- China trade data disappointed as exports fell more than anticipated as external demand conditions remains weak
- Data points a mixed picture, with domestic continues improving while external environment remains soft and uncertain
- Traders will be watching UK industrial production which is expected to indicate further weakness in manufacturing
- Ahead of the “Brexit” vote we don’t anticipate GBPUSD to break sideways range 1.4732 and 1.4353
- New Zealand, we firmly believe that global economic conditions will also weigh on the countries’ revenues
- Weakening the kiwi is necessary and the RBNZ still has room to do
- We may expect a rate cut tonight
Risk appetite was mixed in the Asian session following a tepid US close and news the World Banks cut global growth forecast for the next three years. The Shanghai composite and Hang Seng are both trading lower at -0.29% and -0.25% respectively. The Chinese weakness can be attributed to the soft export data, calling in question recent evidence of stabilization. USD was marginally weaker against G10 and EM currencies but losses were well within recent ranges. USDJPY bearish moment continued, after reversal off 107.92 high, declining to 106.72. The JPY was supported by good growth data that was revised higher. Japans 1Q GDP increased 0.5% q/q vs. 0.4% prior read. While Japan Q1 recorded a current account surplus of Y1.8785tln, against Y2.3189tln expected. Data also indicated that Japanese investors were net buyers of foreign securities by ¥2.7582trn. Commodities firmed, led by oil trading near is 10 month high as US crude stocks declined and by concerns about attacks on Nigeria's production, Brent crude reaching $51.5/bbl. The effect was mixed on commodity linked currencies as AUD continued to adjust to a less dovish RBA, yet CAD and NZD gained against the USD. AUDUSD bounded around the 0.7430 to 0.7467 range, yet upside looks capped by 65d MA at 0.7491. Finally, Hillary Clinton declared herself the Democratic party’s nominees for US president with fresh primary wins.
China trade data disappointed as exports fell more than anticipated as external demand conditions remains weak. However, imports provided a bright spot beating expectations, indicated that potentially China growth machine was starting to grind. Chinas exports contracted 4.1% y/y in May against -4.0% expected. China’s import growth continued the positive trend contracting merely -0.4% y/y in May against -6.8% expected and -10.9% prior read. After a weak April, growth in major commodity imports rebounded. Overall, the data paints a mixed picture, with domestic continues improving while external environment remains soft and uncertain.
On the data front traders will be watching UK industrial production which is expected to indicate further weakness in manufacturing. Domestic PMI data contracted below the 50 threshold in April, external demand remains subdued while the risk overhang of the referendum on EU membership have all contributed to the sectors continued weakness. Industrial production is expected come in flat from 0.3% m/m (-0.4% vs. -0.2% y/y). We anticipate Manufacturing production will decline -0.1% from 0.1% m/m. Ahead of the “Brexit” vote we don’t anticipate GBPUSD to break sideways range 1.4732 200d MA and 1.4353 100d MA. Elsewhere, we will see Switzerland inflation data, Canadian housing start and US JOLTs jobs opening.
Yann Quelenn, Market Analyst - RBNZ willing to weaken the kiwi
Central bank decisions are awaited this week and next week. Amongst these, the Reserve Bank of New Zealand will announce its Official Cash Rate decision tonight. Currently, the country’s rates are the highest amongst the G10.
Last month, the central bank kept rates unchanged. Yet, at the prior meeting in March, the central bank took financial markets by surprise by cutting rates to 2.25% (record low). Inflation is below the target band of 1% to 3% over the medium term and is currently running at 0.4% y/y. Furthermore, we believe that inflation will not be reached within the next year despite the recent rebound in commodity prices. We consider that the rebound is still not sufficient. It will nonetheless provide some relief to the country and will providing some upside pressure on inflation. Indeed we firmly believe that global economic conditions (weaker demand) will also weigh on the countries’ revenues. Q1 GDP is expected at 2.40% y/y slightly in line with 2015 GDP of 2.30% y/y.
A major key issue that the RBNZ will need to deal with is the housing bubble that it does not want to feed against its will, which is particularly significant in Auckland. Unfortunately a global currency war on competitive devaluation continues to rage (the dovish stance is the new normal) and New Zealand is unfortunately obliged to participate. Weakening the kiwi is necessary and the RBNZ still has room to do so without affecting too much the credibility of the institution. From our point of view, we may expect a rate cut tonight