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Commonwealth Bank of Australia - FX Strategy - NY Open

Posted by Marge Maresca on Jun 12, 2013 7:34:00 AM

The EUR has edged a little higher this morning reaching a new 3-month high of 1.3335 before dipping back below sub 1.33.  Eurozone industrial production came out a little stronger than expected in April at 0.4% MoM. Annual growth was -0.6% YoY, still in contraction territory, but only just. Evidence of gradual relative improvement in the Eurozone economy is emerging little by little. In the UK labour market data reported a 24k jobs gains in the April 3-month period. GBP/USD has pushed up to a high of 1.5683 this morning. 

Main focus for markets this week remains the US economy. But the top-tier data only commence tomorrow with advance retail sales numbers. The USD remains heavy for the time being despite falling equity and bond prices.  We do not expect this to last, and for the USD to re-firm in coming weeks. Looking ahead, the next data focus is on May US retail sales (Thursday) and industrial production (Friday).  We expect both to improve from last month’s showing, and provide USD support later in the week.

USD/JPY dropped by almost 3.5% yesterday in the aftermath of the Bank of Japan’s (BoJ) decision to keep policy unchanged, and has remained under 97.00 in trade today. We expect USD/JPY to re-strengthen in coming weeks though increased volatility in JGBs and weakness in the Nikkei may persist in the near term, providing a headwind to USD/JPY (see attached note for more details). The next focus in Japan is on 14 June when Abe’s Cabinet is due to approve his economic strategy outlined last week.

AUD/USD has lifted off yesterday’s lows, and is now trading back where it opened the week.  We still think the bias is for further modest AUD declines over the week.  Global equities and commodity markets have eased lower, while questions over the Australian economic outlook remain.  A key focus for the AUD will be the May Australian labour force data (9.30pm EST/ Thursday 2.30am BST).  The monthly change in employment had been volatile over recent months, ranging between -31,100 and +71,700.  CBA economists expect a fall of 10,000 in May, driven by a statistical payback to the large 50,100 employment gain in April.  This is in line with the market consensus.  As a result the Australian unemployment rate should inch up to 5.6%.  Soft labour force data will add to expectations of further RBA policy easing and should keep the pressure on the AUD, although the market appears pre-positioned for a weak number.  Given the current sentiment, we expect a very large and unexpected positive surprise would be required to generate a meaningful lift in AUD.

NZD/USD has lifted over 2c off yesterday’s lows, and is back trading around  0.7980 in Europe today.  NZD volatility may continue over the remainder of the week, with the major catalyst being the RBNZ Monetary Policy Statement and Official Cash Rate (OCR) review (tonight 5pm EST/10pm BST). The unanimous expectation is for no change to the OCR. Market interest lies in the RBNZ’s forecasts and commentary.  The lower NZD over the past few weeks provides the RBNZ some breathing space on the monetary policy balancing act between the strong NZD, and buoyant housing market.  However, the RBNZ may discuss the idea that the introduction of macro-prudential tools such as high LVR lending ‘speed limits’ could potentially delay or reduce the extent of OCR hikes.  Such discussion could weigh on the NZD.

The German Constitutional Court is holding a public hearing on the European Central Bank's outright monetary transactions program (OMT).  While the court does not have jurisdiction over the ECB, it could theoretically limit (or prohibit) the Bundesbank’s participation in any bond purchases.  A definitive ruling is not likely for a number of months, most likely after the September German elections. 



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