Commonwealth Bank Global Markets Research
USD positioning ahead of today’s FOMC meeting remains a key focus. We do not expect the Fed to change its policy settings at this meeting (7pm BST). We expect the Fed to taper its asset purchases in December. The main interest will be on Bernanke’s press conference for any signals about future Fed policy (7.30pm BST). We expect Bernanke to reiterate his 22 May conditional outlook, i.e. the Fed could “consider” a tapering of asset purchases over coming meetings if the US economy continues to improve and the Fed is confident it will be sustained. The decision to taper asset purchases is dependent on the outlook for the US labour market. Bernanke could provide clarity by elaborating what influences Fed thinking for the outlook for the US labour market. Recent moves in US bond yields suggest tapering expectations remain firm. Therefore, if Bernanke does not change his view from his 22 May comments (or emphasises the very low inflation and still elevated unemployment rate), the USD may fall after Bernanke’s press conference. However, although it is not our base case, should the FOMC or Bernanke suggest a policy shift is closer than we think we would expect the USD to strengthen, particularly against emerging market and commodity-linked currencies such as the AUD. The mix of rising US real interest rates and increased volatility driven by Fed policy turning points is typically not a good environment for these currencies.
GBP/USD has traded mostly flat from yesterday’s four-month high, after the release of May BoE meeting minutes. The vote among the BoE MPC is anticipated to have remained unchanged at 6-3 against increasing the asset purchase target. However, the MPC did not mention the tightening in financial conditions brought by a stronger GBP and higher gilt yields. Instead, it noted that “Recent strong growth in private non-financial companies’ broad money holdings suggested that companies, in aggregate, had ample internal funds that could be used to finance investment, and indicators of business confidence had improved”. Nevertheless, GBP is likely to be somewhat volatile over the coming sessions. In addition to the FOMC related USD developments (see above), GBP/USD is likely to be influenced by the BoE Governor King’s final Mansion House Speech (8pm BST). The more positive, yet cautious outlook for the UK economy is likely to be repeated by outgoing Governor King in his final address. Over a medium-term perspective, we continue to think the UK’s large external imbalance and GBP’s increasing vulnerability to any signs of a faltering UK economic recovery suggest GBP/USD may be approaching the top of its range.
NZD/USD movements continue to be largely a function of USD volatility and broader market sentiment. Dairy prices lifted 1.1% at yesterday’s global dairy auction, and the NZD firmed somewhat in the wake of the result. But NZD has failed to hold onto gains above 0.8000, and is trading just under the figure again at the time of writing. New Zealand economic data released over the next 24 hours should be NZD supportive, but we expect USD moves will continue to dominate. Data today showed the NZ current account deficit narrowed to 4.8% of GDP in Q1, in line with expectations. The data highlight this week is tonight’s Q1 GDP (11.45pm BST), where we expect quarterly growth of 0.7% (market expectations are centred on 0.5% growth). This builds on the very strong 1.5% increase in the previous quarter. While a stronger than expected New Zealand GDP print will be NZD supportive, the extent of any moves will be contingent on the reaction to the Fed policy announcement which comes out just under 5 hours earlier.
CHF volatility could increase over coming sessions. In addition to the FOMC meeting, the Swiss National Bank (SNB) holds its quarterly Monetary Policy Assessment (Thursday). We expect the SNB to make no change to its policy to defend the EUR/CHF 1.2000 minimum exchange rate. However, given the persistent deflation in Switzerland and ongoing concerns about the strong price growth in the Swiss property market, the SNB is likely to highlight other policy options that remain available. Recent commentary by SNB officials suggests a negative policy rate remains an option. Should the SNB indicate further policy action is possible we would expect the CHF to come under pressure. However, the extent of any moves in USD/CHF will remain contingent on the reactions to the Fed policy announcement. Nevertheless, in our view the bias is still for both USD/CHF and EUR/CHF to drift higher over coming months, driven by improved market conditions and economic improvement in both the US and Eurozone.
USD/Asia are sold into the European session. Market commentaries still focus on the short-term interest rates in the China’s interbank market, with SHIBOR rates remain elevated. China’s banking system has garnered some attention recently and may be adding to downside pressure on AUD. In our view, China is not facing a ‘credit crunch’ as some analysts fear. Credit growth is strong at 21%pa in China. The recent large lift in SHIBOR* is not unusual and we expect it to fall back over the next few weeks as it has in the past (see chart). If SHIBOR stays high then it may be a sign of stress among some of the smaller Chinese banks that need external financing. However, China’s banking system is flush with liquidity, particularly among the larger banks. Having said that, the situation obviously in the China’s banking system is a tail risk (and has been for a long time). But for a subprime type of financial crisis to take place house prices would need to collapse (which is not taking place) and household indebtedness spiking (which is not the case in China). So we think this risk remains a tail risk for now