EUR/USD rally to weaken as German economy signals a softening
By Yann Quelenn
The Euro, which has powered up from late December 2016 lows of around 1.05 USD to current levels of 1.17-1.18 UDS, is poised to end its rally. The reason: a softening in the German economy, signalled by a decline in the country’s industrial output in June of 1.1%. The tumble caught markets off guard, which had expected an increase of 0.2%. While overall 2017 industrial output has gained an annualized 2.4%, the June decline was the biggest in 6 months.
Since the output data was released early Monday by the German Economics Ministry, EUR/USD valuations have moved only slightly. Traders may be pricing in some seasonality: historically there is always a decline in German industrial production growth during the summer. However, it often happens in July or August, not so early as June.
The Euro’s next test will be the release of Germany’s Q2 GDP data that should be released on Wednesday, 15 August. If GDP is softer than expected, the Euro is likely to fade.
Inflation outlook forebodes further falls in New Zealand dollar
By Arnaud Masset
The Kiwi dropped 0.45% against the US dollar to 0.7375 on Monday, its lowest level since 20 July 2017, and its decline is expected to continue.
The NZD’s fall is mainly due to two factors. One, the latest US jobs report - released on Friday - gave an upbeat assessment of the world’s largest economy and relaunched talk of a more hawkish Federal Reserve. Probability of a rate hike this December - extracted from the Fed funds futures - jumped from 37.4% to almost 45%. Two, NZ businesses expect inflation to fall. According to a recent survey, 2017 inflation expectations have dropped to 1.77% year on year from 1.92% three months ago, while 2018 expectations have fallen to 2.09% from 2.17% previously. Meanwhile, total net speculative Kiwi positions rose to 63.5% of total open interest (futures only) last week, increasing the odds of a downside correction as an unwinding of long position is more than likely.
The decline in inflation expectations will please the Reserve Bank of New Zealand, which is fighting a strong Kiwi. In its review of monetary policy next Wednesday, no policy changes are expected. The RBNZ will likely emphasize the risk to inflation of a strong NZD and add that a tighter monetary policy would just make things worse.