The New Zealand Institute of Economic Research (NZIER) has conducted a survey of economists, presenting important forecasts for the country. The annual GDP growth is expected to drop by 1.1 percent by March 2025, before bouncing back to 1.9 percent the next year.

Economic Growth Boost

Lower interest rates are likely to help the economy grow. Although the job market is weak, leading families to be cautious, many will benefit from lower mortgage payments. This financial relief could result in increased spending on non-essential items in the coming years. Inflation is anticipated to stabilize around the Reserve Bank of New Zealand’s target of 2 percent.

Monetary Policy Implications

In simple terms, after a short decline, we expect modest growth in the next 12 to 18 months. The predicted 1.1 percent drop in annual GDP by March 2025 shows the effects of tight monetary conditions and lower demand at home. It indicates overall less economic activity: fewer goods produced, reduced spending, and less investment. However, forecasts hint at a positive change. A 1.9 percent growth the following year may not be outstanding, but it signals a turnaround. This growth largely depends on lower borrowing costs, which should occur if interest rates decrease as expected. We’re entering a phase where reduced official rates may lower banks’ lending rates. If this happens, households will have more disposable income, primarily through lower mortgage payments. This typically boosts confidence, leading to increased spending on non-essentials. The halt in tightening measures also benefits small businesses relying on short-term loans. However, caution remains. The cooling job market, characterized by fewer openings and stagnant wages, makes people more careful about spending. If workers are worried about job security, they may not spend freely, meaning any increase in spending from lower rates could be gradual. Looking at inflation, it’s projected to stabilize around 2 percent, aligning with official targets. This suggests a steady decline toward a more stable level, without sudden drops or erratic changes. For those monitoring derivatives markets, this points to decreased price volatility, especially in medium-term rate trades. Given these forecasts, reactions in longer-term rate products might become clearer than in recent months, particularly as short-term rates approach their turning point. We will closely consider expectations moving forward, not just in the broader economy but also in guidance shifts and timing indicators. Those involved in options trading should also monitor implied volatility levels as rate expectations stabilize. It is highly likely we will see a drop in risk premiums for near-term contracts. Low inflation combined with expected rate cuts typically lowers those premiums. The NZIER outlook is based on current data and a measured timeline. There are no immediate signals suggesting a change in monetary policy before the year’s end. However, the implications for trades sensitive to delayed recoveries or changes in consumer confidence are significant. Create your live VT Markets account and start trading now.

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The Canadian Dollar has reached new eight-month highs as the US Dollar holds steady and Crude Oil prices rise. Tensions have increased after Israel attacked Iranian nuclear sites, impacting market risk. In the US, consumer sentiment improved last month, affecting market trends. Over the next few weeks, there will be few Canadian economic data releases. Traders will stay cautious until Canadian inflation figures come out at the end of the month. The Canadian Dollar gains strength from rising Crude Oil prices, with the USD/CAD pair falling below the 1.3600 level, hitting eight-month lows.

US Consumer Sentiment Index

The University of Michigan’s US Consumer Sentiment Index for May exceeded expectations. Meanwhile, the Federal Reserve is expected to keep interest rates steady. The market is speculating a possible rate cut in September, which has stirred some criticism. The Canadian Dollar’s strength largely comes from external factors like Oil prices rather than domestic economic indicators. The Bank of Canada (BoC) affects the CAD through interest rate policy, while high Oil prices impact Canada’s economy because it’s a major exporter. Other influences include the economic health of Canada, inflation, and trade balances. As Crude Oil prices continue to rise and global demand remains strong, the Canadian Dollar’s gains are extending beyond what domestic data would suggest. The stability of WTI and Brent has helped push the USD/CAD pair to levels not seen since last October. Although Canadian data is limited this month, the sentiment linked to oil continues to dominate. Even with little fresh data from Ottawa, the upcoming CPI release at the month’s end is significant. Inflation will be crucial for the BoC’s next move. The market isn’t expecting changes in rates yet, but any shift in inflation data could cause volatility. This quiet period often leads to heightened reactions when new figures are finally released.

