Weaker than expected China activity data drive weaker yuan, spilling over into weaker NZD and AUD. Global rates push lower, NZ rates play catch-up

Data showing weaker China economic momentum has weighed on the yuan, spilling over into a weaker NZD and AUD. After last week’s surge, the NZD has underperformed and is lower on all the key crosses. Global rates have pushed lower while US equities continue to push higher.

It has been a typically quiet start to the new week with the key release being weaker China activity data. GDP data for China showed much slower economic momentum, with quarterly growth of 0.8% q/q in Q2 after 2.2% in Q1 and annual growth of 6.3% y/y, well shy of the consensus estimate of 7.1%. The annual figures were inflated by last year’s lockdowns. Monthly activity data showed more sluggish retail sales against a backdrop of stronger than expected industrial production and investment. Alongside signs of deflation in the economy, the weaker activity data continue to raise speculation for further incremental stimulus measures ahead.

The release triggered a weaker yuan, with USD/CNH rising from 7.15 early afternoon to just under a peak of 7.19 overnight. On a day of modest currency movements and some consolidation in the USD after its hefty fall last week, the NZD and AUD have underperformed. The NZD is down about 0.5% from last week’s close to 0.6335, after a brief dip to 0.6310 overnight.  The AUD is down 0.2% to 0.6825, after a brief overnight dip below 0.68. NZD/AUD has pushed lower overnight to around 0.9290.

The NZD’s underperformance sees it modestly lower on other crosses as well on a day in which other majors show little change against the USD. In our weekly FX update yesterday we noted that the DXY relative strength index had fallen below 30, which put it into oversold territory from a technical view, after its significant fall last week.

The only other data release of note was the NY Fed’s Empire manufacturing index, which fell by less than expected to 1.1. The series has been volatile over the past couple of years, but of note the prices paid and prices received indices both fell to levels not seen since mid-2020, feeding the disinflation narrative.

Global bonds show signs of consolidation after last week’s significant fall. US Treasuries are down about 3-4bps out to 10-years maturity, with the 10-year rate at 3.80%, with European rates showing a similar move. US equities continue to push higher, with the S&P500 currently up 0.4%. The Euro Stoxx 600 index closed down 0.6%, with weakness led by consumer cyclical stocks exposed to China’s economic slowdown.

In other news, following a Ukraine drone attack on an important bridge linking the Crimean peninsula, Russia has ended the Ukraine grain export deal, something it has been threatening to do for some time. This could limit food exports from Ukraine going forward. Wheat and corn futures pushed higher overnight but the move wasn’t sustained and prices for both are down about 1% for the day. The market is currently well supplied at present, but Russia’s move could add to future food price inflation. Oil prices are down 1-2% for the day after the weaker China data, with Brent crude down to a USD78 handle.

After the long weekend, the domestic rates market played catch-up to the global moves seen since Thursday’s close. In a quiet session, rates were lower across the swaps and NZGB curve, with a modest flattening bias. The 2-year swap rate fell 4bps to 5.39% while the 10-year rate fell 6bps to 4.51%. All rates are well down from the peak levels of a week ago. The 10-year NZGB fell 5bps to 4.51%, taking its fall from the week-ago level to 38bps.

In the day ahead the key release will be US retail sales, where the consensus expects modest 0.4-0.5% nominal growth for headline and core sales. Annual Canadian CPI inflation is expected to fall further, with the headline rate down to 3% and the core rate down to 3.7%. The RBA minutes of the July meeting are unlikely to reveal anything new from what we’ve heard already from Governor Lowe since the meeting.