Commwealth Bank of Australia
UK MPC minutes from Governor Carney’s first meeting in charge have been the main story this morning. The vote to leave the asset purchase target unchanged was a unanimous 9-0. This was unexpected following the 6-3 vote in June and triggered an instantaneous GBP surge. GBP/USD spiked up over 1.52 and has stabilised around this level through the morning. EUR/GBP has dipped down through 0.8650. Speculation going into the minutes had been on how Governor Carney would vote in his first outing on the committee. In the event he was not in the dove-ish camp calling for more QE. Nor for that matter were Mr. Miles and Mr. Fisher who both changed their votes at the July meeting, on the face of it, a relative hawkish shift.
However, there is plainly also still a divergence of views on the MPC. For most members, the current monetary policy setting was appropriate and the onus on policy at this juncture “was to reinforce the recovery by ensuring that stimulus was not withdrawn prematurely.” The recent rise in market interest rates, were it to be maintained, “would represent such a premature withdrawal”, but the proposed post-meeting statement from the MPC ought to help prevent such an outcome. For these majority of MPC members there is therefore no perceived need for further stimulus at the current juncture, assuming that market interest rates turn back lower.
For certain other MPC members further stimulus was still warranted in July. For these members, “The pace of recovery remains too slow to begin to close the economy’s margin of spare capacity” and there remain “significant headwinds to growth in the UK.” “An expansion of the asset purchase programme remains one means of injecting stimulus, but the Committee would be investigating other options during the month, and it was therefore not sensible to initiate an expansion at this meeting.” Moreover, “given the already large size of the asset purchase programme there was merit in pursuing a mixed strategy with regards to the different policy instrument s at the committee’s disposal.”
The comments suggest that the shift in stance on the committee is perhaps not quite as significant as indicated by the outright 9-0 vote. This second group of MPC members still believes that more stimulus is needed, but are content to wait until the all-important August MPC meeting and Inflation Report to make a judgement. “The Committee’s August response to the requirement in its remit to assess the merits of forward guidance and intermediate threshholds would shed light on both the quantum of additional stimulus required and the form it should take.” We continue to expect forward guidance to be announced following the August MPC meeting, but additional QE now looks very unlikely
Elsewhere in Europe there has been little to report this morning. Modest risk off has again been the theme ahead of Mr. Bernanke’s semi-annual testimony. Equities are a little lower, EUR/USD is trading roughly flat around 1.3150, USD/JPY has edged up to 99.70.
The USD has steadily softened in the lead up to Fed Chairman Bernanke’s semi-annual testimony to the US Congress. Given the reaction to Bernanke’s comments last week and the market sensitivity to turning points in the Fed’s monetary policy cycle we would expect a further modest adjustment to USD positioning ahead of the testimony today. Bernanke’s testimony is split into 2 parts: (1) prepared remarks are released at 8.30am EST/1.30pm BST; and (2) the committee hearing (including the Q&A) commences at 10am EST/3pm BST. The prepared remarks typically reiterate the collective view of the FOMC. In turn, Bernanke is likely to reiterate the Fed is “somewhat optimistic” about the outlook for the US economy, but any adjustment to policy will remain data dependent. The Q&A portion may cause more market volatility, particularly if questions regarding the tapering of asset purchases or the outlook for Fed policy are posed. Overall, Bernanke may provide some more detail on the asset purchase tapering timeline provided in the June FOMC meeting press conference, but we think he will continue to emphasise the difference between a gradual reduction in asset purchases and raising the Fed funds rate and that the current US economic conditions continue to require accommodative policy. But as outlined by Bernanke last week, the Fed uses a mix of policies (asset purchases and forward guidance) to keep monetary policy accommodative. Bernanke is again expected to stress that a 6.5% US unemployment rate is a “threshold” and “not a trigger” for a rate hike. Our baseline scenario is for the Fed to announce a tapering of asset purchases at the 17-18 September FOMC meeting; however we do acknowledge there are some risks of delay. Nevertheless, we still think it is a matter of when, and not if the Fed commences tapering in 2013. In the near-term we still see some mild downside risks to the USD over the remainder of this week as market participants react to Bernanke’s testimony; however much of the USD adjustment is likely to have already occurred last week after Bernanke clarified the FOMC’s policy in his speech and Q&A.
USD/CAD has eased back below 1.0400, as the market awaits not only the Bernanke testimony, but also new Governor Poloz’s first Monetary Policy Report and rate decision. We expect the Bank of Canada’s interest rate decision (10am EST/3pm BST) to offset some of the USD induced softness in USD/CAD. 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. Low Canadian inflation, slowing credit growth and a weaker CAD suggest the Canadian economy is re-balancing. We expect USD/CAD will be volatile today, as the US and Canadian events have a bearing on the exchange rate. But we expect CAD to underperform AUD and NZD over the next 12 hours, continuing the general trend observed over the week so far.
USD/JPY weakened over recent sessions, to trade as low as 98.90. The minutes from the 10-11 June Bank of Japan policy meeting released today had no impact, but USD/JPY has lifted modestly through the Asian session, trading at 99.40 at the time of writing. USD/JPY last week found support around the 30-day moving average (now 98.30). While we see some mild downside risks to the USD, we don’t anticipate USD/JPY will end the week much below current levels. The wide US Japan yield spread and the collapse in Japan’s current account surplus remain supportive for USD/JPY.
AUD and NZD have outperformed over the past 24 hours, and AUD/NZD has lifted back above 1.1700, boosted by yesterday’s RBA minutes which were perhaps less dovish than some participants had expected. With no significant local data due, the direction of both currencies is expected to be a function of the US developments today. On balance we expect both AUD and NZD can press higher today, but will likely meet resistance around recent highs of 0.9306 and 0.7969 respectively.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – The next US focal points will be 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 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 –Q2 Australian CPI is released on 24 July. The inflation outlook remains a key focus for RBA policy. 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. 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 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 today. CPI is due 19 July. 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. Canadian retail sales are due on 23 July.
Martin McMahon European Economist