Fed Pressure and Geopolitical Tensions

The Fed and Powell are facing pressure. While University of Michigan’s sentiment index surprised positively, broader consumer expectations are mixed. Markets are betting on a possible rate cut by September, despite the Fed not signaling a need for immediate action. This creates a disconnect between the Fed’s policy language and market pricing. This dynamic is limiting the US Dollar’s rise. Although it is not collapsing, it lacks the strong momentum seen earlier this year. For now, this situation benefits the Canadian Dollar. The recent conflict between Iran and Israel has increased volatility but mostly through energy markets and safe-haven flows, rather than direct impacts on North American currencies. However, global risk perceptions have shifted slightly as traders consider how escalating tensions may affect commodities and currencies like the CAD. Interest rate differences are narrowing gradually. The BoC remains aligned with the Fed, but any changes in guidance, whether easing or tightening, could affect interest rate expectations and yield spreads, influencing forex markets. We need to be adaptable. Current CAD positions are slowly rebuilding, but there is a risk of overextension as data releases approach. Two key triggers to watch in the coming weeks are the US crude oil inventory data and any OPEC+ comments that may impact futures prices, as well as remarks from the BoC on inflation persistence or labor market weakness. Both of these could create volatility in CAD pairs. At these levels, small sentiment changes or supply shifts could add extra momentum. However, without support from rising inflation or tighter monetary policy, the Canadian Dollar may struggle to maintain its pace. The price trend is more influenced by external factors rather than national strength alone, making it sensitive to global shifts. From a trading perspective, we’re stepping into an environment focused on reactive strategies, where event-based volatility may overshadow trend-following methods. Short-term derivatives pricing should consider potential sharp reversals. Delta hedging around US inflation data and the BoC’s comments is increasingly important, especially for options expiring in June or July. This calls for more active use of spreads and gamma positioning rather than simply holding long volatility. As summer approaches, wider bid-ask spreads may emerge in forward-dated contracts. We need to be quick on options near the 1.3600 mark, as they could attract attention without new catalysts. Lastly, the upcoming Fed meeting in September has piqued interest and could lead to mispricing if rate expectations change suddenly. We should monitor short-dated volatility skews for USD/CAD, especially during important announcements. The risk of short gamma spikes increases if positioning becomes crowded or one-sided. In conclusion, while the Canadian Dollar shows strength, it remains delicate, balanced between oil demand, interest rate stability, and geopolitical tensions. Create your live VT Markets account and start trading now.

