NZD/USD declined 0.6% after the RBNZ surprised markets by stating that it expects inflation to return to the 1-3% target range in 2H, adding that it could temper monetary restraint with a decline in inflation. Markets are now pricing in a 44% chance of a rate cut in August. The RBNZ is also diverging from the RBA, where markets still see a risk of another rate hike due to stubborn inflation. AUD/NZD has leapt towards 1.11, supported by widening short-term AUD-NZD rate differentials.
USD/JPY is trading around the 160-162 range, and one cannot dismiss risks of an intervention should it breaks above 162. Speculative short positioning has become extreme, reaching levels last seen in end-April before the MOF decided to intervene. Meanwhile, the media reported that Japanese megabanks have asked the BOJ to seek early, sharp cuts to JGB purchases to reach an eventual pace of JPY 1tn or JPY 3trn. Institutional investors, including insurers and asset managers, were divided between urging for a cautious reduction and a complete stop. Given the lack of a consensus, the BOJ’s final call on JGB purchase reduction will have the potential to surprise when announced on 31 July, either on the dovish or hawkish side. JPY traders could be more cautious going into the July meeting, while volatility bets could also pick up.
USD/CNH is consolidating around 7.28-7.31 ahead of the crucial Third Plenum next week. Markets are anticipating further policy support for the economy and the housing sector, which could rejuvenate equity markets and support the RMB. Meanwhile, the PBOC has noticeably relaxed its onshore CNY fixing without inducing excessive volatility. The USD/CNY fixing rose to 7.1342 on Wednesday, marking its highest level since late Nov. China’s June CPI inflation undershot expectations, dipping to 0.2% y/y (exp: 0.4%) and underscoring the need for larger-scale policy support next week.
GBP/USD rose above 1.28 after BOE Chief Economist dented August rate cut hopes to 50:50, saying that it is unclear if the BOE should act now. He pointed out that inflation in the services sector and wage price growth remained high, although inflationary pressures have now been contained.
Quote of the day
“One day we will learn that the heart can never be totally right when the head is totally wrong.”
Martin Luther King Jr.
11 July in history
In 1977, the US Medal of Freedom was awarded posthumously to Rev Martin Luther King Jr.
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