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CBA FX Strategy: Dollar Preferred for Now

Posted by Joseph Trevisani on Jun 4, 2013 11:11:00 AM

Commonwealth Bank of Australia--FX Morning Commentary- Strategy, Trader Views, Aud & Nzd, RBA, GDP Preview

 Thoughts from our Strategy Team

 The European morning has been very quiet in terms of newsflow. Main release of note was a better than expected UK construction PMI, one which had limited lasting impact on GBP, but one which does suggest that the UK economy is continuing to improve across the board. Main currency market mover through the morning has been USD/JPY which has rallied back over the 100 level to a high of 100.42 so far. EUR/USD has been essentially flat around the 1.3070 area, GBP/USD likewise is hovering around 1.53.

The USD index has lifted around 0.4% off the New York session lows during Asian trade, and we expect the USD to continue to grind higher in coming sessions.  The USD weakened yesterday after the US May manufacturing ISM decreased to the weakest level since June 2009.  While US manufacturing comprises less than 10% of the US economy, the weak ISM reinforces the risk the US has entered another mid-year economic slow-down.  But more economic data is required before conclusions can be drawn. While the USD index fell by 0.9% in response to the weak ISM, the US ten-year bond yield managed to recover from the initial 10bpt decline and close the session down only 1 bp to 2.12%. This suggests to us that the USD has over-reacted to the ISM survey, and we expect further recovery in the London and NY sessions. We expect relatively firm US yields will support the USD ahead of Friday’s May non-farm payrolls report.

AUD/USD has slipped through most of the European and Asian session, despite the RBA remaining on hold, better than expected Australian current account data, as well as some welcome stability in the Japanese sharemarket.  The RBA altered the statement back to what they had previously noted, stating the exchange rate remains high given the decline in export prices. The RBA retains an easing bias, and we continue to expect a rate cut in Q3. The Australian Q1 Current Account Deficit fell to $8.5bn, lower than market expectations of $9bn (CBA $ 8.2bn).  The current account deficit is now around 2.2% of GDP (low by Australian standards).  Net exports look like they will add around 1.0ppts to Q1 GDP. Our economists’ forecast for tomorrow’s Australian GDP is stronger than consensus, with Q1 growth of 0.8 - 0.9%(data due 9.30pm EST/2.30am BST), and this should be AUD supportive.  Nonetheless, we doubt the AUD centric events will be enough to outweigh our expectations of a firmer USD this week, and a rally in AUD/USD risks fading further over the course of the week.

USD/JPY unexpectedly fell some 1.3% following the weaker than expected US ISM survey, but has recovered around most of the drop during trade today, grinding back over the ¥100 mark.  The inability of US long bond yields to close significantly lower suggests to us that the currency move was over-done.  Accordingly, we view this dip in USD/JPY below 100.50 as “accumulation territory”. We maintain an eye on the medium-term drivers weakening the JPY (a collapse in Japan’s current account surplus) and the medium-term drivers strengthening the USD (higher US real bond yields).

NZD/USD briefly lifted back above 0.8100 as the USD weakened, but has faded throughout trade today.  The global dairy auction is due today (from 7am EST/12pm BST). The likelihood is that dairy prices will fall from the drought induced spike over March and April. It is likely that NZD/USD will decline in intra-day trade as dairy prices fall, and in response to the market correcting from the USD sell-off.  Dairy prices are nevertheless likely to remain high on a historical basis.  The risk remains the NZD/USD closes the week below 0.8000 if the USD continues strengthening.  However, over the next 48 hours, local data may offer a degree of NZD support. Q1 Building Work is due today (6.45pm EST) and the quarterly Manufacturing Survey is released 24 hours later (Wednesday 6.45pm BST).  Concrete usage continued to increase over the quarter, which suggests higher construction activity, and we expect a quarterly lift of 2.6% in Building Work.  We expect a 1% quarterly lift in NZ manufacturing activity, reflecting the improvement seen in manufacturing PMI surveys in recent months, as well as manufacturers’ indication of activity in the Q1 NZIER QSBO.

AUD & NZD Today

AUD and NZD have given up much of yesterday’s post ISM gains with Asia a good net seller of both pairings with Asian Banks leading the way … AUD saw strong selling interest from 0.9740 and this has probably set us up for accounts to play the 0.9620/0.9740 range today with the market evenly split at current levels, overnight the RBA left the OCR unchanged as widely expected but still kept the door open for cuts down the track with Q2 CPI the next key event in late July …. the next event is Q1 GDP tonight with market expectation sitting in the +0.7 – 1.0% range … similar move in the NZD overnight which has pushed the pairing back from near 0.81c with the market mildly short this morning, for now 0.80c has some buying interest with the better support seen below 0.7960. No data of note tonight in NZ.

Thoughts from our Trading Team

Aud/usd:  retraced yesterday’s gains overnight.  LARGE bids seen at .9650 this morning taken out(.9649 low) but reloaded immediately and supported there since.  Resistance at .9720 where we saw good selling interest overnight.   I will look to play this range in NY today. 

Nzd/usd:  support .8000 then .7940.  Resistance .8120 where there were large offers and where we topped out yesterday on a s/l run in NY afternoon.

USD/ZAR:  We are 6 % off highs seen last Friday.  Short term longs have all stopped out.  We think this is an opportunity to buy USD and have gone long here at 9.6650 with a stop at 9.5000 looking for another test of 10.3000 medium term. 

EUR:  Stalled at the 100 day MA yesterday (1.3110).  I am looking to sell EUR rallies to 1.3120 and add below the 200 day (1.3038) with a stop at 1.3180. 

Other Points of Note

Spanish Unemployment much better than expected

Zar recovery continues- +1.5% today despite softer Business Confidence data

Try markets partially recover yesterday’s losses with Try +0.6% and stocks up 4.2%

Australia GDP Preview

 On Wednesday, the overall picture on how the economy has been travelling for the first quarter of 2013 will emerge with the GDP data.  We think the data will show that the real economy grew a little above trend over the quarter, but annual growth will be a bit below trend.  In the context of global headwinds and an elevated currency, a quarterly growth rate a bit above trend would be a commendable achievement. 

Based on the partial data available so far, a QI result of +0.9% looks possible.  On that basis, annual growth would be 2.8% (notwithstanding any revisions). 

GDP growth in QI will be powered by net exports.  Foreign demand for resources is boosting export volumes while import volumes declined over the quarter as mining capex slows.  The swing in net exports will contribute a very solid 1.0ppt to GDP growth.  Household consumption, courtesy of a solid lift in retail trade volumes, will also be a growth driver.

 Chart: Bloomberg

ScreenHunter 1232 Jun. 04 11.19



Commonwealth Bank of Australia


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