China's trade balance unaffected by trade war
By Peter Rosenstreich
If there is a "trade war", no one has told China's importers/exporters. The growth of China's exports unexpectedly rose above expectations despite US tariffs and heavy media rotation of protectionist rhetoric. Imports also accelerated, indicating solid domestic demand. A key focus for the market was China's surplus with the United Sates, which fell only marginally. The China July trade balance came in at $28.05 billion; Exports are up 12.2% vs. 10.0% y/y; Imports increased 27.3% compared to 16.5% y/y.
Ironically for US President Trump, the negative sentiment on trade, which has driven the CNY down 10% since April against the USD, actually supported exports. Yet with no sign that either nation is prepared to back down and disagreement expanding further than trade into intellectual property, investments and technical transfer, the downside risk to China's growth has increased. In response, Chinese officials have moved proactively by releasing additional liquidity into the banking system and suggesting further fiscal stimulus. As the potential for a trade war shifted from a tail-risk into base scenario, equities, specifically Chinese shares, become vulnerable to deeper correction.
Our base scenario: China will now seek to negotiate with the US to avoid further escalation, but the outcome is uncertain. The directional risk to the CNY at this point is at an unstable equilibrium.
NZD edges higher amid stronger inflation expectations
By Arnaud Masset
The New Zealand dollar was amongst the best performers within the G10 complex on Wednesday, after the last RBNZ survey showed inflation expectations increased in the third quarter. Business managers anticipate a moderate pick-up as average annual inflation expectations have increased to 1.86% y/y in the third quarter compared to 1.8% in the previous one, which is still below the central bank's mid-range target. Two-year inflation expectations rose marginally to 2.04% from 2.01% three months ago.
The Reserve Bank of New Zealand is set to announce its monetary policy decision later today. However, the slight improvement in inflation expectations isn't going to make the monetary institution raise rates. The Official Cash Rate should remain unchanged at a record low 1.75%. According to the last survey, market participants do not expect the RBNZ to raise rates before at least the third quarter of 2019. It is an optimistic view.
Speculators are still shorting the Kiwi as the net short speculative position as a percentage of total open interest has stabilized around 45%. Given this extreme positioning, the downside in NZD/USD is limited. The USD rally is slowly running out of steam. NZD/USD is currently trading around 0.6755, which is slightly higher than the bottom of its 3-month range. A return towards the 0.68-0.69 area appears the most likely scenario.
Crude oil futures contracts heading higher amid Trump Iran sanctions
By Vincent Mivelaz
US sanctions on Iranian exports have pushed oil prices higher since the beginning of the week. Despite concerns as to how demand could be affected by ongoing US-China trade tensions or Russian and Saudi Arabian plans to increase crude oil output, speculation about lower supply is dominating the marketplace, although current sanctions do not directly concern Iran's oil exports, in contrast to USD purchases, automotive industry, coal and metals.
Accounting for 5% of total world oil production, Iran, the third largest OPEC producer, is an important stakeholder of the industry and can have a serious influence on the global market, but before US sanctions start hitting at the beginning of November, anything could happen in the run up. Strong opposition expressed by China, India and the EU to the US sanctions could also play an important role in the negotiations.
Since the beginning of the week, Brent crude, WTI and Shanghai Crude gained +2%, +1.11% and +4.51%, and now trade at $74.70, $69.25 and CNY 530.60 ($77.67), respectively.
US crude inventories released by the API (The American Petroleum Institute) indicated a fall in inventories of 6 million barrels (consensus: -3.33 million barrels). EIA (Energy Information Administration) inventories data are approaching later today and are expected to be lower (consensus: -2.16 million), favouring a lift in crude prices. WTI (West Texas Intermediate) is heading along $69.90.