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The People’s Bank of China (PBOC) determines the daily midpoint for the yuan, or renminbi. This is part of a managed floating exchange rate system, allowing the yuan’s value to shift within a range of +/- 2% around this central reference rate. Every morning, the PBOC sets this midpoint using a basket of currencies, mainly considering the US dollar. The bank looks at market supply and demand, economic data, and changes in the international currency market. This midpoint acts as the starting point for trading that day. The PBOC allows the yuan to vary within a +/- 2% range around the midpoint. This range can change depending on economic conditions and policy goals. If the yuan gets close to the edge of this trading range or experiences too much volatility, the PBOC may intervene. The bank can either buy or sell the currency in the foreign exchange market to stabilize its value. These actions aim to manage and gradually adjust the currency’s value over time. In summary, the Chinese central bank carefully manages the daily movements of the yuan. It doesn’t let it float freely, nor does it fix its value. Instead, there’s a new midpoint set each morning that guides the day’s price range, influenced by various global currency changes. Although the currency basket aims to reflect wider market trends, it heavily favors the dollar. This means that the PBOC’s strategy is still very much affected by US economic events, like changes in Federal Reserve policy or US Treasury yields. Because of this dependency, fluctuations in the dollar can introduce volatility into the otherwise stable decisions from Beijing. Recently, these mechanisms have gained importance as liquidity pressures have increased both onshore and offshore. In offshore yuan markets, tightening signals that authorities are subtly discouraging speculative selling without being obvious. Meanwhile, the midpoint fixings have been stronger than expected, indicating a strategy to prevent the yuan from dropping too sharply, even when fundamentals suggest otherwise. As trading progresses, it’s crucial to monitor the daily midpoint level and how it compares to consensus models. Regularly overestimating or underestimating can open arbitrage opportunities, which can be risky if positions aren’t adjusted quickly. If you notice the fixing managed in one direction for several days, it often hints at upcoming administrative actions—whether through liquidity tools or direct market involvement by state banks. With external pressures from the dollar and global liquidity, the gap between onshore and offshore yuan can widen unexpectedly, especially during volatile overnight sessions. This gap serves as a subtle signal when intervention isn’t clear. For instance, if the offshore yuan weakens while the central bank sets a stronger-than-expected midpoint, it’s typically a message rather than mere oversight. Interest rate differences are still important, but factors like earnings season and trade data also influence the models the PBOC uses. A larger-than-expected trade surplus tends to support stronger midpoint settings. However, if the offshore market ignores that and continues to trade weak, we may see widening forward curves and renewed tensions. From a trading perspective, being patient is often wise, but exposure to currency-sensitive derivatives should consider underlying policy motivations that may not appear on the economic calendar. We’ve observed increased intraday volatility when foreign policy cycles diverge from local guidance. For example, sharp changes in US Treasury yields can lead to quick adjustments in CNH forwards, even if Beijing’s official stance remains steady. Going forward, it’s vital to analyze onshore volume data alongside daily fixings. Previously, one could rely heavily on either, but now, decisions are becoming more aligned and less predictable in advance. Those using volatility strategies in the options market, especially delta-neutral ones, may see lower realized volatility unless there’s a specific trigger. Be ready for exaggerated reactions on low volume days, as state-owned banks often create sudden changes in bid-ask spreads in offshore markets. Keeping an eye on these shifts can provide insight into future bandwidth tightening. We’re also closely monitoring overnight repo rates in Hong Kong. If they rise while the onshore yuan remains stable, it usually indicates limited carry opportunities. In this environment, rolling short-dated structures may not offer the flexibility they did a few weeks ago. So, in the short term, what matters most is not where the yuan is currently trading, but where gaps might appear between policy signals and market reactions. Traders who can understand this gap are more likely to avoid getting caught off guard.

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The Dow Jones Industrial Average fell over 1,000 points after Israel’s surprise attacks on Iran. Although positive consumer sentiment data helped cushion the drop, the Dow reversed its week’s gains, ending a four-day winning streak. The University of Michigan’s Consumer Sentiment Index for June rose to 60.5, beating expectations of 53.5. Inflation predictions also improved, with the 1-year figure dropping from 6.6% to 5.1% and the 5-year figure falling from 4.2% to 4.1%.

Federal Reserve Rate Decision

The Federal Reserve is expected to keep its interest rates unchanged in its upcoming decision. With encouraging inflation data, there is about a 70% chance of a rate cut in September, and another cut could follow by December. Despite recent challenges, the Dow remains above the 200-day Exponential Moving Average at 41,800. The 50-day EMA is close to crossing over, suggesting a possible upward trend if supported by technical levels around 42,000. The University of Michigan’s monthly survey assesses consumer financial and economic sentiment. This survey is a good predictor of future U.S. economic activity, showing how willing consumers are to spend. A strong forecast generally boosts the U.S. Dollar. The unexpected military actions in the Middle East caused a significant drop in major U.S. indices, particularly the Dow, which experienced one of its steepest declines in weeks. While the sell-off was linked to geopolitical tensions, traders also noticed encouraging economic indicators. The University of Michigan’s sentiment reading exceeded expectations and showed improved medium-term inflation predictions, which policymakers closely monitor. This rise in consumer sentiment indicates that confidence is increasing, which may support steady spending through the summer. Lower price expectations give the Federal Reserve room to ease policies without igniting inflation fears. The markets have priced in about a 70% chance of a rate cut in September, with another possible before the year ends. Short-term swaps and implied volatilities for rate-sensitive instruments are starting to reflect this outlook more clearly. From a technical viewpoint, although the Dow fell below short-term support during the session, it stayed above the 200-day EMA, softening the drop’s impact. This long-term average is a key indicator of trend stability, and staying above it indicates that bullish patterns are still present, despite short-term swings. There’s also a narrowing gap between the 50-day and 200-day EMAs; if this crossover occurs with high volume, it could spark increased buying interest among short- to medium-term participants.

