The USD continued to gain modestly, as a big drop in Chinese equities lowered risk appetite and weighed on hard commodities.
GBP outperformed on a surge in core inflation. NZD was supported by a strong bounce in dairy prices, but 0.66 looks to cap for now.
The Shanghai Composite index fell by 6% yesterday, its sharpest fall in three weeks.
There was little fundamental news to drive the move, with reports simply suggesting renewed concerns about the authorities’ ability to support the market indefinitely.
This affected metals prices, with copper falling 1.6% for the day, and the London Metals Exchange Index off by 0.8%. AUD was a predictable underperformer, down 0.4% to 0.7340.
In the UK, headline inflation beat expectations only modestly at 0.1% y/y. But core inflation, which strips out food and energy prices, surprised materially at 1.2% y/y.
This will help support the case made by a growing hawkish contingent on the BoE’s Monetary Policy Committee.
The rather resounding 8-1 vote to leave policy rates unchanged in August looks likely to shift toward a more even split, but we are very unlikely to see policy changed before 2016. GBP gained strongly to take a look above 1.57 before paring those gains somewhat.
NZD/USD remained well supported in the run-up to last night’s dairy auction, on the basis that prices would likely bounce.
The 14.8% gain in the GDT Index was probably at the high end of expectations, and NZD got a small 30pt lift back to 0.66.
We expect resistance at 0.6620 to hold, especially with China concerns still percolating and AUD under pressure. But NZD’s relative outperformance may wane, now that the auction is behind us.
Today’s local PPI report for Q2 will pass without much comment, since the more-relevant CPI report for that quarter was released nearly a month ago.
The US CPI report will be the evening’s highlight, along with the July FOMC minutes. We’ll be looking for hints on what the quantum of “some” is, in relation to “further improvement in the labour market”.
If there is a strong signal (very unlikely) that the bar is low, that would encourage USD strength, less than a month out from possible lift-off.
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Raiko Shareef is on the BNZ Research team. All its research is available here.