CBA FX Strategy; NY Open
Modest risk off has been the theme through the European morning helped along by more soft European economic news. German unemployment jumped 21k in May, the largest monthly increase since 2009. Italian business confidence inched up, but remains subdued. Eurozone loans to corporates continued to slide in April. Meanwhile, in the UK the CBI distributive trades survey also softened up unexpectedly in May. The moves were also part catch-up to the soft second half to the US session yesterday. Equity indices are around 1% down in Europe, USD/JPY has dipped to 101.50 and the USD index generally has been under modest pressure through the morning. EUR/USD has popped back up over the 1.29 level, despite the generally lacklustre European news-flow. As outlined on Monday, we think EUR/USD can retest its seven week low of 1.2746 in the near-term. The German CPI is released today (8am EST/1pm BST) ahead of the Eurozone CPI on Friday. Analysts expect both the German and Eurozone CPIs to accelerate in May but to remain below the ECB’s 2%pa target. Any downside surprise to German or Eurozone CPI will likely raise expectations for more ECB easing. This will add to the downside pressure on EUR/USD, particularly in an environment of a firmer USD and relative Eurozone economic underperformance against the US.
The AUD has also rallied through the morning, reversing downward pressure in Asian trade driven by a mixture of: (a) a firm USD. (b) weaker than expected Q1 Australian construction work done data. The volume of construction work fell by 2% (QoQ) in Q1 to A$51.1bn. As a result of the weaker data, CBA economists have revised down their preliminary Q1 GDP forecast (released 5 June). At this stage, Q1 GDP growth is projected to come in around 0.8%‑1.1% over the quarter. Q1 growth will be driven by strong retail volumes (contributing around 0.4ppts) and high net exports (contributing around 0.9ppts). Q1 GDP forecasts will be finalised on Tuesday once the remaining partial data is released. (c) Comments by the IMF’s First Deputy Managing Director Lipton that the IMF now sees China’s growth at 7.75% in 2013 and 2014. In its April World Economic Outlook, the IMF had forecast the Chinese economy to grow by 8% in 2013 and 8.2% in 2014.
We expect the AUD to stay heavy in the lead up to the Australian CAPEX data (9.30pm EST/2:30am Thursday BST). The CAPEX data will elaborate when mining investment is expected to peak and will be an important consideration for the RBA’s policy meeting next week. To confirm an outcome of nominal capex growth of around 6%pa in 2013/14, CBA economists estimate 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. The OIS market is currently pricing a 27% chance of a 0.25% cut in the cash rate by the RBA on 4 June. A soft CAPEX would raise the odds of a near term cut by the RBA, though the recent weakening in the AUD would afford the RBA some breathing space.
The relative outperformance in the US economy compared to its G7 peers, diverging monetary policy expectations and rising US bond yields continue to support the USD. Today a key focus will be on comments by FOMC voting member Eric Rosengren (1pm EST/6pm BST). Rosengren is speaking on the US economic outlook and will take questions from the audience. Rosengren is typically viewed as a dovish member of the FOMC. When he last spoke in mid-May, Rosengren stated that contractionary US fiscal policy is a headwind for the US economy and given the high unemployment and low inflation in the US, one could argue that “policy has not been sufficiently accommodative”. Any indications Rosengren has changed or softened his views would undoubtedly be USD supportive. However, should he reiterate his recent rhetoric, we doubt the USD trend will change. We expect a stronger USD to remain a key theme in FX markets over the period ahead.
USD/JPY has eased in today’s session, dipping down to 101.50. In line with its recent correlation, a positive day on the Japanese stockmarket has supported USD/JPY. BoJ Governor Kuroda added little new when he spoke at a BoJ conference today, rather he provided a retrospective of past financial crises. We continue to favour buying USD/JPY on dips. A structural decline in Japan’s current account surplus should continue to weigh on the JPY in the medium-term.
A key focus today for USD/CAD will be the Bank of Canada’s (BoC) policy meeting (10am EST/3pm BST). We and the market consensus expect no change to the BoC’s interest rate. But there is a chance the BoC moves to further temper expectations regarding its interest rate outlook at today’s meeting, given benign inflation, softening labour market and questionable momentum in the Canadian economy. The risks to CAD appear asymmetric. Retention of the status‑quo will have minimal impact on the CAD, while a change will weaken the CAD and help USD/CAD continue its upward trend.
NZD/USD has been stable so far this week, despite the firmer USD. Early in the Asian session, New Zealand dairy producer Fonterra announced a preliminary milk price forecast of NZ$7/kg for the 2013/14 season, NZ$1.20/kg higher than the current season, and higher than most estimates. Looking ahead, NZD volatility is likely to pick up tomorrow. RBNZ Governor Wheeler will deliver a speech, “Forces affecting the New Zealand economy and policy challenges” (Wednesday 4pm EST/9pm BST). 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, further jawboning by Wheeler regarding the NZD is likely. 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. The RBNZ’s monthly FX transactions is released tomorrow (11pm EST/4am BST). 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, significantly below the NZ$2.4bn sold during the RBNZ’s “active” intervention in mid‑2007.