Consumer Side Resilience

We see the consumer sentiment report as a sign that consumer spending may stay strong, even with external shocks disrupting broader sentiment. Historically, positive surprises in this survey have supported the dollar and increased risk-taking among investors. However, appetite for risk can quickly change when geopolitical risks rise, which is what happened. In terms of market positioning, hedging activity increased significantly after the weekend news, with spikes in options implied volatility and more short-dated put buying. This indicates uncertainty rather than a clear market direction. For those trading indices or rates, it’s essential to monitor the timing of data releases and any Fed comments before September. Long-term yields remained stable, suggesting some confidence in controlling inflation. Under normal circumstances, this would help boost stocks. However, geopolitical risks complicate this assumption. Hedging against extreme risk or taking low-delta positions is becoming more appealing, especially in sector ETFs and emerging market-sensitive rates. We’re watching for market movement around the 42,000 level. If this level stabilizes on good volume and the overall situation remains stable, it may be time to reevaluate short-term bearish strategies. However, any rally towards previous highs will likely require the Fed’s confirmation, especially regarding September rate expectations. It’s also worth noting the differences in how defensive and discretionary sectors are performing compared to the broader market. Markets are responding in layers—first reacting to headline news, then recalibrating based on macro data. Next, we’ll focus on employment and housing figures, as they significantly influence consumer behavior and Fed projections. While noise will remain high, data ultimately determines the validity of guidance going forward. Create your live VT Markets account and start trading now.

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On Sunday morning, Trump talked about the ongoing conflict between Israel and Iran. He said that the US is not involved right now but pointed out that future involvement is possible. He confirmed there is currently no engagement from the US. Later that day, Trump stressed the US’s continued support for Israel. His remarks indicate that the US stance might change based on how the situation evolves.

Possible Change in US Position

Trump’s comments suggest the US may alter its current position as events unfold in the region. While there is no direct involvement at this time, his support for Israel indicates a willingness to act if the situation changes significantly. This opens up various options for military or diplomatic responses. Although the US is not involved now, an escalation in regional tensions or increased domestic pressure could lead to a different approach. For derivatives traders, this situation creates uncertainty for the week ahead. The market may not yet reflect the risks outlined by Trump’s statements. Historically, markets quickly react when words turn into actions, so there could be new opportunities for trading as responses to headlines emerge. There may be mispricing in energy and defense sectors during this time, which means adjustments are likely. Past geopolitical events provide examples. A small military incident can lead to a swift drop in risk assets before any policy changes occur. Similarly, options markets often take time to adjust, so traders who use leverage or short-term bets should reevaluate their positions. Any escalation, whether planned or accidental, could impact short-term valuations.

Watching News and Military Updates

Trump’s statements clearly show a leaning toward support, not a neutral stance, even without direct action. This signal requires careful monitoring of news and military updates. Changes might affect areas beyond the immediate region, as geopolitical tensions usually impact related asset classes, like commodities and safe-haven currencies. We believe that shifts in how traders view implied volatility will likely begin with energy price futures options and then extend to other areas. Reactions may start during the Asia trading session, depending on any new developments. Weekend news can disrupt illiquid markets, presenting opportunities for those who can act quickly before European markets open. Additionally, it is wise to anticipate more strategies focused on protecting against interest rate changes and commodity-linked indexes. This situation isn’t just about reducing risk; it could lead to selective buying and trading opportunities in different regions, especially where central banks are about to make decisions. This is the time to focus on price spreads, not just levels. In summary, while the shift in Trump’s comments doesn’t mean immediate action, it does require close attention to market movements and early positioning before broader consensus and pricing adjustments occur. Create your live VT Markets account and start trading now.

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The AUD/USD pair is falling due to increased geopolitical risks and limited economic data from Australia. The US Dollar is gaining strength as a safe-haven currency after the attack on Iranian nuclear sites by Israel, which lowers demand for the Australian Dollar. Currently, the AUD/USD is trading under 0.6500, down 0.60% for the day. Market sentiment is shaky due to tensions in the Middle East, which raises fears of a broader conflict. This situation favors the US Dollar over riskier currencies like the AUD.

