Aussie and Kiwi Rise as Australia's Inflation Beats Expectations

The Aussie and the Kiwi rose on Wednesday against major currencies, following a higher-than-expected rise in Australia's inflation. At around 5:42 am GMT, the U.S. dollar lost 0.88% of its value against the Aussie to trade around 0.9046. The greenback has been losing ground against major currencies in the last couple of days as traders become increasingly agitated by a looming U.S. default, but the Aussie made inroads into other currencies as well. The euro fell 0.77% to stand around 1.3143, while the British pound is trading around 1.4858, or 0.78% below its previous close. At the same time, the Kiwi is trading at 1.1421 against the dollar (up 0.55%), 1.6594 against the euro (up 0.44%), and 1.8758 against the pound (up 0.46%). The Aussie found support in a higher-than-expected increase in inflation. According to the Australian Bureau of Statistics, Australia's CPI increased by 0.9% in the June quarter, compared to the previous quarter. The Q2 results were below a 1.6% increase in the March quarter, but above 0.8% expected by most analysts. In spite of rising inflationary pressures, Reserve Bank of Australia, Australia's central bank, has left its interest rates unchanged since November 2010. So far, Australia's central bank has blamed temporary factors on the rising inflation. However, many analysts believe the central bank's board might be forced to re-think its position following the latest sign of rising price levels. The Kiwi found support in improving business confidence. According to the National Bank of New Zealand, New Zealand's business confidence rose from 38.7 in June to 43.7 in July. At the same time, the activity outlook improved from 46.5 in June to 47.6 in July. Australia and New Zealand were among the star performers among the developed countries following the financial crisis. Recently, both countries have been hit hard by natural disasters (Australia by floods and New Zealand by an earthquake). The latest data suggest that both countries are recovering. Both countries are major exporters of commodities, so continuing rise in the prices of commodities should provide an additional boost to the economies of Australia and New Zealand. On Wednesday, gold rose to new heights as the yellow metal approaches the $1,625 mark. Presently, gold is trading around $1,624.55, or 0.2% above its previous close. Silver is also climbing higher, rising 0.1% to $40.97. However, crude oil fell 0.1% to $99.34. The price of copper is also in retreat, sliding 0.04% to $4.483. The prices of commodities are increasingly linked to the performance of China, which has become the world's largest consumer of raw materials. As a result, both Australia and New Zealand may be spared the worst effects of a possible debt collapse in the United States and the Eurozone, since their economies are now more and more linked to China. ACTION ITEMS:

Bullish:
Traders who believe that rising commodities prices will continue to support the economic recovery in Australia and New Zealand, which should provide some steam for the Aussie and the Kiwi, might want to consider the following trades:

• GreenHaven Continuous Commodity Index Fund GCC is a long play on commodities. GCC may rise if the prices of commodities rise.

• CurrencyShares Australian Dollar Trust ETF FXA is a long play on the Aussie. FXA may rise if the Aussie appreciates.

• WisdomTree Dreyfus New Zealand Dollar Fund BNZ is a long play on the Kiwi. BNZ may rise if the Kiwi appreciates.

Bearish:
Traders who believe that the Aussie and the Kiwi are already overvalued, which might have detrimental effect on the countries' exporters, may consider an alternate positions:

• PowerShares DB Commodity Short ETN DDP is a short play on commodities. DDP may fall if the prices of commodities decrease.

• ETFS Short New Zealand Dollar Long US Dollar ETC (Sterling) ETF (SNZP) is a short play on the Kiwi. SNZP may rise if the Kiwi depreciates.

• ETFS Short Australian Dollar Long US Dollar ETC ETF (SAD) is a short play on the Aussie. SAD may rise if the Aussie depreciates.

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