ANZ Morning Focus: FXWW

From the FXWW Chatroom – OVERNIGHT NZDUSD 6769-6839 NZDAUD 9177-9207
TODAY NZDUSD 6760-6810 NZDAUD 9160-9210
– The stronger local inflation pulse gave NZD a boost yesterday, but a stronger US Dollar and choppy price action quickly reversed those fortunes
– The kiwi remains in a higher range against the majority of other crosses as a short market coupled with a marginally stronger local backdrop helped support
– NZ Q2 CPI actually missed headline expectations (0.4% vs 0.5% Est for Q2), but the market had been drawn toward ANZs outlier expectation (+0.1%) and the actual result had non-tradeable inflation trucking along nicely. ANZ review attached.
– The Sectoral Factor model (RBNZ preferred inflation measure) released later in the afternoon drove the major NZD rally, increasing to 1.7% from 1.6% and suggestive of inflation continuing to move toward the middle of the target band.
– Global Dairy Auction recorded its fourth consecutive fall (GDT -1.7%), with sizable falls in butter (-8%), anhydrous milk fat (-5%), and rennet casein prices (-9.5%), while whole milk powder and skim milk powder were up 1.5% and 0.8%.
– US Industrial Production rose 0.6% m/m, offsetting a 0.5% decline the previous month. Capacity utilisation was at 78% from 77.7%. Manufacturing production was up 0.8%, from -1.0%. Overall a decent rebound in production but shouldn’t alter the way the Fed is thinking about the economy.

– Fed Governor Powell stuck to the script overnight. He was rather upbeat on the economic outlook and acknowledged inflation has moved close to their target level but the challenge will be to keep it there.
– UK PM May survived a fresh revolt over Brexit. May’s government narrowly won a vote over the customs union. The government won 307-301 while before the vote they considered pulling the whole bill.
– Canada’s manufacturing sales rose 1.4% (mkt: 0.4%) from and upwardly revised -1.1%. Solid figures from the country. Bias remains that BoC will need to hike again this year. October is only priced 50/50.
– Equities have strengthened across Europe (Major bourses +0.2% to +0.8%), and US remain in positive territory this morning (S&P +0.4%)
– NZ rates sold-off on inflation nuances yesterday, and the small pricing of a rate cut was unwound, NZ 2yr was +4bps in yield (closing 2.175%) but thin liquidity and receiving flow has seen this more than reverse, looking to open -6bps this morning.
– Ahead Today: No major NZ data and remains that way for a while, AU Leading Index at 12:30pm NZT.
– NZDUSD continues to chop around in a range, and while FIFX has less conviction of material downside from here (shortfalls of economy feel well priced and evidenced in FX positioning), it is hard to bet against the small downside momentum that remains given the US Dollar is in the driving seat. NZD crosses are an easier way to express this view and hence we had shifted to a more neutral stance in NZDAUD and see real risks of short term upside given pricing, positioning and momentum in the respective economies.
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