Economic Data and Technical Patterns

Recent economic data presents a mixed view. The University of Michigan’s Consumer Sentiment Index for June improved, but consumer inflation expectations fell. The market is now focused on upcoming Chinese data, like Industrial Production and Retail Sales, which could affect the AUD/USD given Australia’s strong trade connections with China. From a technical standpoint, the AUD/USD has a bearish trend below 0.6500. A rising wedge pattern suggests a potential decline, with key support at the 20-day Simple Moving Average around 0.6473 and stronger support at the 50% Fibonacci level at 0.6428. If the pair breaks above 0.6535, it could target resistance levels near 0.6550 and aim for 0.6722. The Relative Strength Index (RSI) near 54 indicates weakening bullish momentum. With the pair dipping below 0.6500 and geopolitical uncertainty boosting demand for the US Dollar, the current trend seems largely influenced by external risks rather than local Australian data. The US Dollar’s strength is expected, especially after recent Middle Eastern developments; a larger military response appears more likely, leading investors to seek safer assets like the Greenback. Currently, riskier currencies, such as the Australian Dollar, have little chance for recovery. The weakening bullish momentum indicated by technical markers like the RSI shows that any recent upward momentum is not holding. An RSI near the midpoint suggests that without renewed buying interest, the case for a rise is weaker. The wedge pattern pointing downward indicates a potential short-term decline unless stronger catalysts emerge.

Impact of Chinese Data and External Influences

Upcoming economic data from China will be significant. Since Australia relies heavily on commodity exports and trade with China, any disappointing Chinese Industrial Production or Retail Sales numbers could increase pressure on the Aussie. Conversely, strong figures might disrupt the current trend, but any reaction may be muted if geopolitical issues remain unresolved. Looking at price action, the 20-day SMA at 0.6473 could act as a temporary support, potentially slowing any immediate drop. However, if it breaks, the stronger support around 0.6428 could attract more attention. Movement towards that level might draw larger speculative interest, especially from medium- to long-term traders. Resistance starts at 0.6535. However, without a shift in overall sentiment or stronger data to back it, reaching higher levels like 0.6550 or even 0.6722 is unlikely in the short term. Currently, sellers are more active during rallies, while buyers may hold back until there’s clearer information on geopolitical tensions and the health of the Chinese economy. Market participants should brace for volatility in the coming days. Unexpected news about conflicts or diplomatic efforts could swiftly change currency directions. Even in a generally bearish scenario, short-term price reversals may occur due to speculative interest or shifts in safe-haven demand. The overall message is one of caution. The clash between strong technical resistance and weakening regional sentiment implies low confidence in market direction. We expect volatility to increase without establishing a clear trend over the next few sessions. Shifts in market dynamics, especially during thinner liquidity in the Asia-Pacific trading hours, could heighten the impact of small catalysts. This situation requires tighter control over short-term positions, even if positive data from China boosts sentiment briefly. With another week of minimal domestic economic updates from Australia, global events—particularly from Washington, Beijing, and the Gulf region—are expected to have a major influence. While Australia’s strong trade figures or commodity prices may eventually provide some support, they are currently being overshadowed. For now, economic fundamentals are taking a backseat. Risk management remains crucial. Those looking to make directional bets may prefer approaches that align closely with technical signals rather than broad macro themes until clearer patterns emerge. Create your live VT Markets account and start trading now.

