NZ dollar jumps on retail sales, US and Mexico move closer to NAFTA deal

Summary:

• NZ dollar rises meaningfully this morning being supported by strong retail sales

• US and Mexico move closer to reach a NAFTA deal, key hurdles remain though

• Trump warns the US is going to put a 25% tariff on every car from the EU

Asian equity markets are trading mixed on Wednesday in spite of the fact that the SP500 (US500 on xStation5) topped yesterday its record high from January this year. Nevertheless, the US index was unable to retain these gains and as a result it closed up just 0.2% (off the all-time high). Other indices moved higher as well with the NASDAQ (US100) adding 0.5% and the Dow Jones (US30) jumping 0.25%. Overall, the better performance of US stocks stem, at least in part, from tax cuts implemented at the end of the past year which helped companies improve their profitability - the second earnings season offered a confirmation of such thinking.

Retail sales increased in the second quarter but the underlying trend remains weakish. Source: Bloomberg

Meanwhile, on the FX front the NZ dollar is by far the best performing major currency this morning being up almost 0.4% against the greenback as of 6:45 am BST. The prime reason, along with improved risk appetite, is the retail sales data for the second quarter that smashed expectations coming in at 1.1% QoQ (in real terms) while the consensus had expected just a 0.3% QoQ pick-up. The details illustrated that sales volumes were registered in 11 out of 15 retail industries with hardware, building, and garden supplies having the largest increase of 4.7% after the weakish first quarter - 0.6%. Although the data might be treated as a long-awaited relief to the New Zealand dollar, it does not change the overall backdrop regarding monetary policy there. According to market-based expectations there is the 15% likelihood for a rate cut till February 2019. Thus, domestic data could play a lesser role in the foreseeable future, and the currency could be more susceptible to moves due to external factors.

Technically the NZDUSD is trying to get back to above 0.6700 or so, and if it manages to do so successfully, it could allow bulls to look at further hurdles. Source: xStation5

In addition to the NZ dollar, both the CAD and MXN deserve more attention as they experienced slightly increased volatility this morning due to headline concerning NAFTA. Firstly both currencies gained a foothold following a Politico article. It said, citing three sources close to the talks, that the US was going to announce a ‘handshake’ deal with Mexico as soon as Thursday. Nevertheless, Mexico denied the existence of such the deal claiming that even if both countries had made some strides the key hurdles remained in place. Notice that having a deal between the US and Mexico is a prerequisite to get Canada back to the table. There is also guesswork that the time when the deal could be announced may depend on how a high-level meeting scheduled for Wednesday goes between US Trade Representative Robert Lighthizer and Mexican Economy Secretary Ildefonso Guajardo. While the CAD has already erased all its gains, the Mexican peso keeps trading almost 0.5% higher against the US dollar as of 7:03 am BST.

Finally, let’s mention some remarks Donald Trump delivered on Tuesday with regard to a trade war. US President said that the country is going to put a 25% tariff on every car from the European Union. Meanwhile, Commerce Secretary Wilbur Ross said before the Trump’s speech that he had postponed an August timeline to publish a report on auto tariffs. Notice that Trump asked the Commerce Department in May to examine whether such duties are threats to national security. To sum up, while Europe-based carmakers may feel relief as for now, the auto tariff thread remains among pivotal topics in a trade war being a possible constraint for better performance of European automakers, especially those from Germany.

While the SP500 (US500) managed to register its all-time on Tuesday (it was not the case when it comes to futures), the Dow Jones (US30) drew a shooting star nearby its important technical level. Nonetheless, assuming that bulls on the SP500 move through their resistance, it may also encourage investors to increase their long exposure elsewhere. Source: xStation5