The Week Ahead – Long Kiwi

The Week Ahead – Long Kiwi

Previous week: 07 July 2017 – 11 July 2017

US Crude oil inventories—10.30 pm 09 August 2017 Wednesday

US crude inventories decreased by -6.45 million barrels on the expectation of -2.2 million drop. Baker Hughes US oil rig count increased by 3 from 765 to 768. This would be the third decrease in rig count in the past 6 weeks. Is the rig count establishing a top? Oil production was 9423k barrels per day for week ending 14/07/2017, a decrease from 9430 barrels per day in the previous week. The slight drop in production was mainly due to decrease in production in Alaska which outweighed the increase in the Lower 48 states.

The question now is whether the rig count will start to decline in lagged response to the drop in oil price from $55 to $50 a barrel. The next question is whether this reduction in rig count will depress the rate of oil production in the United States. It is not a given that a drop in rig count will translate to a direct decrease in oil production. Rigs are now more efficient.

RBNZ Official Cash Rate, Rate Statement, Press Conference—5am 10 August 2017 Thursday

The Reserve Bank of New Zealand decided to leave the Official Cash Rate (OCR) unchanged at +1.75%. The RBNZ still sees the need to maintain its accommodative monetary policy because inflation and growth remains weak. The reason for them being weak is because global inflation and growth had been weak. New Zealand is a small and open economy (like Singapore) and is beholden to its trading partners and external factors. The RBNZ, realizing that its currency had strengthened (mainly against the US Dollar), wants its currency to be weakened. However, despite wanting a weaker currency, they refused to act and gave no hints that they will act in the future should their currency continues to rise on the back of depreciating US Dollar.

Key Points from RBNZ’s Monetary Policy Statement dated August 2017:

Policy Assessment:

  • The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 1.75 percent.
  • The trade-weighted exchange rate has increased since the May Statement, partly in response to a weaker US dollar. A lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth.

Key Policy Judgement:

  • Annual headline CPI inflation has returned to the target range, but is expected to be variable over the year ahead.
  • Global conditions continue to suppress inflationary pressure in New Zealand, underpinning a low outlook for tradables inflation.
  • Non-tradables inflation remains subdued, partly reflecting weak price-setting behaviour, but is expected to increase gradually.
  • Monetary policy is expected to remain accommodative to support strengthening GDP growth and rising capacity pressure. This support is needed for headline inflation to move towards the target midpoint over the medium term.
  • Survey measures of inflation expectations are consistent with the Bank’s projections. Longer-term inflation expectations remain well anchored around the target midpoint.

International Development

  • The outlook for economic growth in New Zealand’s main trading partners has remained largely unchanged since the May Statement, with growth continuing at a moderate pace.
  • Global inflationary pressure remains subdued. Combined with recent strength in the New Zealand dollar, this continues to imply low tradables inflation in New Zealand.
  • Globally, monetary policy and financial conditions remain accommodative. Bond yields in major economies remain low but have been volatile, reflecting diverse views about the prospect for policy normalisation.
  • Risks around the economic outlook for New Zealand’s trading partners remain skewed to the downside.

Current Domestic Conditions:

  • Annual headline CPI inflation was 1.7 percent in the June 2017 quarter. Non-tradables inflation and core inflation measures remain below average.
  • With global economic conditions improving, New Zealand’s export prices have increased from their 2016 lows. Import prices have also increased and contributed to higher tradables inflation, but this effect is waning.
  • The New Zealand dollar TWI has increased since the May Statement.
  • Quarterly GDP growth was weaker than expected over the past two quarters, partly due to temporary factors. GDP growth is expected to increase over coming quarters.
  • Housing market activity has continued to slow despite strong fundamental drivers of housing demand, particularly low mortgage interest rates and strong population growth.

Macroeconomic Outlook

  • Subdued global inflationary pressure is expected to keep tradables inflation below average over the projection.
  • Economic activity continues to be supported by accommodative monetary policy and strong population growth. The outlook for domestic demand is also supported by additional fiscal stimulus and the high terms of trade.
  • Above-trend GDP growth is expected to underpin an increase in capacity pressure, generating an increase in non-tradables inflation, despite robust growth in the productive capacity of the economy.
  • Annual CPI inflation is projected to increase over the medium term and settle around 2 percent in 2019.

