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NZD/ZSD reverses gains, Germany's industrial production drops
NZD drops as inflation outlook weakens
The News Zealand dollar tumbled on Monday after a survey showed businesses expect inflation to move south soon. On-year inflation expectations slid to 1.77%y/y from 1.92% three months ago, while two-year ahead inflation expectations fell to 2.09%, down from 2.17% previous reading. As a result, the Kiwi dropped 0.45% against the US dollar to 0.7375, the lowest level since July 20th.
The sharp debasement of the New Zealand dollar of the last couple of days is mainly due to two points. First the last US jobs report - released on Friday - gave an upbeat assessment of the world’s largest economy and relaunched speculations about a more hawkish Federal Reserve. The probabilities of a rate hike in December - extracted from the Fed funds futures - jumped from 37.4% to almost 45%. This is not much but enough to give the greenback a slight boost.
Secondly, the decline in inflation expectations will likely pleased the Reserve Bank of New Zealand, which is expected to review its monetary policy next Wednesday (no change expected), in its fight against a strong Kiwi. 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.
Finally, one could also mentioned the extreme in non-commercial positioning. Total net speculative Kiwi speculative position rose to 63.5% of total open interest (future only) last week, increasing the odds of a downside correction as an unwinding of long position is more than likely.
Germany: Industrial production fell unexpectedly
Markets did not expect it, German industrial production has surprisingly strongly declined in June to -1.1% (monthly performance) while markets estimated the data to increase around 0.2%. However the overall annualized performance remains positive at 2.4%. It is nonetheless the biggest decline in 6 months.
The Eurodollar has barely moved amid the release of this data and the pair keeps on trading slightly above its opening level around 1.18. Seasonality may also be responsible as historically there always a decline in German industrial production growth during the summer, yet it often happens in July or August and not so early. Indeed construction tends to slow during those months.
The decline in Industrial production is now putting a stop to a strong first quarter in the Eurozone. FX markets are not concerned by this pullback and markets does not seem to worry about German Q2 GDP data that should be released next week. For the time being, a weak industrial production is only seen as a retracement after strong momentum since the start of the year. Markets may be overly optimistic about the German economy and the euro rally may soon fades in case of confirming soft data.