Commonwealth Bank - FX Strategy - NY Open
The European session has been very quiet as markets digest yesterday’s comments from Fed Chairman Bernanke. The USD index is 2.6% down on yesterday’s high, and has remained heavy in the Asian and European session. The USD softened in the lead up to the release of the FOMC minutes, then dipped because minutes showed many on the FOMC said further labour gains are needed before tapering. However, the USD quickly recovered from this initial move. The minutes are not as useful as they might normally be because the 18-19 June FOMC meeting occurred after the solid June non-farm payrolls and significant upward revisions to April and May payrolls.
Bernanke’s speech and his Q&A, 2 hours after the release of the FOMC minutes, were more influential. The USD fell sharply when Bernanke indicated “Fed not on target on employment mandate” and “inflation, jobs, signal more Fed stimulus needed”. Bernanke also indicated it is “too early” to say US has “weathered fiscal restraint”. Market participants may have expected more upbeat comments from Bernanke given the solid non-farm payrolls report released on 5 July. Bernanke’s comments emphasising the Fed’s dual mandate , and the ongoing impact of fiscal restraint, suggest there is very little chance of Fed tapering at its next meeting on 30-31 July and there is a risk of delay beyond our call of tapering to begin after the 17-18 September meeting. However, we do not think Bernanke’s comments will cause a change in the medium term trend of the USD towards weakening. Bernanke’s comments are still consistent with the Fed tapering its asset purchases this year, and well before the remaining G4 economies though the risks are for a later rather than sooner start to asset purchase tapering by the Fed.
USD/JPY slumped below 98.50 in the Asian morning because of Bernanke’s comments. USD/JPY recovered to 99.50, only to slump again in the wake of the Bank of Japan’s policy announcement, even though no changes were made to policy settings, and the BoJ forecasts were little changed (i.e. the meeting was in line with expectations). We see today’s movements in USD/JPY as largely a function of the Fed developments, rather than any change to the situation in Japan. We still see upside risks to USD/JPY in coming months reflecting: (i) the slump in Japan’s current account surplus; (ii) Fed to taper its asset purchases this year; (iii) the Bank of Japan to continue its very aggressive monetary expansion until at least the end of 2014. We would use falls in USD/JPY to accumulate medium term long positions.
AUD has been influenced by two factors today: (a) ongoing USD reaction to the Bernanke comments; and (b) the June Australian labour market report, which on the surface looked better than expected. Australian jobs increased by 10.3k (consensus: flat, CBA: 10k). However, full time jobs fell by 4.4k so the headline number is not as good as it looks and a rise in the unemployment rate from 5.6% to 5.7% reflects this. There was a minor downward revision to May jobs from +1.1k to -0.7k. Another 10k jobs created is good but not great, and we expect rate cut hopes will still be kept alive with today's data. OIS pricing now implies a 60% probability of a rate cut by the RBA in August. The Q2 CPI due on 24 July will be very important for the RBA's rate decision on 6 August. Nonetheless, the good headline, has combined with the heavy USD, and helped AUD/USD to press towards 0.9300, where we expect the AUD will start to meet reasonable resistance.
EUR/USD was lifting leading into Fed Chairman Ben Bernanke’s speech and rose sharply in response to his comments in the Q&A session. The Eurozone-US two-year bond spread has lifted to -24bpts. Ex Italian Prime Minister Berlusconi has his eligibility for Senate reviewed (from 9am EST/2pm BST). We expect Italian political instability is likely to have more impact on Italian long bonds than EUR. We anticipate some consolidation in EUR/USD’s recent gains.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – The next US focal points will be US retail sales (Monday 15 July), CPI and industrial production (both Tuesday 16 July), Bernanke’s semi-annual testimony to Congress (16-17 July) and the Fed’s Beige Book (Wednesday 17 July). We anticipate the Fed will begin tapering its asset purchases in September and the US ten-year swap rate lift to 3.0% over the course of the month.
AUD – Chinese Q2 GDP, due Monday 15 July, will be important for AUD. The minutes of the July RBA policy meeting are released on Tuesday 16 July. Following the recent comments from Governor Stevens and Deputy Governor Lowe, interest will be on the extent of the deliberations around the policy decision.
JPY – 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. We expect the June quarter CPI (to increase by just 0.1% QoQ, with the annual rate of CPI inflation falling from 0.9% to 0.6%.
EUR – Given the larger than expected contraction in German industrial production in May, 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 Tuesday 16 July. The May Eurozone current account is due on 18 July.
GBP –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. BoE meeting minutes are due on 17 July. A more explicit use of forward guidance should limit the upside in shorter-term UK bond yields and GBP. On the data front, the next key releases are CPI (16th), employment data (17th) and retail sales (18th).
CAD – New BoC Governor Poloz presides over his first policy meeting, and delivers his first post-policy meeting press conference (17 July).