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The South Korean Finance Ministry is closely watching financial markets. The government is dedicated to providing financial and shipping support to help exporters. Ongoing concerns about the impact of the trade war continue to weigh on the situation. As of August 2, 2023, the South Korean won is feeling the effects of these worries. The Finance Ministry in Seoul is actively monitoring the markets, indicating that officials are prepared to take action if necessary. They’re not just observing; they’re implementing measures like shipping support and credit relief for exporters to alleviate the pressure on significant international trading businesses affected by lower demand and higher shipping costs. Trade tensions are not easing but are instead building up, which is gradually undermining confidence. By early August, the currency is showing signs of strain. The won is declining, reflecting a shift in sentiment. This isn’t just a reaction to external conflicts; it’s also due to capital shifting towards more secure assets. We’ve witnessed this type of pressure before. When large economies impose tariffs or restrict exports, smaller export-driven nations can feel the impact on their currencies and interest rates. This time, with South Korea’s dependence on high-tech exports and ongoing drops in overseas orders, it’s clear that monetary policy alone won’t be sufficient to turn things around. There are signals in the bond and currency markets. Traders who depend on interest rate hedges or foreign exchange swaps might notice spreads changing faster than the news. Price movements are beginning to reveal more than just short-term uncertainty; they now reflect caution regarding South Korea’s long-term growth potential. In the coming weeks, we anticipate one of two outcomes: either the won will continue to decline, or policymakers will intervene more aggressively if the drop intensifies. Either way, volatility is expected to continue, especially in markets that heavily rely on future rate expectations. Forward rates may start to indicate growing pessimism, and this could affect markets beyond Asia. Park’s department has already introduced incentives to stabilize the currency. Such measures generally reduce speculative trading. However, when larger issues like trade slowdowns and declining global semiconductor demand persist, short-term relief might quickly turn into more significant challenges. We believe that over-focusing on headline CPI or central bank statements could mislead us. Instead, examining secondary market behaviors and open interest in FX options reveals a deeper narrative. Volatility measures on out-of-the-money puts have increased, suggesting that traders are buying protection rather than selling it. The situation isn’t just about Korea’s output; it also involves how overseas buyers are managing stock levels and contracts. Recent data from Cho indicates that several trading partners have reduced forward orders, and such trends typically don’t reverse quickly. Considering these changes, we’re updating our models to reflect a broader range of USD/KRW movements. While current levels might seem oversold, there’s still potential for a test of previous lows. Timing trades around policy meetings and export data releases may create opportunities, but patience and adaptability will be crucial. Looking ahead, solid risk-reward setups will likely emerge as export volume data becomes clearer. Until we see improvement in that area, pressure on derivative pricing, especially those related to cross-border fund flows, is expected to remain high.

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The USD/JPY pair is trading above 144.00, boosted by rising tensions in the Middle East and differences in central bank policies. The US Dollar is gaining strength as a safe-haven currency, while the Japanese Yen is weakening partly because analysts expect the Bank of Japan to keep interest rates unchanged. Recent Israeli military actions in Iran have raised geopolitical risks, increasing the demand for USD. Although BoJ Governor Ueda has suggested a possible rate hike, recent economic indicators show Japan’s recovery is still weak. The U.S. Federal Reserve might cut rates in September, based on new inflation data and consumer sentiment.

Technical Analysis

Currently, USD/JPY is at 144.14, near the 23.6% Fibonacci retracement level. Traders are watching the convergence of the 20-day and 50-day Simple Moving Averages, indicating uncertainty and the potential for significant market movement. If USD/JPY breaks above 144.37, it could lead to higher Fibonacci levels. However, if it drops below 143.00, further declines may follow. The value of the Yen is affected by Japan’s economic situation, BoJ policies, compared bond yields with the US, and overall market sentiment. The Yen usually performs well during market stress, as it is viewed as a safe-haven currency. The current USD/JPY level, just above 144, reflects strong reactions to global tensions and diverging monetary policies. Israeli forces’ actions in Iranian territory have contributed to market-wide risk aversion, pushing investors towards the safety of the Dollar. While the Yen has a historical reputation as a safe haven, it isn’t showing its usual strength right now. Ueda had recently maintained a dovish stance, although there was some openness to rate changes earlier this year. However, domestic data suggests that Japan’s recovery is uneven. Industrial output, wages, and consumption are not robust enough to inspire confidence. Therefore, a rise in short-term rates in Japan seems unlikely for now. This situation could keep downward pressure on the Yen, especially compared to US interest rate expectations, which are only tentatively pricing in a Fed move for later this year.

