External trade data from China released on Tuesday morning turned out to be much worse than expected. Year-on-year exports declined by 14.5%, the largest decrease since the launch of COVID-19 restrictions in 2020, which points to a sharp drop in global demand. Furthermore, imports fell by 12.4% year-on-year, reflecting a decline in domestic demand.
China, as an economic locomotive primarily for the Asia-Pacific region, so the sharp decline in trade volumes has a strong negative impact on the foreign trade of both Australia and New Zealand. As a result, the currencies of these countries are beginning to feel more and more pressure.
In general, markets traded in narrow ranges on Tuesday in the absence of significant economic reports. Active movement may start on Thursday after the release of US inflation data for July. It is expected that the core inflation rate will decrease from 4.8% to 4.7%, but surprises are possible. The yield on 5-year TIPS, which are protected from inflation, is gradually rising and reached 2.29% by Tuesday evening. This is the highest level since April. TIPS yield reflects business's view on inflation expectations rather than consumer expectations and is often a more accurate indicator of the projected inflation level.
The dollar continues to strengthen, albeit with a not very pronounced character, but the trend persists. Commodity currencies remain under pressure.
NZD/USD
New Zealand's largest company, Fonterra, which supplies about 30% of the world's dairy products, has lowered its milk price forecast for the 2023/24 season from $8 to $7. For the company, this means a decrease in income by $1.9 billion, and since dairy products are New Zealand's largest export, such a decrease in price forecasts will inevitably have serious consequences for the country as a whole.
Real economic activity will decline, and GDP will decrease by about 0.6% solely due to the decreased milk prices, and with the multiplier effect, the GDP decline may eventually exceed 1%. At the same time, a decrease in export prices is noted for other products as well (lamb by -25% compared to last year, beef by -10%, etc.).
Of course, price reduction is a disinflationary factor, but the economic slowdown is accompanied by an increase in fuel prices, and according to BNZ Bank's calculations, annual inflation in the 3rd quarter will exceed 6%. The combination of lower prices for raw export goods and higher crude oil prices delivers a double blow to people's purchasing power.
The Reserve Bank of New Zealand will hold a meeting next week, and according to forecasts, the central bank will likely keep interest rates unchanged. On Wednesday, the RBNZ will publish its quarterly inflation expectations review, and it's important to understand whether the dynamics of the previous quarter, when two-year inflation expectations fell from 3.3% to 2.79%, will be maintained.
Expectations of economic slowdown will inevitably lead to a decrease in labor demand, which, combined with a persistently high labor supply (primarily due to significant migration growth), will result in a sharp rise in the unemployment rate, peaking at 5.2% in 2025.
The weekly change in NZD, as indicated by the CFTC report, is +0.2 billion, with a neutral positioning. The overall speculative position remains near zero levels. The calculated price is below the long-term average, but the downward momentum is weak.
The attempt to consolidate above the support level at 0.6044 is apparently coming to an end, with the risk that the support won't hold, leading the kiwi further south. The nearest target is the local low of 0.5978, with the main target being the lower band of the bearish channel at 0.5870/5900.
AUD/USD
Australia's NAB business conditions index rose from 9 to 10 in July, with confidence rising from 0 to 2, both figures exceeding expectations. Meanwhile, Westpac reported a decrease in the consumer confidence index from 2.7% to -0.4%. The indicators are contradictory and haven't added clarity to the overall perception of Australia's economy.
It was forecasted that consumer confidence would increase as the RBA refrained from raising interest rates once again. However, the negative effect from the expected rise in unemployment (this figure has significantly increased over the last six months) seems to have outweighed positive factors.
Domestic conditions in Australia do not provide grounds for optimism; the country heavily relies on external markets, and the sharp decline in China's imports will directly hit Australian producers. The trade balance will worsen, putting more pressure on the aussie.
The aggregate speculative position for AUD during the reporting week remained nearly unchanged at -3.47 billion, indicating bearish positioning. The calculated price is below the long-term average and moves further south.
The targets mentioned in the previous overview remain relevant. We anticipate another attempt to break the support at 0.6460, aiming for the next target at 0.6350/70. There are few grounds for further corrective growth, even if an attempt is made, it will be shallow and short-lived.
