Commonwealth Bank - Fx Strategy - NY Open
Pressure on GBP has been the main theme of the morning as industrial production data for May disappointed. Output was flat on the month with output growth down to -2.3% YoY. GBP/USD took an instant hit on publication of the numbers, plunging down a big figure and extending its losses through the morning. EUR/GBP is up to a 4-month high of 0.8669 this morning. There has been no news-flow of note from the Euro-zone, EUR/USD is hovering around the 1.2870 area, USD/JPY a little over 101. Other markets are in generally positive mood, equities are again higher, Treasury yields have edged up a couple of basis points.
Following yesterday’s consolidation, the USD tracked sideways in today’s Asian trade. Nevertheless, we anticipate the USD will march higher over the medium-term as the Fed considers tapering its asset purchases. A key focus in the near-term will be the release of the June FOMC meeting minutes and a speech by Fed Chairman Bernanke (both Wednesday). We anticipate both will reiterate the recent Fed rhetoric suggesting the FOMC will start to taper its asset purchases in 2013. (See below for economic calendar highlights over the coming week).
The IMF is scheduled to release its latest World Economic Outlook and global economic forecasts today (9.30am EST/2:30pm BST). Given the information already provided, we think the IMF is likely to downgrade its 2013 global growth projections. The IMF currently expects the global economy to expand by 3.3% in 2013 and 4.0% in 2014. CBA’s current forecasts are for the global economy to grow by 3.1% in 2013 and 3.8% in 2014. We do not expect the IMF’s release to have a lasting impact on FX markets.
AUD/USD has range traded in today’s session. Chinese CPI rose by 2.7%pa in June, this was a touch above market expectations. Stronger food prices (4.9%pa) once again drove Chinese inflation. AUD initially eased as the higher Chinese CPI suggests less likelihood the PBoC will provide policy support. However the AUD has since recovered. The next focus for the AUD will be the Chinese trade data (Tuesday 10pm EST/ 3am BST). We see downside risks to the consensus expectations for the Chinese trade data. CBA expects growth in exports to be 2.2% (YoY) (consensus 3.7% (YoY)) and imports 4.5% (YoY) (consensus 6% (YoY)). This mix should push the Chinese trade surplus down to US$16bn (consensus US$27.8bn). Softer Chinese trade data should act as an AUD headwind. Nevertheless, following the ECB guidance and expectations the BoE will follow suit, we expect the downward drift in GBP/AUD and EUR/AUD to continue. In our view EUR/AUD is likely to ease down to 1.3700 and GBP/AUD down to 1.5900 over coming weeks.
EUR/USD has consolidated today. EUR was afforded some support by the Eurozone Finance Ministers decision in NY trade to release €3bn of aid to Greece in tranches over the coming months. The deal should fund Greece through October; however Greece must deliver strict economic reforms and spending cuts. In our view, the upside in EUR/USD should be limited. The Eurozone macro environment remains weak, and the ECB’s guidance that rates will remain at “present or lower levels” for an extended period should cap shorter-term core Eurozone bond yields. Given the softer EUR outlook, a further drift lower in EUR/AUD to 1.3700 and EUR/NZD below 1.6400 is looking increasingly likely.
NZD/USD continues to hover around 0.7800. The New Zealand Business confidence in the latest NZIER Quarterly Survey of Business Opinion released today suggests New Zealand economic growth remains robust. This was added to by another increase in value of retail electronic card spending in June (1.1% (MoM)). There is little in terms of New Zealand economic data released over the remainder of the week. Broader market sentiment and USD movements should be the drivers of NZD/USD over coming sessions.
USD/CAD continues to trade in a narrow range. In our view there was nothing in the Bank of Canada’s (BoC) loan officer survey released yesterday to alter the BoC’s long-dated tightening bias. The BoC next meets on 17 July. That being said, the soft growth indicators in Canada are likely to keep CAD heavy and USD/CAD firm over coming sessions. June Canadian housing starts (8.15am EST/1:15pm BST) are unlikely to have a lasting influence on the CAD
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD –In addition to the FOMC meeting minutes, and Bernanke’s speech (both Wednesday 10 July), US retail sales (Monday 15 July), CPI and industrial production (both Tuesday 16 July) and the Fed’s Beige Book (Wednesday 17 July) are the main data highlights next week. We anticipate the Fed to begin tapering its asset purchases in September and the US ten-year swap rate to lift above 3.0% for the first time in two years over the course of this week.
AUD - This week’s Australian June employment report (Thursday) is unlikely to change the heavy bias towards the AUD/USD, given we anticipate the USD will further strengthen. This week’s partial June Chinese economic data is unlikely to generate much lasting AUD impact. Chinese Q2 GDP, due next Monday, will be more important for AUD.
JPY - We do not expect any policy change from the BoJ following their meeting on Thursday, though the BoJ is likely to slightly upgrade their 2013 FY GDP and inflation forecasts. The minutes from the BoJ 10-11 June meeting are released on 17 July.
NZD – Q2 New Zealand CPI on Tuesday 16 July (15 July BST) is the next major data release.
EUR – ECB Central bank speeches this week come from Asmussen 9th, Noyer 10th, Asmussen 10th, Weidman 11th, and Coeure 11th. Note all dates are BST. Given the larger than expected contraction in German industrial production in May overnight, there are slight downside risks to the consensus estimates for Eurozone industrial production (Friday 12 July). The July estimate of the Germany ZEW survey is released on Monday 16 July.
GBP - Interest will be on comments from the typically dovish MPC member David Miles who speaks on Thursday 11 July. Further dovish comments should add to the GBP headwinds. Looking ahead, the BoE’s dovish post-meeting statement last week has increased the probability the MPC implements forward guidance towards lower interest rates when it meets on 1 August. A more explicit use of forward guidance should limit the upside in shorter-term UK bond yields.