The biggest US CPI jump since 2008 and a surprise hawkish tilt in RBNZ monetary policy has kept the traders busy yesterday and today. USD rallied yesterday and the NZD today as institutional traders are trying to reposition themselves for the likely central bank policies. The precious metal prices (gold +0.22% and silver -0.38%) didn’t move that much but WTI Crude (+1.55%) clocked some nice gains while the US stocks traded lower. S&P 500, Nasdaq Composite and the Dow Jones Industrial Average lost -0.35%, -0.38% and -0.31% respectively. The losses weren’t that big but the fact that the only US index rising was the fear index VIX (+5.88%) tells that investors are getting careful ahead of Fed Chair Powell’s speech. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.

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The US Labor Department said yesterday that the US consumer price index (CPI) increased by 0.9% in June. This was well above analyst expectations and was, in fact, the biggest move in the index since July 2008. The CPI increase once again made the traders bet that the Fed to roll back some of the current monetary stimulus measures quicker than earlier anticipated. 

Almost all the major USD counterparts trade now lower than at the time of the CPI release. EUR (-0.56%) and AUD (-0.34%) dropped the most with the CAD (-0.29%) following in the heels. However, the impact hasn’t been yet as significant as the size of the CPI surprise might suggest. Traders are obviously waiting for the testimony of Fed Chair Powell (in the US session today) in order to get more insights on the future Fed policy. 

There’s also the fact to consider that once the Fed starts to steer its policy into the opposite direction (becomes more hawkish) the other central banks start to follow the lead. Over the last decade, it’s been evident that the central banks do work in isolation but most likely have some level of coordination and tend not to go in the opposite directions for long periods of time. Early this morning European time the Reserve Bank of New Zealand announced that they will reduce the level of stimulus and stop additional LSAP purchases (as soon as) by July 23rd 2021. The announcement has, by the time of writing this, rallied the NZDUSD and the pair trades about 1% higher than in today’s Asian session on average.

The next major risk events today are the BOC rate decision, the PPI release from the US and the Fed Chair Powell’s testimony. For more information and details see the TIOmarkets economic calendar here.

NZDCAD has broken out of a bullish wedge, retraced back to the SMA(20) and has now rallied on the back of the news that the RBNZ is looking to start tapering by the end of the next week(!). This bullish news supports the bullish technical picture but at the same time we have to take this into account: a) the BOC is expected to announce soon (perhaps even today) that it will cut another billion CAD from its bond-buying programme and b) the pair is, at the time of writing this, trading at a resistance level. Therefore, traders are wise if they follow the price action closely and keep their risks limited in today’s trading. Whatever happens with the BOC announcement it is likely that this pair will provide trading opportunities today. The key S&R levels in NZDCAD are 0.8596, 0.8667, 0.8781 and 0.8852. The two resistance levels roughly coincide with the 23% and 38.% Fibonacci retracement levels at 0.8768 and 0.8875 respectively. 

AUDNZD (-0.79%) has been dropping like a stone after the RBNZ announcement came out. This far the RBA has been insisting that they will keep the monetary stimulus in place for now and the divergence that was now created between the central banks drives the AUDNZD lower. The pair has created yet another lower high as the pair trends lower in a wide-ranging downward channel. AUDNZD has almost reached the 61.8% retracement level and is also approaching a swing point at 0.0599 (another 26 basis points to go). The next significant support after this can be found at 1.0540, while the key resistance levels are at 1.0739 and 1.0811. Technically the setup in this pair is short to medium-term bearish and would need to stop creating lower reactionary highs and start breaking some resistance levels in order to turn bullish. 

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 FEDThe 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. 
StimulusThe 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. 
YieldsAfter 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.
InflationThe 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 

  • 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)
  • Lagarde: ECB policy guidance to change
  • UK GDP m/m +0.8% (1.5% expected)
  • Record high coronavirus cases in South Korea
  • Sidney stays in lockdown as cases increase
  • Analyst consensus: BOC to taper by 1 bn CAD next week
  • Chinese CPI 1.1% y/y (1.3% expected)
  • ECB inflation target to 2%
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The Next Main Risk Events

  • CAD – BOC Rate Statement
  • USOIL – US Crude Oil Inventories
  • CAD – BOC Press Conference
  • USD – Fed Chair Powell Testifies

For more information and details see the TIOmarkets economic calendar here.

Trade Safe!

Janne Muta
Chief Market Analyst
TIOmarkets.com

Open a VIP Black account now at www.TIOmarkets.com. We want you to be able to exploit trading opportunities in financial markets with 0 commission and tight spreads. Take advantage of the best trading account in the industry: Tiomarkets VIP Black. For more details on this truly exceptional offering see here. For more analysis and commentary, visit our YouTube channel where you can find market commentary videos to support your learning and growth as a trader.

DISCLAIMER TIOmarkets offers exclusively consultancy-free service. The views expressed in this blog are our opinions only and made available purely for educational and marketing purposes and do NOT constitute advice or investment recommendation (and should not be considered as such) and do not in any way constitute an invitation to acquire any financial instrument or product. TIOmarkets and its affiliates and consultants are not liable for any damages that may be caused by individual comments or statements by TIOmarkets analysis and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his/her investment decisions. The analyzes and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with any legal requirements for financial analyzes and must, therefore, be viewed by the reader as marketing information. TIOmarkets prohibits duplication or publication without explicit approval. FX and CFDs are leveraged products. They are not suitable for every investor, as they carry a high risk of losing your capital. Please ensure you fully understand the risks involved. All the prices in this report are CFD prices based on price charts provided by TIOmarkets unless otherwise stated. 

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