Major FX pairs remained largely rangebound as regional equities experienced slight declines.
Japan’s Nikkei 225 fell by 0.2%, while Hong Kong’s Hang Seng and the Shanghai Composite both decreased by 0.1%.
New Zealand Trade and Deficit
In New Zealand, June trade data revealed a monthly surplus of NZ$142 million, but quarterly exports dropped for the first time in nearly two years. The country’s annual trade deficit reached NZ$4.37 billion.
The Reserve Bank of Australia’s July meeting minutes showed a cautious easing bias, contrasting with strong market expectations for an anticipated rate cut that did not occur.
China’s PBOC set the yuan reference rate at its strongest level since November 8, surpassing expectations by 175 pips, indicating support for the currency.
In geopolitical developments, Donald Trump stated he would take further action against Iran if necessary, mentioning issues related to nuclear activity.
Buying Opportunities in Low Volatility
Given the low volatility in foreign exchange markets, we see an opportunity in buying options. The Deutsche Bank Currency Volatility Index has been hovering near two-year lows, making strategies like straddles or strangles on major pairs unusually cheap. This allows us to position for a significant price breakout without betting on a specific direction.
The Australian central bank’s minutes create a clear trade setup based on their divergence from market expectations. With interest rate markets currently pricing in a more than 70% chance of a rate cut by November, we view the bank’s hesitation as temporary. We believe positioning for eventual AUD weakness through put options or by selling AUD/JPY is a prudent strategy.
New Zealand’s first quarterly drop in exports in nearly two years, as mentioned in the trade data, points to underlying economic weakness. This, combined with the large annual deficit, suggests the NZD will struggle to sustain any rally against the US dollar. We expect the NZD/USD pair to remain capped, presenting opportunities to sell into strength.
The stronger yuan fixing is a deliberate signal of stability from China’s central bank, but we view it with skepticism. Historically, such strong support has sometimes preceded a controlled depreciation to boost competitiveness. Traders should remain nimble, as a policy reversal could lead to a sharp rebound in USD/CNH.
The comments from the former US President regarding Iran reintroduce geopolitical risk, which typically benefits safe-haven assets. We have seen the Japanese Yen strengthen by over 1% against the Australian dollar during similar periods of Middle East tension in the past few months. Therefore, we should consider increasing exposure to the yen against riskier commodity currencies.
