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CBA FX - Who is Chasing Whom? Bernanke or the Market?

Posted by Marge Maresca on Jul 18, 2013 9:02:00 AM

A UK retail sales print has been the only news of note through the European morning. Retail sales grew by 0.2% MoM in June taking annual growth to 2.2% YoY. Discounts at department stores drove demand for clothes and electrical products. High Street spending growth is positive, but modest. GBP rallied following the release and has pushed up to GBP/USD 1.5240 so far this morning. EUR/GBP has dipped down towards the 0.86 handle. EUR/USD is hovering a little over 1.31, USD/JPY a little over 100. Equity markets are modestly higher, as are Bunds and Treasuries. The Eurozone posted another sizeable current account surplus of EUR19.6b. in May. But the numbers were ignored by markets.

USD has drifted modestly higher overnight as the market digested Ben Bernanke’s testimony. Beyond reiterating the Fed’s monetary policy outlook, the two additional bits of news to come out of Bernanke’s testimony before the House were: (a) the Fed is quite likely to hold its asset purchases until maturity once asset purchases are completed; and (b) the Fed would be unlikely to view a decline in the unemployment rate to 6.5% as a sufficient reason to raise the Fed funds rate if a substantial part of the reduction in the unemployment rate was driven by a decline in the participation rate.

The Fed’s monetary policy outlook may be summarised in the following steps: (1) the Fed is likely to begin to taper asset purchases this year (we believe September) and finish tapering in mid-2014; (2) The Fed will continue to re-invest the proceeds from maturing securities to hold the stock of treasury and agency securities steady once tapering ends; (3) the Fed will continue to maintain forward guidance that rates will kept at exceptionally low levels for an extended period after asset purchases end (we believe until mid-2015); (4) the above monetary policy plan was economic data-dependant; meaning monetary policy stimulus could be either brought forward or extended, but on the Fed’s current economic forecasts, monetary policy is likely to proceed as indicated. 

We think that Bernanke is unlikely to reveal anything new at today’s Policy Report to the Senate (3.30pm BST), and the USD is likely to continue to consolidate.  However, we can never discount the chance that Bernanke’s Q&A could raise something fresh and trigger further market volatility.  We maintain our view that the USD remains on a medium-term uptrend.

AUD/USD and NZD/USD have both drifted lower in the Asian session today. USD movements are likely to determine direction for the antipodean currencies over the remainder of the week.  The local data releases had no significant impact today (NAB Business confidence and RBA FX transactions in Australia; ANZ consumer confidence in NZ).  In addition,  S&P re-affirmed Australia’s Aaa/A-1+ rating and stable outlook today.   In the near-term, we expect both AUD and NZD will continue to respect their recent ranges.

USD/CAD has endured a choppy session yesterday, as expected. Having dipped to 1.0356 in the wake of Bernanke’s testimony, USD/CAD spiked to as high as 1.0442 after the Bank of Canada’s policy meeting and press conference.  The BoC's new governor Stephen Poloz, made his mark by providing slightly more definitive guidance on the interest rate outlook.  The BoC has changed the reference that interest rates are likely to remain unchanged for a “period of time”. The BoC now states “considerable monetary policy stimulus currently in place” remains appropriate “as long as there is significant slack in the Canadian economy, the inflation outlook remains muted, and imbalances in the household sector continue to evolve constructively.”  The comments were perceived as more dovish, and weighed on CAD.  We expect USD/CAD will drift slightly higher over the rest of the week. The next focus is June CPI (8.30 am/1.30pm BST Friday).  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.  We maintain our USD/CAD forecasts of 1.0500 for Sept 13 and 1.0600 for year end.

Upcoming Economic Calendar Highlights Important for Exchange Rates

USD – 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 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 flash estimates of the July Eurozone PMIs are released 24 July, and the July German IFO is due on 25 July. 

GBP –  The first estimate of Q2 UK GDP is released on 25 July. 

CAD – Canadian retail sales are due on 23 July. 


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