Summary:

• Australian headline price growth misses expectations, but core measures come as anticipated
• Donald Trump calls for free trade with the European Union suggesting a removal of all duties
• PBoC devalues CNY again, NZ trade balance disappoints, API reports a larger than expected draw of oil stocks

The Australian dollar is by far the worst performing major currency in the morning being almost 0.3% down against the US dollar as of 6:37 am BST. This is a result of a bit disappointing headline inflation for the second quarter as  price growth came in at 2.1% in annual terms and fell short of the median estimate placed at 2.2%. Anyway, it was an increase compared to the previous quarter albeit this scheme was only seen in headline CPI. Similarly to other countries a CPI rise was chiefly driven by higher transportation costs as well as alcohol and tobacco. The first category jumped 5.2% in a year-over-year basis while the latter picked-up 7.8%. On the other hand, communication, clothing and footwear prices decreased by 4.2% and 2% respectively suggesting that the overall pick-up in inflation was steered by non-domestic factors.

Headline and core inflation measures in Australia has diverged lately. Source: Macrobond, XTB Research 

This was perfectly pictured in core measures of inflation. Even as all of these indices came in line with economists’ expectations, the overall tone was rather bearish – it has been depicted at the chart above. Cutting to the chase, trimmed median stood at 1.9% while weighted median held onto 2% reported in the first three months of the year. Nonetheless, the second gauge made a slight dip in annual terms and therefore the overall core CPI slipped as presented at the chart. In effect, while headline CPI seems to be pushing higher one cannot say the same about inflation stripping out the most volatile items. Bear in mind that core inflation is a real indicator of domestic inflationary pressures and is not subject (directly) to jumps in oil or food prices. By and large, the Q2 inflation report does not change our view with regard to Australian monetary policy, hence the RBA is expected to stay on hold for the rest of the year. Notice that the likelihood for a 25bps hike till the end of 2018 is basically negligible and stays below 10% this morning.

Anyway, the Australian dollar, like other commodity-related currencies, remains largely oversold (based on weekly CFTC reports) therefore investors might be eager to invest in the AUD once the greenback terminates its rally (recall that Trump ha put the brakes on the USD increase of late). Technically, the pair might head lower in the nearest future bouncing off its upper limit of the range. Source: xStation5

Meanwhile, the US President Donald Trump called overnight for free trade with the European Union claiming that the US was ready to get rid of all duties against the EU. In a tweet Donald Trump doubted however that the EU might agree to his proposal. It sounds a little weird as the US President might have forgotten about the TPP from he decided the pull out the country. Negotiations in Washington are expected to be really tense, but more far-reaching consequences are doubtful as the EU seems to stand pat. Note that the meeting is taking place less than two weeks after Trump called the European Union a “foe” illustrating how unreliable the US President actually is.

Trump pours some hopes into investors’ hearts ahead of the Trump-Juncker meeting on Wednesday. Source: Twitter

Whipping through the Asian session one needs to single out another devaluation of the Chinese onshore yuan as the PBoC set the USDCNY reference point subtly above 6.80 for the first time since late June 2017. Either way, Chinese stocks seem to play down those risks at least as of yet as major indices are trading mixed today (stocks in Shanghai hover around the yesterday’s close level while stocks in Hong Kong gain 0.7% at the time of writing). Beside Chinese monetary policy it’s worth paying attention to the New Zealand trade data for June which produced a 113 million NZD deficit compared to a 200 million NZD surplus expected. The data showed that imports decreased only negligibly we saw a greater slowdown in terms of exports. However, taking into account the seasonal analysis one may notice that exports still remains far above the 5Y average. Last but not least, the API reported yesterday a 3.2 million barrels draw of crude inventories with a 4.9 million barrels decrease in case of gasoline. The DoE will release its weekly publication this afternoon. Brent prices are gaining 0.8% while WTI prices are adding 0.4% shortly after 7:00 am BST.

Brent prices keep moving within the ascending channel and its upper bound seems to be the major obstacle for bulls right now. Source: xStation5