The USD was broadly weak on Friday, reflecting a mixture of news and position covering ahead of month-end. This saw the NZD recover a little from a fresh 2-year low, although much of the action was in local trading hours. There remained little action in global bond markets, while NZ rates fell further.
A sleepy Friday afternoon session was awaken by reports that EU leaders struck a deal on migrants. The toughened-up migration plan included setting up refugee processing centres outside Europe and the EU as a collective sharing responsibility for migrants rescued at sea. This agreement was seen to pave the way for Germany’s CSU and CDU coalition partners to make up and hopefully secure Merkel’s position. But over the weekend, the agreement reached was deemed insufficient enough to reduce immigration and some doubt remains over the future of the German government. EUR rose sharply and this spilled over into other currencies, with traders taking up the opportunity to close short positions. The USD seemed to be the main casualty and it lost further ground in Friday night trading. The weekend news could see some of this price action reverse course as the new week begins.
EUR rose from around 1.1570 to end the week more than a cent higher at 1.1685, even with the ECB’s Draghi warning that an escalating trade war may have a larger impact than policy makers and investors currently expect. Euro-area CPI data were keenly awaited, but were in line with expectations, with headline inflation nudging up to 2.0%, but core CPI inflation nudging down to 1.0%.
Strength in EUR spilled over into a stronger GBP, with a small upward revision to UK Q2 GDP adding to its performance, with GBP ending the week over the 1.32 mark. Soundbites on Brexit emanating out of the EU summit were mainly negative, with signs of frustration by EU leaders of the lack of progress by Britain in putting forth proposals on the way forward. EC President Tusk said that “there’s a great deal of work ahead and the most difficult tasks are still unresolved...this is the last call to lay the cards on the table.” The FT reported that the UK’s chief Brexit negotiator Davis had spent just four hours in talks over the whole year with his EU counterpart Barnier. GBP largely ignored these negative vibes.
The EU migrant deal saw the NZD rise from a fresh 2-year low of 0.6736 to near 0.6780 by the NZ close and there was no further progress in Friday night trading. CFTC data showed that short positioning in the NZD extended in the period ending 26 June and we suspect that post the OCR Review on Thursday more short positions were put on. This takes the NZD to historically extreme levels of short positioning, which increases the hurdle for significant further near-term weakness. Technicals don’t give a clear picture, with one wondering about the potential for further weakness since the break of key technical levels last week while the relative strength indicator suggests that the Kiwi is currently oversold.
CAD was the strongest of the majors in Friday night trading. Canada GDP was slightly better than expected in April and a BoC business survey showed near-record business confidence and strong capacity constraints. The odds of a rate hike in July rose to 85%. NZD/CAD went sub-89, racking up a weekly loss of over 3%.
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