Commonwealth Bank - FX Strategy - NY Open
The morning session in Europe has been quiet in terms of news-flow, but currencies have moved a little anyway. Eurozone industrial production fell by 0.3% MoM in May, but the news was in line with expectations and ignored by EUR/USD. The USD has generally edged higher this morning. EUR/USD has dipped down to a low of 1.3040, USD/JPY is up to 90.40. AUD/USD has taken a dive and dropped to 0.9040. There has been no particular newsflow to drive this price action.
We do not think Bernanke’s recent comments about monetary policy will change the medium-term trend of a firmer USD. More details on this week’s Fed developments are in the attached note. We still view Chairman Bernanke’s comments as being consistent with the Fed tapering its asset purchases later in 2013, in contrast to the monetary policy outlooks of the other G4 central banks and the RBA. We do not anticipate real US long-term bond yields to fall by 100bpts back into negative territory. Positive real US long-term yields should remain a source of USD strength. The announcement that Elizabeth Duke will resign from the FOMC on 31 August will not affect monetary policy or the USD. On the data front, the US week ends on a quiet note with June Producer Prices and the University of Michigan Confidence report the only data expected. The next US focal points will be US retail sales (Monday 15 July).
USD/JPY remains weak in contrast to other exchange rates, but we expect USD/JPY to rise in coming months reflecting: (i) the slump in Japan’s current account surplus; (ii) Fed asset purchase tapering in 2013 that should widen the US Japan interest rate differential; and (iii) the Bank of Japan’s very aggressive monetary expansion, which will at the margin encourage some additional Japanese bank offshore lending, and capital outflow in search of higher yields. We anticipate the BoJ will continue to aggressively ease monetary policy until at least the end of 2014, though the BoJ governor yesterday raised the possibility that the BoJ “may need to adjust policy depending on risks”. We would use falls in USD/JPY to accumulate medium-term long positions.
AUD/USD has endured a choppy week, and is currently under pressure and testing range lows for the week around 0.9050. Today’s Australian lending data did not have a bearing on AUD direction, and we expect the next major influence to come from the large batch of Chinese data released on Monday. We expect China’s Q2 real GDP growth to come in at 7.6%(YoY), a tad above this year’s official target of 7.5%, but softer than last quarter’s outcome. Market expectations are centred on 7.5% growth. We expect Chinese industrial production to have risen in June by 9.2% (Market 9.1%) and retail sales to have increased by 13.1% in June (market 12.9%). AUD/USD will be vulnerable to any signs of weakness in the Chinese data on Monday, but for today, we expect further consolidation near 0.9200.
EUR/USD gathered further support yesterday as the Eurozone-US two-year bond spread narrowed to -21bpts. The current level of the bond spread is consistent with the current level of the EUR/USD; the Eurozone’s record current account surplus also remains a solid source of support for the exchange rate. As global bond markets consolidate this week’s recent moves, EUR/USD is likely to do the same. The tail risk for EUR/USD remains developments in Portugal. Amidst political uncertainty, the country’s Finance Ministry has asked the EU, IMF and ECB to delay the aid reviews scheduled for 8-9 August, until the end of August. Political uncertainty continues, Portuguese banks remain under pressure, and Portuguese ten-year bond yields rose another 12 bpts to 6.69%.
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 – 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).