US CPI m/m July

Name Actual Expectation Last
Core CPI m/m +0.1% +0.2% +0.1%
Core CPI y/y +1.7% +1.7% +1.7%
Headline CPI m/m +0.1% +0.2% +0.2%
Headline CPI y/y +1.7% +1.8% +1.6%

At least headline CPI y/y ticked up from +1.6% to +1.7%. With another miss in CPI, Goldman Sachs lowered their probability of a third rate hike in 2017 from 60% to 55%.

Donald Trump says this, Kim Jong Un says that

North Korea is now able to put a miniaturized warhead onto a rocket.

President Trump: “North Korea best not make any more threats to the United States. They will be met with fire and fury like the world has never seen… he has been very threatening beyond a normal state. They will be met with fire, fury and frankly power the likes of which this world has never seen before.”

KPNA: “The KPA Strategic Force is now carefully examining the operational plan for making an enveloping fire at the areas around Guam with medium-to-long-range strategic ballistic rocket Hwasong-12 in order to contain the U.S. major military bases on Guam including the Anderson Air Force Base.”

In my opinion, as much as they hate each other, neither Donald Trump nor Kim Jong Un will be willing to be the first one to strike at the other party. Donald Trump will not do a preemptive strike on North Korea even if the Pentagon said it was planning one. A preemptive strike will be seen as an offensive attack on the sovereign land of North Korea by the international community. It will also give Kim Jong Un reason to retaliate in defense. Kim Jong Un will not fire the first missile because if he does so, North Korea will be completely annihilated by the massive military might of the United States. Therefore since neither party is willing to strike first, it will be safe to assume that a nuclear war will not start in the Korean Peninsula.

When dealing with the controversial issue of nuclear weapons, the conversation will always be directed towards the final outcome of “Mutually Assured Destruction”. During the Cuban Missile Crisis where Soviet Union and United States were both increasing their nuclear stockpiles, some historians commented that the Cold War was actually one of the safest period in modern history. This was because neither party was willing to be the first one to strike the other and take on the responsibility of starting the next world war. The two parties also knew that a nuclear war would also lead to the complete destruction of both sides. Therefore by simple game theory, it is safe to assume that both parties (Trump and Jung Un) will eventually realise that no action is the best choice.

Coming week: 07 August 2017 – 11 August 2017

UK CPI—4.30pm 15 August 2017

UK CPI was +2.6% in June. Continued decrease in CPI will make it almost definite that rate hike by BOE MPE is off the table.

US Retail Sales m/m—8.30pm 15 August 2017

US Crude oil inventories—10.30 pm 26 July 2017 Wednesday

Another draw in inventories and rise in production?

FOMC Meeting Minutes—2am 17 August 2017

Probably nothing since July FOMC meeting was a nothing burger.

Trade Ideas

NZD/USD long to watch

NZD/USD having broken out from resistance zone at 0.73 is now retesting it to see if support holds.


1) With the ongoing beef between the two most egoistical men (Trump and Kim), the US Dollar had been under pressure.

2) The probability of rate hike by December 2017 currently stands at 36.7% (0% for September and November). It made a high of around 46% some time last week and then it dropped 10% in quick order in response to heightened tensions between US and the DPRK and weak CPI data out of US.


1) Divergent monetary policy between the Federal Reserve in the US and RBNZ in New Zealand. The Fed is steadfast in its resolve to hike rates and initiate Quantitative Tightening. On the contrary, the RBNZ intends to keep interest rates accommodative for extended durations of time because growth and inflation are still weak.

USDJPY to watch

USDJPY is now testing horizontal support trend line at 109 area which is an area of interest for a buying opportunity.

There is a divergence in monetary policy between the Federal Reserve and the Bank of Japan. The Fed had been and is planning to continue to tighten their monetary policy by hiking Federal Funds Rate and initiating Quantitative Tightening. The Bank of Japan having admitted to failing to make progress in attaining their inflation target of 2% (The BOJ pushed back the expected date at which 2% inflation target will be met to FY 2019) will have no choice but to loosen its already uber-loose monetary policy further if it is to reach its inflation target.

However, macroeconomic data out of US in recent times had not been the best. Also, the recent war of words between Trump and Kim had led to safe havens like the Japanese Yen to be bought. The lack of inflation in Japan may not be all that bad for the Japanese economy. This point of view was argued by Noah Smith on Bloomberg View and is a very good read.



The Week Ahead - Shorting the Yen The Week Ahead - Marx and Markets