NEW ZEALAND: Inflation Stabilising, Weaker Employment But Exports Improve

Q2 CPI prints Wednesday and will be monitored closely given that the RBA relies on this series with the monthly version not yet complete (due to take place on November 26). Headline inflation continues to be distorted by federal & state government electricity rebates and so attention will remain on the underlying trimmed mean. Bloomberg consensus expects it to rise 0.7% q/q and for the annual rate to ease to 2.7% y/y from Q1’s 2.9%. The RBA’s May forecast was for 2.6% y/y and so a print close to this would likely result in an August cut but steady around Q1 may add doubt. 

• Most analysts reporting to Bloomberg are around consensus at 2.6-2.7% y/y but forecasts range from 2.5-2.8% and the quarterly rate 0.5-0.8%. In terms of the major local banks, NAB and Westpac are in line with consensus, CBA expects 0.7% q/q but the annual rate to rise to 2.8%, while CBA has a slightly lower quarterly increase of 0.6% but annual inflation still 2.7%.
• Services inflation will continue to be watched as a measure of domestically-generated pressures. After being sticky through 2024, core services moderated to 3.3% y/y in Q1 from 4.2%.
• Q2 headline CPI is forecast to rise 0.8% q/q and 2.2% y/y after 0.9% q/q and 2.4% y/y in Q1. The RBA projected 2.1% y/y in May. CBA and NAB are in line with consensus, ANZ is forecasting 0.8% q/q & 2.1% y/y but Westpac is higher with 0.9% q/q & 2.3% y/y.
• Monthly June data are also released Wednesday and headline inflation is expected to be steady at 2.1% with forecasts ranging from 2.1% to 2.5%. ANZ and CBA are in line with expectations, NAB is lower at 2% and Westpac higher at 2.3%. 

The BBDXY range overnight was 1198.76 - 1208.24, Asia is currently trading around 1208. The USD’s slide lower finally stalled at the back end of last week and some profit-taking was seen. Yesterday's US-EU trade deal was seen as a big loss for the European Union and this has provided the USD bounce with further tailwinds. There is lots of event risk coming up this week and we are heading into month-end so some caution is warranted, this could potentially see some more paring back of USD shorts. Today is corporate month-end and this could also add to some short-term USD demand putting further pressure on the shorts.

• Daily Chartbook on X:  “In "a survey of 800 institutional investors ... The proportion of respondents expecting the dollar to weaken amid growing US fiscal concerns is near an all-time high -Goldman Sachs.” See Graph below.
• Arnaud Bertrand on X: “If Europeans were paying attention (or being told the truth), they should be beyond appalled by this "deal. It's nothing more than one of the most expensive imperial tributes in history. Just a massive one-way transfer of wealth with no reciprocal benefits.”
• Robin Brooks on X: “Today's rise in the Dollar is very unusual. Usually, such increases in the Dollar (vertical) map into a favorable move in the 2y2y forward rate differential (horizontal), but that isn't the case today. That could be a sign that Dollar short positioning is extremely stretched...” 
• “The Dollar is seeing a big rise. Several drivers: (i) EU - US trade deal is reminder that - having dropped the ball on Ukraine - EU is supplicant, not master; (ii) tariffs are Dollar-positive, the fact that they drove the Dollar down was always an anomaly. The Dollar has based...”
• There is a broad consensus that the USD is set to embark on a decent move lower as the world reduces its exposure to the US and repatriates a lot of these flows. This consensus will also result in some decent short squeezes as a lot of the market is positioned the same way.
• Data/Events :  Advanced Goods Trade Balance, FHFA House Price Index, S&P Corelogic, JOLTS, Conf. Board Consumer Confidence, Dallas Fed Services Activity.

Fig 1: Goldman Survey On USD View

Source: MNI/@dailychartbook/Goldman Sachs

The latest round of ACGB May-28 supply sees the weighted average yield print 0.61bps through prevailing mids (per Yieldbroker), extending the recent trend of firm pricing at ACGB auctions.

• However, the cover ratio dropped to 3.3300x from 3.9550x at the previous outing.
• As highlighted in the preview, the outright yield was 10-15bps higher than the previous auction but remained around 80bps lower than the cycle peak in early November last year.
• Today’s bid was likely supported by market expectations for RBA easing in 2025. A 25bp rate cut in August is given a 90% probability, with a cumulative 59bps of easing priced by year-end.
• Also on the positive side, it's important to note that the May-28 bond was included in the YM basket.
• However, sentiment towards global bonds has deteriorated over July.
• There has been no notable movement in the cash line in post-supply dealings.