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CBA FX Strategy: NY Open

Posted by Marge Maresca on May 13, 2013 8:07:00 AM

The European week has started slowly with no meaningful news-flow of note this morning. Risk assets have pulled back modestly following last week’s gains. EUR/USD has held steady a little under the 1.30 level, EUR/GBP is likewise little changed on the day. USD/JPY is also around levels where it closed last week around 101.60, albeit having popped over the 102 level temporarily in the Asian session. The main economic interest of the day will be the US advance retail sales print for April in a little while.

We expect USD strength to continue into the start of this week.  US 2 year yields lifted 4bps while US 10-year bond yields have increased sharply in the past two weeks (from 1.67% to 1.90%), providing some fundamental support to the USD.  While US economic data is likely to remain soft this week, consistent with a mid-year slowdown, expectations are already low, including for April retail sales (8.30am EST/1.30pm BST), industrial production (Wednesday) and CPI (Thursday).  Therefore, the risk is for an upward surprise and a stronger USD.  There are seven Fed speakers this week – all the voters that are speaking are generally dovish about the economy (Rosengren, Raskin and Williams).  Bernanke is speaking though is not expected to talk about the US economy or FOMC monetary policy. 

As a result of USD strength, AUD dipped below parity for the first time since June 2012 on Friday, and been near or below parity over the Asian trading session today.  With the USD firm, the AUD is likely to remain soft, at least in the early part of the week.  The Chinese economic data released today (1.30am EST/6.30am BST - industrial production, retail sales and investment) was all very close to expectations, and accordingly didn’t impact the AUD.  The Australian budget (Tuesday evening in Australia) is very unlikely to have any effect on the AUD. 

USD/JPY has traded above 102.00 in Asia today. Although USD/JPY has dipped back towards 101.60 in late Asian trade, we expect USD/JPY appreciation to persist, led by higher US bond yields and the collapse of the Japanese current account surplus. JGB futures trading was briefly suspended today due to rapid price moves.  Last weekend’s G-7 meeting of finance ministers signalled acceptance of the yen’s decline and is no barrier to further yen weakness.  We expect Japanese Q1 GDP to improve from Q4’s 0.0%, but by less than the consensus (Thursday).  Overall, the weak Japanese economy and a stronger USD should combine to keep USD/JPY firm this week.

In line with the firmer USD, EUR/USD has edged lower.  The bias is for further modest EUR/USD declines in the near-term.  The dataflow out of the Eurozone is likely to keep EUR on the back foot.  The first estimate of Q1 Eurozone GDP (Wednesday) is expected to show another quarter of contraction.  This would mark the sixth consecutive quarter of decline.  In addition, although the May print of the ZEW survey (Tuesday) may show some improvement, the index should remain off its recent highs.  Overall, the data should keep market expectations of further ECB policy easing elevated.  Although the Eurozone’s record current account surplus (1.3% of GDP) should remain an avenue of EUR support, the macro environment should offset this and weigh on the EUR. 

GBP/USD continues to reverse its recent gains.  The prospect of a firmer USD is likely to keep the bias on further modest declines.  In addition, a key focus this week will be on the Bank of England’s (BoE) latest inflation report (Wednesday).  We don’t anticipate any meaningful changes to the BoE’s growth or inflation profiles in May.  While the UK economy has shown some improvement recently, given the underlying issues faced in the UK, we expect the BoE to present a cautious assessment of the UK economic outlook.  As such, in our view, the underlying tone of the report should keep the door to further BoE action over coming months open, particularly when new BoE Governor Carney commences his tenure in July. 

NZD/USD drifted lower in New York trade on Friday.  The broader USD direction is likely to be the major determining NZD/USD factor this week.  If the USD strength continues, the year’s NZD/USD low (0.8162) could easily be tested this week, particularly if the Q1 New Zealand retail sales under performs the market expectations as our New Zealand economists expect (Tuesday).  The New Zealand Budget (Thursday) will continue the Government’s approach of achieving a surplus in the 2014/15 year through modest spending restraint.  The 2012/13 deficit is likely to come in smaller than previously forecast, thanks largely to higher than expected tax revenues.  We do not expect the budget to have a lasting impact on the NZD. 

USD/CAD has lifted over 1% off last Thursday’s low of 1.0014, as the USD surged, and Canadian labour market data failed to induce any CAD strength. The Canadian economy added 12,500 jobs in April, and the unemployment rate held steady at 7.2%.  The result was a touch softer than median expectations of 15,000, and importantly, there were no revisions to the prior month’s shock drop in employment of -54,500.  Recent labour market reports suggest there is very little momentum in the Canadian economy, and plenty of spare capacity.  This week’s focus is on CPI data for April (Friday), which is likely to show another very week outturn, with annual inflation potentially falling out of the bottom of the Bank of Canada’s 1-3% target band.  A weak inflation print will serve as a reminder the BoC is likely to remain on hold for an extended period, which combined with our expectation of a firmer USD suggests USD/CAD will drift higher this week.


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