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In the Zone
- There are contingency plans for a possible no deal in Brexit negotiations. This is a clear sign to the EU that the UK will not accept a bad deal. The jury is still out – but is this a sign that this could turn ugly?
It is a bank holiday in Japan today and so the liquidity was a little thin first thing this morning, this meant that the focus was on China this morning as they reported on GDP, Industrial production and Retail Sales. All three beat expectations by some way, the response was rather limited as news started trickling in from the National Financial Work Conference – this is held every five years in China and so can often obtain major policy changes.
There is talk about the PBOC (Peoples Bank of China) taking more control on monetary policy to avoid systemic risk, we also saw a lot of reference towards more regulation. To me this may indicate that China are getting to a point where the numbers can’t be “fudged” anymore as the debt burden gets too large – the Government control a lot of the countries assets. The market took this as major policy change looming.
The second interesting occurrence this morning was that the Deputy Governor of the RBNZ was slotted in at late notice to speak, he mentioned on more than one occasion that a strong currency will not bode well for growth in New Zealand. With inflation data to be released early tomorrow morning, one wonders if this is the start of some jawboning in the NZDUSD which could ultimately drive the pair lower. There is a clear widening gap in interest rates brewing for the Kiwi and perhaps the currency is a little over valued currently.
My strategy remains the same this week, I am actively seeking opportunities in the commodity currencies. I believe that there is a mismatch in interest rate policies and whilst the US are not going to raise rates in September, I do think that there will be a hike in December – we will also see a gradual unwind of a hefty balance sheet starting in September. I also believe that both the AUD and NZD will be on hold for a further 12 months. Technically both pairs are trading at weekly chart highs and also forming divergence on those charts.
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