Thoughts from our Strategy Team
The temporary period of USD weakness that we had expected, particularly against the EUR and GBP, is proving to be short-lived. The USD continues to trade with a positive correlation with the US economic data. This was again highlighted by the positive USD reaction to the better than expected US economic data yesterday. Positive US data is supporting US bond yields as it continues to reinforce market expectations that the Fed will begin to taper its asset purchases in coming months. Our view is that the Fed will commence to taper its asset purchases in September. Interestingly, the ongoing positive news from the US housing market may encourage the FOMC to focus on tapering its agency MBS purchases when it begins later this year to taper asset purchases. Today’s release of the final estimate of Q1 US GDP is not anticipated to have any revisions (8:30am EST). The next set of important US economic data is tomorrow’s PCE inflation, personal income and spending, though next week’s ISM and payrolls will be more influential for FOMC policy and the USD. In the short-term, focus will also be on the array of Fed officials speaking later this week. Specifically, interest will be on FOMC voting members Dudley and Powell (Thursday) and Stein (Friday). Non-voting members Lockhart, (Thursday BST), Lacker and Williams (Friday BST) are also set to speak on the US economy and/or monetary policy. We expect the FOMC speakers to largely toe the FOMC party line. Details contained in their respective speeches are unlikely to challenge the medium-term upward trend in US yields and the USD.
Yesterday’s announcement by the PBoC reinforces our view that the recent lift in interbank interest rates has in part been a deliberate attempt by the Chinese authorities to rein in very rapid credit growth. According to the PBoC, the “tight liquidity situation will gradually ease”, and it will continue to implement “prudent monetary policy” to slow total social financing (that is total credit growth). However, for lending in favour of China’s “national industrial policy and macro-prudential requirements” the PBoC will “provide liquidity support”. The PBoC will also ensure that primary dealer liquidity and trading in the Shibor market remains healthy. The PBoC has also noted that “all financial institutions” have lifted total excess reserves in the system equivalent to about CNY 1.5 trillion, which is almost double the usual system amount, implying “no liquidity shortages”. In our view the improved sentiment regarding the developments in China should be AUD supportive. We are looking for AUD/USD to lift back up towards 0.9500 over coming months, driven in large part by a rebound in the AUD against some of the other majors such as EUR and GBP. On a side note, although PM Gillard has been replaced by Kevin Rudd, we do not expect the political uncertainty to have any long-lasting impact on the AUD. RBA policy expectations and Australia’s broader economic developments are more important factors that influence the AUD.
EUR/USD continues to trade below last week’s New York Close. Our view from earlier this week that EUR/USD could push up to 1.3200 appears challenged. A key factor behind the heavy EUR/USD is the contrasting expectations regarding Fed and ECB monetary policy expectations. The better US economic data continues to support expectations that the Fed will reduce the pace of its stimulus. By contrast, the tone of the ECB continues to be dovish. This was highlighted once again by the comments made by a number of ECB members including President Draghi. Looking ahead, a key focus for the ECB in the lead up to next week’s policy meeting (4 July) could be the recent tightening in financial conditions across the region. On a trade weighted basis, EUR continues to track near levels from early February, while market interest rates have increased. This relative tightening in financial conditions is unlikely to be welcomed by the ECB given the fragile nature of the Eurozone economy and the impact this could have on the recovery. This suggests that the ECB could step up its verbal rhetoric at next week’s meeting, which could weigh on the EUR.
NZD/USD continues to track near levels it opened the week. In today’s session, it was announced that RBNZ Deputy Governor Grant Spencer will give a speech tomorrow (11.00am NZT). The speech is titled “Macro-prudential policy and the New Zealand housing market.” The RBNZ has been consulting with New Zealand banks on the implementation of high LVR lending restrictions. It appears the RBNZ is very likely to implement restrictions around growth in high LVR lending in the second half of this year, potentially over August through November. Tomorrow’s speech is unlikely to be a major market mover, but should provide insights into the RBNZ’s thinking about and progress towards implementing macro-prudential policies. In addition to the speech, the May New Zealand trade data is released. In isolation we think the trade data should provide some NZD support around the time of its release. We expect a solid trade surplus of NZ$500mn in May (consensus NZ$427mn). Nonetheless, we do not expect the trade data to have a long lasting impact on the NZD, barring an outlying result. Broader market sentiment and any unexpected comments from the RBNZ Deputy Governor’s speech should have a greater lasting influence on the NZD.
AUD & NZD Today
AUD a little more buoyant this morning on better feelings towards China’s liquidity “situation” which saw a spike above 0.9300 to trip a few weak stops just above here, buying against the Euro cross also helped in this move …. Since then AUD has slipped back to the mid 0.92’s with talk of 0.9250/0.9275 strikes holding us here for now …. From here AUD has the ability to rally as high as 0.9330/40 where selling interest is expected to kick in, there are a few stops just above here which give better selling opportunities if they get taken out … buying from 0.9240 with stops below 0.9180 if we head lower on the day. NZD remains trapped 0.77/0.78c as the AUDNZD stays trapped in a 1.18/1.20c range and that should cover us on the day ahead of May Trade Balance & June Business Confidence/Activity later tonight in NZ.
Thoughts from our Trading Team
Aud/usd: continues to be trapped in .9200-.9300ish range. Range moving up slightly overnight with better bids now ahead of .9200. Offers remain .9310-20 but stop losses stacked behind above .9325. Prefer still playing from long side until .9135-40 broken.
Usd/cad: Double top Mon/Tues 1.0550-55 region capping for the short term. Seeing 2 way interest over past 24 hours with Corporate buying of usd and Reserve managers selling usd. I will look to play 1.0450-1.0525 today.
JPY: EUR/JPY selling on the back of a dovish Draghi has dampened the rally in USD/JPY. Topside momentum has stalled in this very crowded short JPY trade. We have cut longs for the moment and will re-evaluate on a break of 98.70.
EUR: Stops triggered beneath the 50,100, and 200 day moving averages (1.3070’s). That should provide resistance on the topside. 1.3000 initial support and 1.2945 thereafter. I will sell EUR on rallies to 1.3050 and look for 1.2980 to be tested later in the day.