NZD: Asia Wrap-NZD/USD Trades Heavy Around 0.5850, CFTC Shows Shorts Being Built
The NZD/USD had a range of 0.5847 - 0.5868 in the Asia-Pac session, going into the London open trading around 0.5860, -0.05%. US stocks initially tried lower on the H-1B visa story but have failed to follow through in our session. The USD retracement continues to extend though time will tell how long the reprieve lasts. The NZD underperformance got a real nudge from the poor GDP data last week. While the USD continues to pullback the NZD/USD is a great vehicle to express that but when the USD sellers return the NZD underperformance will once again be best expressed in the crosses. The 0.5800 is important support, I suspect we will see buyers around this area initially. A sustained break through there would turn the focus back towards the 0.5500 lows.
- Bloomberg - “Kiwibank Now Sees RBNZ Cash Rate Ending Year at 2.25%. Now expect a 50 basis-point cut in October followed by a 25bp cut in November so that the cash rate ends the year at 2.25%. “It has become crystal clear that the Kiwi economy is not recovering” and “the Reserve Bank needs to do more.”
- MNI Brief: China Sept LPR Remains Unchanged. China’s LPR held steady on Monday, in line with expectations, with more easing expected later in the year as the economy suffers stronger headwinds, according to a statement on the website of the PBOC.”
- Options : Closest significant option expiries for NY cut, based on DTCC data: 0.6020(NZD374m). Upcoming Close Strikes : 0.5900(NZD372m Sept24) - BBG
- CFTC Data of last week shows Asset Managers beginning to rebuild their short positions in the NZD, -11933(Last -3121). The Leveraged community is doing the same as it looks to rebuild its own shorts, -5327(Last -1874). Positioning shows the market is again turning bearish on the NZD.
- AUD/NZD range for the session has been 1.1240 - 1.1267, currently trading 1.1255. The Cross has broken above the multiple highs towards the 1.1200 area and is looking to accelerate higher on the back of some very poor NZ Q2 GDP data last week. Dips should now continue to be supported as the market turns its focus towards the 1.1400/1.1500 area.
Fig 1: NZD CFTC Data
Source: MNI - Market News/Bloomberg Finance L.P
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FED: NatWest Now Sees Cuts In 2025, Starting In September
As with Deutsche earlier, NatWest has changed its Fed call after the Powell Jackson Hole speech to reflect a 25bp September cut. Previously, the call was for no cuts in 2025. The new baseline outlook includes further 25bp cuts in December and March, bringing rates closer to neutral ("however, the changing composition of the committee becomes far less clear once Powell term expires in May").
- "While the August jobs and CPI reports will be watched carefully, it is clear to us that Powell has already seen enough to decide renewed action to counter downside economic risks is likely warranted, and so we now look for a 25 basis point rate cut on September 17th.
- "We expect officials will very much downplay the likelihood of a 50bp rate cut leading up to the jobs data, but we have to admit if the report is "weak enough" (e.g., the unemployment rate increases by 0.3pct to 4.5% (where officials had it at year end) anything can happen and wouldn't rule anything out. However, given the latest pivot and with financial markets pricing (86% of a 25bp rate cut) a lot has to happen (unemployment rate 3-handle and core CPI +0.5%) for the FOMC to undeliver and hold off from a rate cut in September. "
USDCAD TECHS: Bull Cycle Hindered
- RES 4: 1.4111 High Apr 10
- RES 3: 1.4019 38.2% retracement of the Feb 3 - Jun 16 bear leg
- RES 2: 1.3968 High May 20
- RES 1: 1.3925 High Aug 22
- PRICE: 1.3840 @ 16:55 BST Aug 22
- SUP 1: 1.3794 20-day EMA
- SUP 2: 1.3769/22 50-day EMA / Low Aug 22
- SUP 3: 1.3576 Low Jul 23
- SUP 4: 1.3557/40 Low Jul 3 / Low Jun 16 and the bear trigger
Gains this week in USDCAD and the breach of resistance at 1.3879, the Aug 1 high, marked a positive development, however the slippage into the Friday close undermines this sentiment - for now. Moving average studies have crossed and are in a bull-mode position, reinforcing current conditions. An extension higher would signal scope for a climb towards 1.4019, a Fibonacci retracement. On the downside, support to watch lies at 1.3769, the 50-day EMA - a level not yet challenged by the correction lower.
CANADA: Q2 Expected To See GDP Contraction, BOC's Estimate Looks Too Negative
The June retail sales release helps wrap up the last major data before Canadian Q2 GDP is released on Friday August 29.
- Current Bloomberg analyst consensus shows Q2 is expected to show a 0.7% Q/Q annualized contraction, versus +2.2% in Q1. The private sector consensus is more optimistic than the Bank of Canada's -1.5% estimate in its July Monetary Policy Report (which MNI thinks is too low) but the component-by-component breakdown is similar if of differing magnitudes.
- Widely expected are: a softening in household consumption growth (+1.2% in Q1), with a pickup in government spending, continued weakness in fixed investment (-3.0% in Q1) though with residential outperforming business capital formation, and a reversal of Q2's positive contribution from net exports. In short, the data are expected to confirm that trade activity was brought forward to Q1 ahead of tariffs, with the effects reversing in Q2.
- Going forward, the BOC envisages growth resuming in Q3 (+1.0% in its "current tariff" scenario). In the meantime, a weak Q2 reading could provide Governing Council with more conviction to resume easing rates in September, with the July meeting decision noting "If a weakening economy puts further downward pressure on inflation and the upward price pressures from the trade disruptions are contained, there may be a need for a reduction in the policy interest rate".
