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US Bond yields lending support to the Dollar

Posted by Marge Maresca on Jul 16, 2013 7:43:00 AM

Commonwealth Bank - FX Strategy - NY Open

There has been plenty of news-flow through the morning, but only modest currency impact. First up was a slightly lower than expected UK CPI inflation print at 2.9% YoY in June. GBP took a hit following the release, GBP/USD dipped to 1.5050, EUR/GBP pushed up to 0.8685. A little while later the German ZEW survey was roughly unchanged on the month, the current situation balance a little stronger, the economic expectations reading a little weaker. EUR/USD dipped a little, but quickly shrugged off the news and is back to roughly flat on the session around 1.3080. Markets are waiting for the next wave of US economic news including CPI, TIC flows and industrial production numbers ahead of tomorrow’s semi-annual testimony from Fed Chairman Bernanke.

The USD index has been steady in trading today.  The details of yesterday’s Advanced Retail Sales data for June indicate that retail activity relevant for the Q2 GDP accounts was virtually flat over the quarter; US swap rates moved lower.  As mentioned in our Weekly Currency View yesterday, we expect USD direction will largely be determined by Fed Chairman Ben Bernanke’s semi‑annual testimony to US Congress this week.  We expect a dovish tone from Fed Chairman Ben Bernanke when he provides his testimony on Wednesday. The Chairman may be ready to taper asset purchases, but will not be lifting interest rates for some two years.  We are anticipating the USD to consolidate this week, and end the week marginally lower. Today’s US June CPI report (08.30am EST/1.30pm BST) will be important for determining the level of real US bond yields. The recent lift in real US bond yields is one of the main factors supporting the USD’s medium-term upward trend. US June industrial production is also due today (09.15 am EST/2.15pm BST).

AUD/USD has lifted in the wake of the RBA minutes today. The minutes of the July RBA meeting have retained the RBA's diluted easing bias.  The RBA board noted that the "inflation outlook, although slightly higher because of the exchange rate depreciation, could still provide scope for further easing" should that be required.  This is the significant part of the discussion because we were unsure whether the depreciation in the AUD would discourage the RBA from cutting rates further.  The comments in the minutes indicate that it won’t prevent them from cutting rates if deemed necessary.  Focus will now turn to the Q2 Australian CPI (released 24 July). A CPI print towards the bottom end of the RBA's 2-3% target band will keep the door to more stimulus open, particularly given the tick up in the unemployment rate to 5.7%.  The AUD lift is likely to be indicative of some participants being pre-positioned for a slightly more dovish tone to the minutes, given the comments made by the RBA governor the day after the July meeting.  Market pricing implies that RBA cash rate expectations have been pared back towards a 50% probability of a 25bpt cut in August.  In the very near-term, AUD/USD risks going up towards 0.9200 over the coming sessions, particularly with Bernanke's testimony expected to exert some downward pressure on the USD.

NZD/USD dipped below 0.7800 in the Asian morning after data showed New Zealand Q2 inflation rose 0.2% over the quarter (consensus 0.3%), with the annual rate of CPI inflation falling from 0.9% to 0.7%.  The annual increase in inflation is the lowest since 1999, and the fourth annual increase in a row below 1%. The trend is consistent with low global inflation pressures. 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.  Indeed the NZD has lifted towards 0.7870 through the European morning.

EUR/USD and GBP/USD have remained range bound to start the week, tracking the broader USD movements.  Key focus for GBP this week remains the July BoE meeting minutes (Wednesday).  Overall we expect the minutes to maintain a dovish undertone and should provide more detail on the discussions around the use of forward interest rate guidance. Headlines from BoE policymaker Paul Fisher’s testimony to the UK Treasury Select Committee (currently underway) on quantitative easing could also generate some intra-day GBP volatility.  Mr Fisher has voted for more asset purchases between February and June 2013.  Overall however, we expect GBP/USD to remain within its recent range in the lead up to the BoE minutes and Fed Chairman Bernanke’s testimony. 

USD/CAD has lifted back above 1.0400 over the past 24 hours.  CAD also underperformed AUD and NZD, with the CAD weakness reflecting the softer than expected US retail sales report yesterday.  We expect the Bank of Canada’s interest rate decision (Wednesday) and Canadian June CPI data (Thursday) will keep the upward pressure on USD/CAD this week. 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 under the new governor’s leadership. 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 looking beyond last night’s retail sales disappointment, 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.


Upcoming Economic Calendar Highlights Important for Exchange Rates

USD – The next US focal points will be US 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).  The prepared remarks to Bernanke’s testimony are released at 10:30pm AEST Wednesday, and the hearing (including the Q&A) commences at midnight AEST.  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 Friday 19 July, the G20 central bankers and finance minister’s hold a two-day meeting in Russia.  We do not anticipate any currency moving events to stem from the G20 meeting. 

AUD – Following the release of the July RBA meeting minutes, the next AUD focal point is the Q2 Australian CPI (24 July).  The flash estimate of the July HSBC China manufacturing PMI is also released on 24 July. 

JPY – The minutes from the BoJ 10-11 June meeting are released on 17 July.  The June trade balance (24 July), June CPI (26 July) and preliminary estimate of June Industrial production (30 June) are the key Japanese data releases over coming weeks.  BoJ Governor Kuroda is set to speak on 29 July. 

NZD – The RBNZ holds its next policy meeting on 25 July.  We expect no change to RBNZ policy in July.

EUR –The May Eurozone current account is due on 18 July.  The flash estimates of the July Eurozone PMIs are released 24 July, and the July German IFO is due on 25 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 (16 July), employment data (17 July) and retail sales (18 July).  The first estimate of Q2 UK GDP is released on 25 July. 

CAD – New BoC Governor Poloz presides over his first policy meeting, and delivers his first post-policy meeting press conference (17 July).


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