Market Dynamics

We see how these fundamental factors are affecting prices. At around 144.14, USD/JPY is staying above a key Fibonacci level, providing insights into market positioning. Attention is on the convergence of the 20- and 50-day SMAs—a common setup that often leads to increased volatility. The tight range just below 144.40 indicates traders are cautious before making a move. If this level breaks, it could open the way to 145.00 and beyond, triggering more buying opportunities. On the downside, if USD/JPY falls below 143.00, it may test previous support levels, and momentum traders could quicken that drop. It’s all about these key levels. For traders, short-term breaks followed by solid confirmations may offer better results than trying to predict direction without clear patterns. The difference in real yields still favors the Dollar. US Treasury yields, especially short-term ones, haven’t dropped significantly, even with low CPI readings. This uncertainty suggests that traders are on alert regarding the Fed’s next moves. Overall, there’s a sense of waiting—both in price movements and policy decisions. With yields remaining high, it’s tough to foresee a strong Yen comeback. For now, we have a chart showing underlying tensions. These tensions involve not just interest rates or conflicts, but also market reactions on a daily basis. They are mechanical in some aspects, emotional in others, and always pattern-driven. Given these conditions, we advise shorter holding periods and more selective trade entries. Use tight stops, particularly in this environment where news can quickly change market trends. Momentum is fragile, likely to remain so as long as central banks send mixed signals without decisive actions. Create your live VT Markets account and start trading now.

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New bank loans in China hit 620 billion yuan in May, which was below the expected 850 billion. This follows a nine-month low recorded in April. Year-on-year loan growth dropped to a record low of 7.1%, down from 7.2% in April. Household loans rose slightly by 54 billion yuan in May, but demand for corporate loans weakened further.

broad M2 money supply

The broad M2 money supply increased by 7.9% year-on-year, falling short of the expected 8.1% and down from 8.0% in April. Total social financing (TSF) growth remained steady at 8.7%, primarily due to more government bond issuances. Ongoing deflation and high real borrowing costs seem to be dampening private credit demand, despite some easing from the central bank. Analysts at Capital Economics anticipate further rate cuts of up to 40 basis points this year. The People’s Bank of China (PBOC) plans to add funds via reverse repos for the second time this month. This article highlights a slowdown in credit growth in China, showing a reduced interest in borrowing despite minor actions from the central bank. The figures indicate a disappointing rise in new loans during May—only reaching 620 billion yuan compared to the forecast of 850 billion. This suggests banks are lending less and that both businesses and households lack eagerness to borrow, even with credit available. The situation is reflected in the sluggish year-on-year loan growth, which has dipped to 7.1% from the already low 7.2% in April. Household loans saw a tiny increase of 54 billion yuan, while businesses indicate a clear reluctance to borrow. A major cause of this hesitation is the high cost of borrowing when adjusted for inflation, which is being pushed down by deflation. This means that even if nominal interest rates are low, real rates stay high when prices are stagnant or falling, discouraging debt-driven expansion. Monetarily, the broader M2 money supply grew less than expected, also declining from the previous month. This trend reflects a similar issue—money circulation in the economy is slowing. While total social financing stayed stable, this was not due to an increase in borrowing demand from businesses or households, but rather due to government bond activities. In summary, the government continues to borrow and spend, while the private sector pulls back. This backdrop sets the stage for potential policy adjustments.

implications of cooling credit

Zichun Huang from Capital Economics expects further easing, predicting up to 40 basis points in rate cuts later this year. In response, the central bank has stepped in again with reverse repos to increase liquidity in the market. This shows their intent to enhance the short-term money supply to stimulate more lending. We are closely monitoring disinflation risks, changes in the M2 trend, and policy measures like open market operations as they significantly impact rate-sensitive strategies. It becomes challenging to position for growth when loan growth declines alongside private demand. If the central bank goes ahead with rate cuts and liquidity boosts, we might see yield compression. Funding rates could remain stable or even drop, which might lower implied rates as well. This gives us an opportunity. Higher chances for layered rate adjustments bolster the directional bias in short-term interest rate markets. We expect shifts in the term structure to reflect this cooling credit cycle, suggesting that positioning for curve steepening while keeping a neutral stance further out could be advantageous. With new lending below expectations, especially after a weak April, current trends are likely part of an overall cooling phase rather than a one-time event. Keeping an eye on reverse repo activity, the pace of government bond issuance, and changes in the PBOC’s MLF activities will help refine our rate expectations. The movement of spreads between instruments linked to government policy and those tied to corporate credit may provide entry points during this quiet issuance period. Additionally, the market appears less volatile than in the past, making short-term repricing events more reflective of fundamental credit data instead of random spikes in uncertainty. Therefore, it’s wise to compare new loan and M2 figures alongside inflation data and repo rates in the upcoming sessions. Adopting a patient approach based on balance sheet conditions may offer steadier returns during this phase. Create your live VT Markets account and start trading now.

