CBA FX Strategy; NY Open
The European morning has been quiet in terms of news-flow but markets have generally rallied irrespective. European equity indices are 1.0%-1.5% higher, USD/JPY is up over 102. EUR/USD has held over the 1.29 level through the morning. The only scheduled data interest of note will be in the US with publication of the May Conference Board consumer confidence survey this afternoon. A modest improvement is anticipated, but it is unlikely to have much currency market impact.
The lift in US ten-year swap yields and volatility in the Japanese equity markets and cross/JPY remained the main focus in today’s Asian trade. The Japanese equity market closed 1.2% up, and this has coincided with a lift in USD/JPY and cross/JPY. Comments by the BoJ’s Miyao late in the Asian session were in line with recent rhetoric. According to Miyao, the BoJ wants to achieve its 2% inflation target “as soon as possible”, and the aim of the BoJ policy easing is to put “downward pressure on yields”. Miyao also stated that the recent rise in JGB yields is related to the higher US yields and Japanese equity market gains. As we have outlined previously, given the structural headwinds in the Japanese economy we do not expect the BoJ to achieve its 2% inflation target. In addition, should JGB yields continue to rise, we would expect the BoJ to act and increase its asset purchases. An objective of the BoJ’s new policy is to keep JGB yields low. Given the recent strong correlation between USD/JPY and Japanese equities, any further declines in the Nikkei over coming weeks are likely to translate in mild downward pressure in USD/JPY. Nevertheless, based on the deterioration in Japan’s current account surplus we continue to expect the JPY to weaken over the medium-term, and for the correlation between Japanese equities and the JPY to ease. Based on our structural JPY outlook, our earlier published research of accumulating USD/JPY on any dips below 100.50 still stands.
In addition to the movements in the Japanese markets, AUD/USD near-term direction will be influenced by the release of the 2nd estimate of Australia’s 2013/14 capex spending survey (Thursday). According to CBA economists, to confirm an outcome of nominal capex growth of around 6%pa in 2013/14, a dollar figure of around A$154bn is required. However, it is important to note that there is no consensus survey undertaken by Reuters or Bloomberg on the 2013/14 estimate. Hence, the market reaction is difficult to forecast if the actual survey number comes in lower (or above) our A$154 billion estimate, because A$154 billion could be above (or below) other forecaster’s estimates. While we continue to believe the Australian economy will face headwinds over the next twelve to eighteen months as mining investment falls from its levels equivalent to 8.0% of GDP, the economy should still be able to grow slightly below trend as net exports, residential investment and household consumption firm. As we have outlined previously AUD has tended to underperform in May, but has rebounded in June/July. A relatively firm capex survey could prove to be the catalyst for a rebound in the AUD, particularly given we do not expect the RBA to follow up with another rate cut in June (4 June) (CBA economists expect another rate cut in August) and given Q1 Australian GDP (5 June) is expected to be strong.
NZD/USD has been stable so far this week. NZD volatility is likely to pick up later in the week, particularly on Thursday. In today’s Asian session it was announced that RBNZ Governor Wheeler will deliver a speech on Thursday 5pm EST Wednesday. Wheeler’s speech is titled “forces affecting the New Zealand economy and policy challenges”. Given the title, we assume the NZD and its impact on the New Zealand economy will be a major focus. Despite the recent decline in the NZD, as has been the trend in recent RBNZ commentary, further jawboning regarding the NZD is likely (should it be discussed). While it can never be fully discounted, based on the RBNZ’s strict criteria, we do not expect the RBNZ to overtly intervene to weaken the NZD. However, further “passive” intervention (i.e. portfolio adjustment) is likely. In that regard, another focus on Thursday will be on the RBNZ’s monthly FX transactions (11pm EST Thursday). This data will indicate how much “passive” intervention the RBNZ undertook in April. Based on the aggregate balance sheet data already released, we estimate that the RBNZ undertook around NZ$400‑500mn worth of NZD selling in April. While this would exceed the amount of NZD’s sold in December 2012, it would remain significantly below the NZ$2.4bn sold during the RBNZ’s “active” intervention in mid‑2007. A short-term tactical long AUD/NZD position (at current spot 1.1923) may prove to be opportune for a move back up to 1.2050.
EUR/USD has range traded in today’s trade. In our view, the bias is for EUR/USD to edge back down towards its recent lows in coming weeks. This week the key focus will be on May Eurozone CPI (Friday), which is expected to lift to 1.4%pa in May from 1.2%pa in April. Nevertheless Eurozone CPI will remain well-below the ECB’s 2%pa target. Any downside surprise to the Eurozone CPI will likely raise expectations for more ECB easing, adding to downside pressure to EUR/USD, particularly in an environment of a firmer USD and Eurozone economic underperformance. Yesterday, two ECB members (Asmussen and Praet) highlighted that the discussion around further stimulus is continuing. According to Asmussen, the ECB is currently having an “open discussion” on negative deposit rates, and that while he is in the camp that is “less open” to the idea of a negative deposit rate, there are some members that are “more open than others”. At the May ECB press conference President Draghi noted that the ECB is "technically ready" for a negative deposit rate and that the ECB will "address and cope with" any unintended consequences if they decide to introduce a negative deposit rate. Based on Assumen’s comments overnight, the debate among the ECB regarding a move to a negative deposit rate in June is likely to be extensive. A lot will depend on the ECB's new forecasts and the outlook for the expected economic recovery. On this front, Praet noted that the ECB sees stabilization of contraction and the start of a gradual recovery in H2 2013. This appears to be a slight delay from the ECB’s previous forecasts, though is unsurprising given the recent data flow.