Commonwealth Bank - Fx Strategy - NY Open
The new week has started quietly in Europe with no news-flow of note this morning. The USD has edged a little higher, but the gains have been modest as markets await this afternoon’s US data points. EUR/USD has inched down to 1.3020, USD/JPY up to 99.80.
AUD/USD direction will likely continue to be a function of today’s Chinese data batch. The Q2 Chinese GDP data was slightly below expectations, with the economy expanding by 1.7% (QoQ) in Q2, to be up 7.5% (YoY). This is the slowest pace of annual growth in China since Q3 2012, but not totally unexpected. The partial activity data showed that Chinese retail sales were a little stronger than expected in June (13.3% YoY), but industrial production was below expectations (8.9% YoY). Overall, the data batch confirms that the Chinese economy slowed in the first half of 2013, arguably to a more sustainable long term pace and consistent with the recent trend. In terms of market reaction, we do not think any downside market reaction in AUD/USD will be overly significant, given the concerns over recent sessions that the Chinese data could significantly undershoot expectations. Indeed, AUD/USD has been stable, trading just shy of 0.9100 in the Asian afternoon. The RBA minutes from the July meeting is the main AUD-centric event over the remainder of the week (Tuesday 2.30am BST). Although the RBA should reiterate its easing bias, there have been some subtle hints of a rethink on the inflation outlook due to the recent fall in the AUD. Discussions around this and/or the extent of the deliberations around the policy decision given the recent comments by Governor Stevens and Deputy Governor Lowe will be of interest. Based on our outlook for a slightly softer USD, we do not expect a weekly close in AUD/USD below 0.9000 just yet.
USD direction will largely be determined by Fed Chairman Ben Bernake’s semi-annual testimony this week (Wednesday BST, Thursday AEST). We believe Bernanke will continue to repeat the current FOMC policy of separating the policy tools of a gradual reduction in asset purchases (likely to take place this year) and an eventual lift in the Fed funds rate (almost two years away). We believe the USD will continue to consolidate this week. We see some mild downside risks to the USD as market participants react to Bernanke’s comments; much of the market reaction is likely to have occurred after Bernanke clarified the FOMC’s policy last week. We don’t expect any currency moving events to occur as a result of the G20 central bankers and finance minister’s two-day G20 meeting in Russia beginning Friday. Today’s release of US June retail sales data (1.30pm BST) will set the early-week tone of the USD. Market consensus is for a stronger monthly retail trade number (0.8%) than last month (0.6%).
GBP/USD has eased off its recent highs, and traded down to 1.5040 in trade today. In our view, the bias is for the GBP-centric events to weigh on GBP. However, anticipated consolidation in the USD this week should limit the immediate downside in GBP/USD. Key focus will be on the minutes of the July Bank of England (BoE) meeting (Wednesday). This was the first meeting with new Governor Carney at the helm. The BoE released a statement following the July policy meeting in an effort to lean on the tide of rising market interest rates. We expect the BoE meeting minutes to contain further insights around the discussion on forward guidance and/or other policy easing measures. We think the BoE will announce forward guidance on interest rates at the MPC meeting on 1 August. The discussions on forward guidance will build on the usual interest in the voting pattern for further asset purchases. Carney’s vote will be of particular interest. While Carney’s vote for QE is uncertain, given the recent downgrades to UK GDP, the output gap is larger than previously thought; this should keep the overall tone of the July minutes dovish. In addition to the BoE minutes, June UK CPI (Tuesday) and retail sales (Thursday) will be of interest. Given the large increase in UK retail sales in May, the risk is the June outturn is weaker than market expectations.
EUR/USD continues to consolidate its recent gains over 1.30. While our expectations of a softer USD should support EUR/USD, there are a number of Eurozone-related factors that should act as EUR headwinds. Primarily, issues across the Eurozone periphery continue to bubble just below the surface. The main political parties in Portugal have set a 21 July deadline to agree on new measures to keep the country’s bailout package on track. The uncertainty has seen Portuguese government bond yields spike higher, with 10-years up 70bpts on Friday and back above 7%. Added to these concerns are the political developments in Spain, where the PM remains embroiled in corruption allegations. The July reading of the German ZEW survey is the data focal point this week (Tuesday). While modest improvement in the ZEW are expected, the weakness across the broader Eurozone economy should keep the ECB forward guidance on interest rates intact for the foreseeable future.
USD/JPY last week found support on the 30-day moving average of 98.30. While we see some mild downside risks to the USD this week as it extends its period of consolidation, we don’t anticipate USD/JPY will end the week below the 30-day moving average of 98.30. The widening of US-Japan swap yields and the collapse in Japan’s current account surplus remain supportive for USD/JPY.
USD/CAD is trading just below 1.0400; some 2% below last week’s high. The lower USD/CAD largely reflects the over-bought USD rather than CAD specific developments. However, the Bank of Canada’s interest rate decision (Tuesday) and June CPI data (Wednesday) could generate a lift in USD/CAD once again. The BoC meeting is the first for new Governor Poloz. We expect the BoC to retain its long-dated tightening bias at the policy meeting, but the risk of a removal of the bias cannot be fully discounted. Inflation pressures in Canada are benign – although annual inflation is likely to jump from 0.7% to around 1.4%, the jump is purely due to base effects. On a sequential basis, inflation is only lifting by 0.1-0.2% MoM. Low Canadian inflation, slowing credit growth and a weaker CAD suggest the Canadian economy is re-balancing. But the improving outlook for the US economy, the destination for three-quarters of Canada’s exports, is medium-term positive for Canada’s economic outlook.
NZD/USD has spent more than three-weeks consolidating the downward adjustment from 0.8400, and has traded around 0.7800 in Asia today. Low New Zealand Q2 inflation (due 11.45pm BST today, 8.45am AEST) is likely to weigh on the NZD over the first part of the week. We expect the June quarter CPI to increase by just 0.1% over the quarter, with the annual rate of CPI inflation falling from 0.9% to 0.6%. Behind our forecast for a subdued Q2 inflation result are declines in petrol prices, clothing and footwear prices, and communications prices. However, beyond some weakness following the CPI data, when our view of USD consolidation this week is taken into account, we do not expect any NZD/USD decline to be too severe. We expect NZD should receive reasonable support ahead of recent lows near 0.7700.
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. On Thursday, the Fed releases the latest edition of the Beige Book. On Friday, the G20 central bankers and finance minister’s hold a two-day meeting in Russia.
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. The RBA release details of their monthly activity in the foreign exchange market on Thursday (18th). China June property price data is also due Thursday.
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).