CBA FX Strategy; NY Open
EUR/USD has extended its gains up to the 1.30 level this morning as the USD remains under gentle downward pressure across the board. The regular suite of European sentiment readings generally improved in May, the economic confidence reading rising to 89.4, the business climate indicator to -0.76. Readings suggest the economy is still contracting slightly, but at least not deteriorating further. The ECB will remain on hold in coming months to further monitor the evolution of the Eurozone economy and hoped-for recovery in H2. Elsewhere there has been little to report. The Nationwide measure of UK house prices rose by 0.4% MoM in May, GBP/USD has pushed up towards the 1.52 level in tandem with the general USD softening through the morning. Equity markets have held steady through the morning and have not followed the lead of the Nikkei which plunged another 5% overnight.
USD/JPY and the Nikkei both had a volatile day. BoJ Governor Kuroda’s appearance at the Diet revealed he is growing less comfortable with the volatility in Japanese markets, stating he “seeks to reduce volatility to make BoJ policy effective”. He did not elaborate on what he may do to reduce market volatility, though we suggest the BoJ increasing or bringing forward purchases of JGBs may help. USD/JPY fell just short of our accumulate target of 100.50 and has spiked up to 101.50 a little while ago. We expect USD/JPY to reach 114.00 by year end and still recommend buying USD/JPY on dips below 100.50.
AUD/USD has continued to squeeze back off its lows in today’s trade and has rallied to within a whisker of the 0.97 level this morning. The key focus overnight was on the Australian CAPEX data. The second estimate for 2013/14 CAPEX plans came in at A$156bn, largely in line with expectations (market A$153bn, CBA A$154bn). The data suggests that nominal CAPEX growth in 2013/14 remains on track to keep investment constant at 8% of GDP. The CAPEX data has not changed CBA’s views regarding the mining story. Mining CAPEX looks set to peak around the second half of the year. In addition, April building approvals were a lot stronger than expected, rising by 9.1% (MoM) (market consensus 4.0%). Looking ahead, the June RBA policy meeting (Tuesday) and Q1 Australian GDP (Wednesday) are the next AUD focal points. The fall in the AUD since the RBA last met, and tentative signs that the housing is responding to lower mortgage rates, reinforces our view that a follow up rate cut in June is unlikely. Following the data today, market expectations for a 25bpt rate cut in June have declined to 18% (down from 32% immediately before the CAPEX survey was released). In addition, CBA’s preliminary estimate is for Q1 GDP is for growth of around 0.9-1.1% over the quarter. This is a strong result. Should these events transpire as we expect, the risks reside with the AUD edging higher over the coming week. Nevertheless, given sentiment about a firm USD, large gains in AUD/USD are unlikely.
NZD/USD dropped around 0.5% in the early part of the Asian session, but then recovered almost half its declines, after Reserve Bank of New Zealand (RBNZ) governor Wheeler described the New Zealand dollar as “significantly overvalued”. Wheeler also openly talked of the RBNZ's current policy challenge. On one hand, rising house prices represent a case for raising the cash rate, but “increasing the OCR would carry significant risks in the current environment”. On the other hand, if the exchange rate continues to strengthen, in the absence of a corresponding improvement in the New Zealand economy, “a reduction in the OCR might be warranted”. Wheeler concluded by saying “we will use all policy instruments, including macro-prudential measures”. Interestingly, Wheeler stated the RBNZ is prepared to “scale up our foreign exchange activities if we see opportunities to have greater influence”. In our view, Monday 10 June (the Australian Queen’s birthday long weekend holiday) may be an opportunity for the RBNZ to possibly “actively” intervene because liquidity is lower with most Australian participants not in. The last and only time the RBNZ ‘actively intervened’ was at 12.30pm (AEST) on 11 June 2007 (Queen’s birthday long weekend). Data released today showed that the RBNZ sold $256mn worth of NZD’s in April as part of its “passive” intervention. This adds to the NZ$64mn and NZ$199mn the RBNZ sold in November and December 2012 respectively. Although the amount sold in April is larger, in the context of daily fx volumes the amount remains quite small. Nonetheless, it may signal a shift in the RBNZ’s thinking.
The USD index has continued to inch lower in today’s trade. Comments made by FOMC voting member, Eric Rosengren, in the New York session reiterated Fed Chairman Bernanke’s 22 May speech indicating “the Fed should be willing to increase asset purchases” and “significant accommodation remains appropriate at this time”. Rosengren also added, consistent with Bernanke’s 22 May speech, that “it may make sense to consider a modest reduction in the pace of asset purchases if we see a few months more of gradual improvement in the labour markets and improvement in the overall growth rate in the economy.” It is likely we will continue to see some vol. in both the USD and US long bond yields until the US economic data becomes convincing and we hear firmer sounds from Bernanke; at that point a definitively sharper trend should emerge. The second estimate of Q1 US GDP (8.30am EST/1:30pm BST) is expected to reaffirm the initial estimate and should not impact the USD.