Chinese Inflation
China’s inflation remained below 2% in June. The 1.9% growth in consumer prices was well within analyst expectations and bodes well for the Chinese economy despite falling short of the central bank’s 3% target. Compared to last month, the change was marginal, showing that the weakening yuan and rising oil prices have not affected China’s economy so far. While consumer prices stagnated, the Producer Price Index showed a sharp increase. Their prices rose by 4.7% in June, which is 0.6% higher than last month and exceeded expectations by 0.2%. The largest increases were seen in the prices for extraction and means of production.
Prevailing Optimism
Asian markets have been on the up for three consecutive days since last Friday. The Nikkei closed 0.66% higher today. The Shanghai and Hong Kong exchanges were a little more reserved, but still increased by approximately 0.3-0.4% each. The only cause for concern was the Australian index, which was 0.5% in the negative. The recently published Australian Business Confidence Index was at 6 points instead of the expected 8 points. The ASX’s downward direction shows that the markets did not take this news well. The two largest oil futures, WTI and Brent, both increased by over 0.5%, opening on the European trading session at 74.20 and 78.60 respectively.
GBPUSD
Following the departure of chief negotiator David Davis on Sunday, Theresa May’s cabinet was dealt another blow on Monday. Boris Johnson, one of Brexit’s most vocal supporters, handed in his resignation. In his letter, Johnson said Brexit should be about opportunity and hope, however, the deal proposed by Prime Minister May would leave Britain bound by EU rules and “headed for the status of a colony”. This latest scandal had an effect on the pound. After having successfully weathered the resignation of Secretary David Davis, the political uncertainty caused by Monday’s news proved too much to handle.
The GBPUSD fell from 1.3350 to 1.3188 when news of Johnson’s resignation broke. Its fall was interrupted by a brief correction which tempered the decline, but failed to halt the downwards trend overall. Price has stayed within its previous upwards trend channel, however, it is rapidly approaching the channel’s lower limit. The British government’s predicament will likely prevent a large body of buyers from appearing on the pound’s market, making a downwards trend the more probable outcome. That said, chart patterns and technical indicators do not support this possibility just yet.
USDCAD
It may be worthwhile to keep an eye on the price of the Canadian dollar, since the Bank of Canada (BoC) is the only central bank holding an interest rate meeting this week. According to market expectations, this BoC meeting will not just be for show, but will end with a 0.25% rate hike decision. The BoC already increased interest rates by 0.25% earlier this year, so an additional quarter percent rate hike could be seen as a continuation of their earlier policy. The only factor casting serious doubt on the possibility of a rate hike is the change in Canada’s economic outlook due to the US pulling out of NAFTA and raising tariffs. Interest rate policy is more than just a means to keep inflation in check, it’s also a tool to either invigorate or reign in the economy if the situation demands. This puts the BoC in a delicate situation as the 2.2% rate suggests they should raise rates, however, the 6% unemployment figures and 0.3% quarterly GDP growth makes it difficult to do so. Current market expectations definitely favor the possibility of a rate hike, however the BoC may still surprise us.
The USDCAD is on an upwards trend, despite the Canadian dollar strengthening over the past few weeks. Price met a powerful line of resistance at the upper end of the 1.3050-1.3060 range earlier this year, until the USD broke it in June. The upwards movement peaked at 1.3383 where it formed a double top pattern, then reversed to retest its previous resistance. The former resistance line, now acting as a support was tested when it intersected with the long term upwards trendline. Price will likely hover near this level in anticipation of the upcoming interest rate decision. The chart indicates the continuation of the upwards trend, which suggests the BoC will forego a rate hike. That said, the BoC comments will still heavily influence market reaction so any mention of a rate hike would cause the Canadian dollar to strengthen, therefore sending the currency pair on a downwards path.
Sincerely,
Laszlo | Market Analyst
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