US Dollar Tries to Muster a Bounce from Oversold Territory, China Helps
Key Overnight Developments
Like yesterday, the US dollar is rallying in the overnight session, largely due to the fact that it finished the US session at multi-month lows. Commodity currencies, led by the New Zealand Dollar, are declining the most versus the reserve currency. A combination of overbought conditions and concerns about slowing Chinese economic growth are the drivers of the move. Yesterday, traders were optimistic that slower China growth would mean that the government could ease some of the measures it has taken in trying to cool the economy. Today traders are reconsidering that view and wondering if China growth is set to cool further, which would obviously be bearish for the world economy and commodity demand. Whether the Chinese government is successful in its attempts to orchestrate a soft landing will be of much importance to currency traders in the coming days, weeks, and months.
Asia Session Highlights
The New Zealand Consumer Price Index rose 0.3% from the first quarter to the second quarter. That was below the expectation of a 0.4% rise, and 1.3% rise in the previous period. New Zealand consumer inflation is quite tame with prices up 1.8% year-over-year. Lower inflation means less urgency for rate hikes, which is in itself bearish for the Kiwi. Nevertheless, the overall strong outlook for the New Zealand economy makes it likely that the RBNZ will follow through with the aggressive rate hike campaign that the market expects from it. The central bank is expected to raise rates 124 basis points over the next twelve months, according to overnight index swaps.
The Japan Tertiary Industry Index fell 0.9% month-over-month in May, which was worse than the decline of 0.7% expected, and below the 2.4% rise in April. Economic growth in Japan remains feeble, but that has not stopped the Yen from advancing aggressively versus the US Dollar. USDJPY is testing the July 7th lows near 87 in the Asia session. Below that lie the November 2009 lows near 84.82, a break of which would send the pair to levels not seen in 15 years.
Euro Session: What to Expect
The highlight of a very light European economic calendar is the Euro-Zone Trade Balance for May, which is expected to come in at 0.8B on a seasonally-adjusted basis versus 1.6B in the prior period. Expect the Euro to continue to move on broader risk and sentiment trends rather than trade flows.
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