EU-China pact weakens USDBy Vincent-Frédéric Mivelaz
The European Union and China drew closer; the USA and Russia not so much. So the USD is plummeting against major pairs. USD/CNY is losing ground, currently at 6.6798 and expected to approach yesterday’s lows of 6.670.
This visit of Donald Tusk, President of the European Council, and Jean-Claude Juncker, President of the European Commission, to Beijing for the 20th EU-China summit was largely worth it. Both sides confirmed a common view of free trade, multilateralism and international order. They agreed a joint statement on foreign relations, security reinforcement, modernization of WTO rules and support on climate change. In the face of Trump tariffs, the summit can be seen as an attempt to build an “anti-US alliance”. Meanwhile the Russia-USA summit in Helsinki ended on a poor note, with Trump’s disappointing response to Russian meddling in US’s 2016 elections,
Kiwi surges on inflationBy Arnaud Masset
The New Zealand dollar rose unexpectedly on Tuesday morning with NZD/USD hitting $0.6841, the highest level since 7 July. This after NZ’s headline inflation, released a few hours earlier, came in below expectation at 1.5% annually, below a forecast of 1.6% and a mark of 1.1% in the previous quarter. The statistic shed a new light on inflation: the central bank’s gauge increased 1.7% in Q2 (1.6% in the previous quarter), while non-tradable inflation increased 2.5% (2.3% in the previous quarter).
It is surprising to see a 0.85% kiwi appreciation against the greenback while inflation is still within its target range, but speculators are massively short NZD. According to the latest Commitment of Traders report, net-shorts represent more than half of open interest. Because the upside surprise in inflation could translate into a more hawkish central bank, speculators are taking profits to reduce short exposure. Unwinding of short positions should continue and will help the Kiwi recover ground. NZD/USD has tested 0.6673-0.6781 for the last two weeks. The closest resistance stands at 0.6859 (high 9 July), then the next at 0.6922 (high from 25 June). A period of consolidation seems most likely. In the medium-term, we expect the Kiwi to grind higher as speculators unwind shorts and the central bank shifts its tone.