Commonwealth Bank - FX Strategy
There has been little news-flow of note through the morning today, indeed that will remain the case through the afternoon as well. Only the US factory orders print is of note and typically does not garner much market attention anyway. The USD has generally rallied a little through the morning, EUR/USD dipping down to 1.3030, GBP/USD under 1.52. USD/JPY remains caped by 100 for now. The UK construction PMI was a fraction better in June at 51, but ignored by currency markets. Minutes of the BoE’s financial policy committee meeting continued to show concerns about risks and imbalances in the UK and global economy. The committee has asked for some more details on the distribution of debt within the UK economy. The BoE meets on Thursday under the helm of new Governor, Mark Carney. We continue to expect the BoE will begin issuing a statement following MPC meetings, quite probably starting this week. A statement, if delivered, would likely be fairly dove-ish in tone despite the recent improvement in UK economic outturns. However, a change to actual monetary policy settings is not expected at this week’s meeting. 6 of the current members of the MPC did not believe that there was need for any change to monetary policy settings at the June meeting. There is no reason to expect any of them to change stance ahead of the important August Inflation Report forecasting round, particularly given the ongoing improvement in the UK economic data. Nevertheless, we still see downside risks to GBP/USD this week.
Overnight AUD/USD dipped around 0.5% in the immediate wake of the RBA’s on hold decision and continues to trade under 0.9200 at the time of writing. The RBA have altered its observations about the exchange rate and its impact on the economy. At last month's meeting the RBA noted "the exchange rate remains high considering the decline in export prices". At today's meeting the RBA noted the exchange rate "remains at a high level,” dropping the reference to commodity prices. The additional point the RBA made on the AUD was that "it is possible that the exchange rate will depreciate further over time, which would help foster a re-balancing of growth in the economy," This comment was present in the minutes of the June meeting (released on 18 June). It is important to note, that the RBA are not guiding the AUD lower or are no longer somewhat perplexed that the AUD was not lower, given the decline in commodity prices and interest rates. The net effect is that today's statement is quite neutral for the AUD, however, AUD may soften somewhat because the RBA have introduced the statement that a lower AUD "would help foster a re-balancing of growth in the economy" into the main monetary policy statement release. The RBA have not altered their some-what diluted easing bias. The one-month OIS swap rate has appropriately adjusted, but there is very little change in swap rates. Ultimately, given the differing outlook for the Fed and the RBA, we think the risks lie in a lower AUD this week. The next focus for the AUD is May retail sales (Wednesday 9.30pm EST/ 2.30am BST) AUD should garner some support if our economists’ above consensus forecast proves correct (CBA f/c:+1% MoM, market +0.3%).
The USD has edged up in trade this morning, having absorbed a barrage of generally better than expected economic data so far this week, emanating from Europe, the UK as well as within the US. US bond market and USD direction will be taken later today from a speech on the US economy by New York Fed President William Dudley, a FOMC voter and dove (12.30 pm EST/5.30pm BST).
USD/JPY has consolidated in the 99.50-100 range today, and is now comfortably past the soft patch reached in mid-June when concern about the timing of Fed tapering was high. Volatility in Japanese financial assets, while still elevated, is declining. Lower volatility, a firmer USD as the Fed becomes the first of the G-3 central banks to step back from easing, and a narrower Japanese current account surplus, should see USD/JPY track higher this week and in the medium term.
NZD (and AUD and CAD) benefited from improved global manufacturing data that also boosted commodity prices yesterday. The next focus for NZD is today’s global dairy auction (from 7am EST/12pm BST). Dairy prices have held up well in the past few auctions despite drought concerns dissipating. Today’s dairy auction will provide further guidance for prices out to December 2013. But for the NZD, direction today (and over the remainder of the week) is more likely to be a function of the USD.
USD/CAD temporarily eased back below 1.0500 yesterday, and could dip back below 1.0500 again in the near term as the USD consolidates and if commodity prices (particularly oil and gas) continue to firm. However, the key influence on CAD will be the June US and Canadian payrolls report due on Friday. We think US payrolls will continue to track at recent solid rates. However, Canadian payrolls outsized 95,000 increase in May contains more “noise” than “information”. Consequently, we expect a larger than consensus correction in June, and see upside risks to USD/CAD by the week’s end. A large fall in Canadian employment should keep expectations about Bank of Canada policy tightening in the distant, rather than near future, particularly given the muted price pressures in the Canadian economy.