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CBA FX Strategy - NY Open

Posted by Marge Maresca on May 1, 2013 7:57:00 AM

Most of continental Europe is shut for the May Day public holiday. Markets have been very quiet accordingly. Main news through the morning has been in the UK. The April manufacturing PMI improved to 49.8 from 48.6, still indicative of gradual contraction but a little better than expected. GBP bounced following the release, GBP/USD has rallied up to 1.5590 so far this morning, EUR/GBP down to 0.8460. All is not doom and gloom in the UK economy. The economy grew modestly through QI and should post positive, if unexciting growth through 2013 as a whole. GBP can recover a little further following its sharp QI sell-off. But more stimulus is still expected in due course, suggesting that the medium-term case for weakness remains intact.

EUR/USD squeezed higher yesterday, and has edged up a little further to the 1.32 level this morning.  Currency markets are focused on the US today, first with top-tier economic data, then the FOMC meeting. The USD is likely to remain heavy ahead of the FOMC statement later today (2pm EST/7pm BST).  US ten year bond yields remain just above the year’s low and equity markets are lifting.  US equities are being supported by low inflation, a commitment by the FOMC to low interest rates, and some nominal GDP growth.  The S&P 500 equity index increased to a fresh record high in the US yesterday.  By comparison, other equity markets remain well off their record highs.

•           The UK’s FTSE remains 8% below the record high reached in 1999.

•           Europe’s Stoxx50 remains 51% below the record high reached in 2000.

•           Japan’s Nikkei remains 64% below the record high reached in 1989.

•           Australia’s ASX remains 24% below the record high reached in 2007

We expect no change in Fed policy nor any material changes in the post-meeting statement.  In our view, the weakness in US growth and very low US inflation (PCE inflation is only 1%pa, below the levels where QE1, QE2 and QE3 were introduced) 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.  See attachment for more details. 

Although the FOMC is the main event for the next 12 hours, we cannot ignore the US ISM Manufacturing survey (9.30am EST/2.30pm BST).  We expect the ISM index for April will dip towards 50 following March’s 51.3 print, which adds to our view of a heavy USD in the upcoming US session.

AUD/USD and NZD/USD have been well supported today, trading around 1.0370 and 0.8570 respectively.  The main data focus in Asia was the April China Manufacturing PMI today (which printed at  50.6, near expectations centred on 50.7.  The index remains indicative of Chinese economic expansion.  We expect AUD and NZD to continue to remain well supported, particularly with the USD likely to remain heavy ahead of the FOMC later today.

USD/JPY continues to consolidate around 97.50. The US-Japan ten-year bond spread remains under some downward pressure, driven mainly by lower US ten-year bond yields. The bond spread has declined to 106bpts. Until the bond spread turns higher, driven by some better US economic data, USD/JPY may find it difficult to rally. A dip in USD/JPY to the 30-day moving average of 96.85 and down to 96.50 should provide an attractive medium-term buying opportunity as the collapse in Japan’s current account surplus drive medium-term JPY weakness.

 Margaret Maresca



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