expected. This suggests the Fed might have an incentive to move quicker in their tapering plans.|
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Market News & Facts
- Yellen: several more months of strong inflation
- Increase in covid-infections: L.A. (US) makes the masks mandatory again
- BOJ: No change to the main policy
- Chinese GDP 7.9% (8.0% expected)
- Australian employment change 29.1K (19.7K expected)
- Australian Unemployment Rate 4.9% (5.1% expected)
- BOC tapering: $1Bn per week vs $1 Bn expected
- Australian July Consumer Confidence Index +1.5% m/m (-5.2% expected)
- SNB’s Jordan: long-term inflation expectations well-anchored
- US CPI for June +5.4% y/y (4.9% expected)
- US, UK trade ministers agree to address China’s anti-competitive practices
- Another 4 to 6 weeks of lockdown in Sydney, Australia
- Fed’s Barkin: tapering delayed if labour market recovery slow
- Germany wholesale price index for June 1.5% (1.7% previous)
- Dutch Covid-19 cases up eight-fold in a week
- China state media: more economic support on the way
- Japanese June PPI 0.6% m/m (0.6% expected)
The Next Main Risk Events
- USD – Core Retail Sales
- USD – Retail Sales
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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