Commonwealth Bank FX Strategy - NY Open
Another set of Euro-zone sentiment readings has improved in July continuing the run of decent economic news-flow from Europe. The headline economic sentiment reading rose to 92.5, a 15-month high, but currency markets ignored the news. EUR/USD has been relatively directionless through the morning. EUR/USD edged up early in the session and has hovered around the 1.3270 area for most of the morning. GBP/USD has dipped lower despite any obvious drivers, temporarily edging below the 1.53 level a little while ago. USD/JPY has also dipped back down to the 98 level. All are in familiar territory.
AUD/USD has stabilised around 0.9070 through the European morning after declining by 1.4% from over 0.92 in today’s Asian trade and AUD has underperformed on the crosses. The June Australian building approvals data underwhelmed expectations, falling by 6.9% (MoM) or 13% (YoY) in June. The soft reading is a disappointment given housing activity is an area of the economy expected to fill the void left by the drop off in mining investment. Later in the day, RBA Governor gave a speech entitled “economic policy after the booms”. Market participants latched onto comments by the RBA governor that the recent inflation data does “not appear to have shifted” the assessment that the inflation outlook may provide the RBA scope to ease policy further if deemed necessary. In addition, Governor Stevens noted that: (a) while there were signs lower interest rates were encouraging more risk taking, it has not been to an extent that the RBA sees “a serious impediment to further easing”; (b) he was not currently concerned about running out of ammunition in regards to further interest rate cuts; and (c) the Australian economy is faced with substantial challenges, that “require appropriate responses”. The OIS market is now pricing in a 91% chance of a 25bpt rate cut next Tuesday (up from 79% yesterday and 54% two weeks ago). Given our outlook for a firmer USD this week, a softer than expected China PMI (Thursday) and Governor Stevens comments, we think AUD/USD is likely to remain under downward pressure. We believe the RBA will cut interest rates again
next week (Tuesday) and the AUD/USD will test the recent 12 July low of 0.8999 sooner, rather than later.
NZD/USD continued its drift lower in today’s Asian session but has also stabilised through the European morning. Looking ahead there is no significant New Zealand economic data released this week. Moves in NZD/USD are likely to be contingent on USD developments and the official China PMI data. Based on our outlook for the USD and China PMI, the bias is for further declines in NZD/USD. That being said, the diverging monetary policy outlooks between the RBA and RBNZ should keep the very interest rate sensitive AUD/NZD exchange under downward pressure. The Australia-New Zealand two-year swap spread is now -60bpts. This is the most negative this spread has been since March 2009.
USD/JPY drifted modestly higher in today’s Asian session, in line with the bounce in the Nikkei
stockmarket, but has retraced back lower through the European morning to trade around 98 at time of writing. The June Japanese industrial production data was significantly weaker than expected, falling by 3.3% (MoM). Nonetheless, given the strong readings in April and May, Japanese industrial production rose by 1.4% over Q2. Our equation mapping industrial
production to GDP is now suggesting a 0.6% (QoQ) increase in Japanese Q2 GDP (released 12 August). Overall, we think USD/JPY will remain largely range bound ahead of the FOMC meeting on Wednesday.
USD/INR was higher today in the lead up to the Reserve Bank of India (RBI) policy meeting.
As expected the Reserve Bank of India (RBI) left policy interest rates unchanged today. The RBI stated that the “risks to growth have increased in India”, it “will roll back” it’s tightening steps as the INR steadies, and India’s “current account gap” is a “formidable structural risk”. India continues to be faced with a dilemma: despite soft Indian economic growth, inflation is too high and the current account deficit continues to widen (out to 5.1% of GDP) led by the rise in oil imports. The RBI’s attempts to restrain liquidity and stabilise the weakening in the INR have led to a sharply inverted yield curve. The likelihood is USD/INR continues to press higher, reflecting the policy-paralysis of the RBI and India’s widening current account deficit.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – It is a busy week in the US, with the FOMC’s policy meeting and the first estimate of Q2 GDP (31
July), July ISM Manufacturing (1 August) and July Non-Farm Payrolls (2 August) the highlights. FOMC voting member Bullard is due to speak on the US economy on 2 August
AUD –The official China Manufacturing PMI for July is due 1 August. June Australian retail sales are released on 5 August, and the RBA holds its next policy meeting on 6 August. CBA expects a 25bpt rate cut by the RBA in August.
JPY – The BoJ holds its next policy meeting on 8 August.
NZD – Q2 New Zealand labour market data is released on 6 August.
EUR –Final readings of the Eurozone PMI data are due on 1 August (manufacturing) and 5 August (services and composite). The ECB meets on 1 August.
GBP –Next week’s focus will be on the Bank of England policy meeting (1 August), although the meeting may be a non-event, with the focus on the BoE Inflation Report (7 August). The July UK manufacturing PMI (1 August) and services PMI (5 August) are the next major data points.
CAD – May monthly GDP (31 July) is the next key data release in Canada