Summary:

• NZ dollar surges in the morning on the back of the highest pace of core price growth in seven years
• RBA minutes do not offer too much more, “the next move in rates more likely up”
• Chinese stocks continue declining following a negligible session on Wall Street, beware of a pullback on the NASDAQ (US100)

The NZ dollar is surging more than 0.8% against the US dollar in the morning (as of 6:29 am BST) after the RBNZ’s own core inflation indicator sped up during the second quarter to the highest in seven years.

Inflation in the NZ economy took a breath in the second quarter. Source: Macrobond, XTB Research

Core inflation, called ’sectoral factor model’ reached 1.7% in annual terms sending some encouraging signals to NZD traders that the central bank may have to alter its forward guidance at the next meeting. Notice that the RBNZ put a phrase that the next move could be either down or up (depending on necessity) at its June’s meeting. Admittedly, there is just a stirring of possibly mounting core inflationary pressures in the NZ economy, keep in mind that the ’sectoral factor model’ is one of the many the central bank uses to measure core inflation, the data turned out to be sufficient to substantially shored up the NZ currency. It stems, at least in part, from the fact that the NZD along with its other commodity-related peer, has been strongly sold out over the recent weeks which saw the net positioning plunging in favour of short positions. This kind of scenario implies that the market which is tremendously oversold could experience bounces and its vulnerability to any upbeat news is greater. This is exactly the case what we have seen in the NZ dollar post the inflation release.

The second quarter CPI increase’s breakdown unveils some hopeful details in terms of the core inflation trend. Source:  businessinsider.com.au

On the flip side, the official inflation even undershot expectations coming in at 1.5% while the consensus had expected a rise to 1.6% from 1.1% previously. This print was really played down by market participants, but even a slight disappointment does not seem to be so gloomy. Looking at the breakdown of the second quarter inflation release one may identify that higher CPI was driven mostly by a robust lift in rents, the cost of building new dwellings as well as a jump in electricity prices. Obviously, food and transport prices added quite a lot to the annual CPI increase, but this is the case elsewhere alike, and what is more important one may reassure itself that higher price growth has not been solely driven by transitory effects.

Looking for trade opportunities involving the NZ dollar it’s worth taking a look at the EURNZD cross which seems to be reversing from its crucial resistance. If this move continues unfolding, one may count on a decrease at least toward a 23.6% retracement. Source: xStation5

AUD and CAD are also feeling the love this morning, but gains seen there are incomparable to these on the NZD. Over the Asian session we were offered the RBA July’s minutes which enhanced the view that a next move in rates is likely to be up if economy improve as expected. The minutes said that downside risks to global growth had increased calling trade tensions as ’harmful’. By and large, the document did offer nothing what we had not known shortly after the RBA’s meeting. The Australian dollar did understandably barely respond to these comments, and its relative outperformance against the greenback appears to come from the general upbeat mood surrounding high-beta currencies. Having said that, upbeat spirits have not been shared among Asian equity investors as Chinese stocks keep plummeting. As of 6:45 am BST the Shanghai Composite is down 1.1% while the Hang Seng (CHNComp on xStation5) is losing almost 1.3%. Just the Japanese NIKKEI is doing well and rising 0.6%. Meanwhile, there was not too much volatility on Wall Street yesterday as major indices ended the day pretty flat. The largest fall was witnessed by the NASDAQ (US100) and the Monday’s candlestick could be even a bellwether of a possible pullback in the near-term.

The US100 drew a bearish engulfing on Monday, and if history repeats itself, it could give rise to a decline even toward 7000 points. On the other hand, a local support might be also found in the vicinity of 7200 points. Source: xStation5