AUD/USD remains in a period of consolidation towards the lower-end of its recent range. There appears little to drive AUD/USD in either direction at present. It is likely that AUD/USD will continue to remain close to its 2.5 year average of 1.0310. This week in Australia, a host of partial economic indicators are due. Intra-day direction in AUD/USD is likely to come from offshore. The China April manufacturing PMI is due Wednesday. We expect the PMI to remain indicative of a Chinese economic expansion, and print around 50.8 for April (market expectations 50.7, March’s reading 50.9). AUD/JPY may drift below 100.00 over the course of this week as consolidation occurs in USD/JPY. But there is nothing of note to suggest a change of trend in AUD/JPY, and so dips appear good medium-term buying opportunities.
The USD is likely to remain heavy this week, in line with low US bond yields. US ten year bond yields closed on Friday at 1.66%, their lowest level in 2013. The first estimate of US Q4 GDP was even softer than our below-consensus call, at 2.5%, as US government spending (led by a decline in defence spending) declined for the tenth quarter in the past eleven quarters. We expect no change in Fed policy or any material changes in the post-meeting statement on Wednesday (Thursday morning Australian time). In our view, the weakness in US growth and very low inflation (PCE inflation is only 1.3%pa) are likely to encourage the FOMC to continue buying US$85 billion of assets per month, until at least early 2014 which should keep the USD heavy. US non-farm payrolls (Friday) should be around twice as large as March’s weak 88,000 increase but employment growth will not be strong enough to change the FOMC’s policy stance. With few Canadian developments scheduled, we expect USD/CAD to move in line with broader USD moves this week. Bank of Canada governor Carney delivers a speech (Friday). USD/CAD is likely to find support at 1.0075 (100dma).
EUR/USD has lifted 0.3% in early Asian trade driven by political developments in Italy. Italian politicians have finally formed a government and the Democratic Party’s Enrico Letta was sworn in as Prime Minister. Letta has secured support of Berlusconi’s party to form a government. The immediate focus now shifts to the ECB meeting on Thursday. There are building market expectations of further ECB policy action, and the majority of economists surveyed by Bloomberg now expect the ECB to cut the refi-rate by 0.25% to 0.5% at this week’s meeting. In our view, there appears to be a greater possibility the ECB initiates further measures to improve the Eurozone monetary policy transmission mechanism via more direct bank lending (ECB balance sheet expansion) but we acknowledge a cut to the refi-rate is also real possibility. Other Eurozone data this week is unlikely to be EUR positive (business climate indicator 29th, CPI, unemployment rate 30th, manufacturing PMI 2nd). EUR/USD is now trading around 1.3060, near the centre of the past month’s range (1.2746 – 1.3202). We expect this range will hold over the week ahead. Ironically, EUR/USD may rally if the ECB eases policy but it is hard to be sure. In any event, we would expect EUR/GBP to decline, so would edge on the side of EUR/USD edging lower.
GBP/USD continues to recover and lift from its March low of 1.4832. From a technical perspective, the 50% retracement level from GBP/USD’s January high of 1.6381 and its March low of 1.4832, rolls in around 1.5607. We maintain our strategy of selling into GBP/USD rallies and would suggest selling GBP/USD at 1.5600. Depreciation pressure remains on GBP/USD led by the combination of negative real interests and a current account deficit at a 22 year high of 3.7% of GDP. If the ECB were to further ease monetary policy at this week’s Thursday meeting, we would expect intra-day EUR/GBP selling may generate the lift in GBP/USD to the 1.5600 sell-range.
NZD/USD is likely to be largely unaffected by this week’s New Zealand data. But the economic data will provide some insights into key themes within the NZ economy. Business confidence has not been dented so far by the drought, with confidence improving since the mid-2012 soft patch. Meanwhile, a lift in pricing intensions is a tentative sign the weakness in inflation pressures may be starting to bottom out. The latest ANZ business outlook survey will provide insights into these developments (2am BST tonight, 9pm in New York). Credit aggregates (4am BST, 11pm NY) will be keenly watched, given the RBNZ’s concerns about the housing market strength. At last week’s official cash rate review, the RBNZ noted it “does not want to see financial or price stability compromised by housing demand getting too far ahead of supply”. The latest building consent data for March is also due tonight (11.45pm BST, 6.45pm NYT). We expect that last week’s range (0.8361 – 0.8563) in NZD/USD will be maintained, with the risk skewed slightly downwards if we are correct about cross/JPY selling this week.
USD/JPY eased 2 big figures since Friday to a low of 97.35 in Asia today. It appears some large unwinding of long USD/JPY positions occurred after the BoJ made no change to policy settings and USD/JPY “failed” to break above 100.00 last week. Not that any monetary policy change should have been expected by the BoJ (our analysis is in the attached note) it just means that USD/JPY will spend a longer period of consolidation before lifting above 100.00. This week, the key Japanese data release is March industrial production (tonight12.50am BST, 7.50pm NY). Although production is expected to lift modestly over the month, activity remains significantly down on year-ago levels. We continue to expect that JPY will consolidate following the large movement over the past 6 months, where USD/JPY has lifted nearly 30%. We expect USD/JPY can edge lower towards the 30-day moving average of 96.85, given low level of US 10-year govt. yields, and the associated narrowing of the US-Japan interest rate spread. But the collapse in Japan’s current account surplus suggests buying USD/JPY between 96.85 and 96.50 should work well over the medium-term.