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Gold prices have risen for three days in a row due to the conflict between Israel and Iran, leading to a cautious approach in financial markets. XAU/USD is now priced at $3,422, showing an increase of over 1%. Tensions escalated after Israel targeted Iran’s military, creating instability in the region. Gold reached a five-week high of $3,446 but dipped slightly as traders took profits. In the U.S., inflation continues to decrease, according to the latest Consumer Price Index (CPI) and Producer Price Index (PPI) figures. A survey from the University of Michigan indicates growing optimism, though there are still concerns about rising prices. The U.S. government has warned Iran about its nuclear activities, linking the conflict to these actions.

Upcoming Federal Reserve Policy Meeting

All eyes are on the Federal Reserve’s upcoming monetary policy meeting, which will provide updated economic forecasts. Key indicators like Retail Sales, Industrial Production, housing, and jobs data could influence the price of Gold. Analysts forecast that Gold could surpass $3,450, with the Relative Strength Index (RSI) suggesting a bullish trend. If the price falls below $3,450, support may be found at $3,400, and then at the 50-day Simple Moving Average (SMA) of $3,281. Gold serves as a protection during crises and against inflation and currency decline. In 2022, central banks added 1,136 tonnes of Gold to their reserves, valued at about $70 billion—marking their largest annual growth. Typically, Gold rises when the U.S. Dollar and Treasuries go down, especially when interest rates are low. The trends in the U.S. Dollar continue to impact Gold prices. As Gold prices rise for a third consecutive session amid geopolitical tensions, the metal is reinforcing its role as a secure asset during uncertain times. After Israel attacked Iranian military sites, market sentiment shifted toward safety, significantly increasing demand for non-yielding assets. Consequently, the XAU/USD pair reached levels not seen in over a month, nearing $3,446 before dropping slightly as traders took profits. Such profit-taking is common after consecutive gains and doesn’t indicate a loss of optimism.

Investor Sentiment and Market Dynamics

The recent drop in U.S. inflation measures, especially the CPI and PPI, adds complexity to the situation. While price growth is slowing, inflation remains above the Federal Reserve’s comfort zone. The University of Michigan’s consumer sentiment survey indicates a slight improvement in economic outlook, but worries about buying power continue. Policymakers have a limited timeframe to act without increasing market anxiety. The Fed’s upcoming meeting, along with new economic forecasts, will provide important insights. We will keep an eye out for any changes in tone or outlook, especially with fresh data on consumer spending, hiring, and industrial activity. These figures will influence expectations on how long current interest rates will remain or if the central bank may delay easing policies. Gold, a non-yielding asset, typically benefits when interest rate expectations decrease. The outlook suggests that Gold could move higher if buyer momentum continues. RSI indicators show that buyers are in control, and if prices convincingly break above $3,450, we might see even higher levels. On the other hand, any drop may find support at $3,400, with further backing around the 50-day SMA at $3,281. For investors managing exposure, these levels can help in making clear entry and exit decisions. It’s worth noting that central banks accumulated large quantities of Gold in 2022, reflecting enduring confidence in the asset. With over a thousand tonnes added to their reserves, these institutions appear to be aiming for long-term stability rather than quick gains. Their strategy was influenced not only by inflation but also by evolving attitudes toward the Dollar and sovereign debt. Gold’s usual inverse relationship with the U.S. Dollar and Treasury yields remains strong. Should interest rate expectations soften further, we anticipate a decline in the Dollar, which may add upward pressure to XAU/USD. Traders looking beyond immediate news should keep this dynamic in mind. In the coming weeks, staying responsive rather than reactive will be crucial. Although the geopolitical situation may remain tense, the interaction with monetary policy and broader economic indicators will provide clearer trading signals. Sudden market shifts can create opportunities and risks, so careful attention to these trends is important. Create your live VT Markets account and start trading now.

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