China Trade balance unaffected by trade war
If there is a ‘trade war’ no one told China importers/exporters. China’s exports growth unexpectedly rose above expectations despite U.S tariffs and heavy media rotation of protectionist rhetoric. Imports also accelerated indicating solid domestic demand. A key focus for the market was Chinas surplus with the United Sates, which fell only marginally. China July trade balance came in at $28.05, Exports 12.2% vs. 10.0% y/y, Imports 27.3% vs. 16.5% y/y. Ironically for US President Trump the negative sentiment on trade which has driven the CNY against the USD, down 10% since April, actually supported exports. Yet with no sign either nation is prepared to back-down as disagreement expanding further then trade into intellectual property, investments and technical transfer, downside the risk to China’s growth has increased. In response, Chinese officials have moved proactively by releasing additional liquidity into the banking system and suggested further fiscal stimulus. As the potential for a trade war shifted from a tail-risk into base scenario, equites, specifically Chinese shares become vulnerable for deeper correction. Our base scenario, China will now seek to negotiate with the US to avoid further escalation, however, outcome is uncertain. The directional risk to the CNY at this point is at an unstable equilibrium.
NZD edges higher amid stronger inflation expectations
The New Zealand stood amongst the best performers within the G10 complex on Wednesday after the last RBNZ survey showed inflation expectations increased in the third quarter. Business managers anticipate a moderate pick-up as average annual inflation expectation increase to 1.86%y/y in the third quarter compared to 1.8% in the previous one, which is still below the central bank’s mid-range target. Two-year inflation expectations rose marginally to 2.04% from 2.01% three months ago.
The Reserve Bank of New Zealand is set to announce its monetary policy decision later today. However, the slight improvement in inflation expectations isn’t going to make the monetary institution raise rates. The Official Cash Rate should remain unchanged at record low 1.75%. According to the last survey, market participant do not expect the RBNZ to raise rates before at least the third quarter of 2019 – it is an optimistic view.
Speculators are still short the Kiwi as the net short speculative position as percentage of total open interest stabilized around 45%. Given this extreme positioning, the downside in NZD/USD is limited. The USD rally is slowly running out of steam. NZD/USD is currently trading around 0.6755, which is slightly higher than the bottom of its 3-month range. A return towards the 0.68-0.69 area appears the most likely scenario.
Crude oil futures contracts heading higher amid Trump sanctions against Iran
US sanctions on Iranian exporting goods have pushed oil prices higher since the beginning of the week. Despite concerns as to how demand could be affected by ongoing US – China trade tensions or Russian and Saudi Arabian plan to increase crude oil output, speculations towards lower supply are dominating the marketplace, although current sanctions do not directly concern Iran’s oil exports (i.e. USD purchases, automotive industry, coal, metals).
Accounting for 5% of total oil production, Iran, the third largest OPEC producer, is surely an important stakeholder of the industry, which can have a strong influence on the global market, but as US sanctions will be taking place at the beginning of November 2018, anything could happen since then. Strong oppositions expressed by China, India and the EU with regards to US sanctions against Iran could play an important role in the negotiations.
Since the beginning of the week, Brent crude, WTI and Shanghai Crude gained +2%, +1.11% and +4.51% and trade at $ 74.70, $ 69.25 and CNY 530.60 ($ 77.67) respectively.
As US crude inventories released by the API indicated a decline in inventories of 6 million barrels (consensus: -3.33 million barrels) and EIA inventories data are approaching later today and are expected to be lower (consensus: -2.16 million), a lift in crude prices is favored. WTI is heading along $ 69.90.