Commonwealth Bank - FX Strategy - NY Open
Decent economic data in Europe has again been a driver of currency markets this morning. First up, better than expected UK industrial production numbers supported GBP/USD which spiked up to a session high of 1.5392 following the release. UK industrial production grew by 1.1% MoM in June taking annual growth back into positive territory for the first time since 2011. Then Italian GDP contracted less than expected in QII, falling by 0.2% QoQ, before German factory orders numbers soared by 3.8% MoM in June. EUR/USD has also pushed higher through the morning reaching a high so far of 1.3295 a little while ago. Economic news-flow is undoubtedly improving in the UK and Europe and markets are taking note. EUR/USD continues to trade in a familiar range, centred on 1.3250. In our view, there is little on the schedule that is likely to push EUR/USD too far beyond a 1% range either side of 1.3250 over the coming days.
Overnight the AUD/USD and Australian swap rates lifted as it appears the RBA has removed its easing bias. The RBA now appear to have a neutral bias. This is because the RBA are no longer indicating that the inflation outlook may provide them with some scope to cut interest rates should it be required, unlike their commentary every month so far this year. However, this does not mean the risk has changed that the RBA will cut again. The RBA have indicated in today's statement that "the Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time." Our take is that Australian swap rates will temporarily grind a bit higher as some near-term easing risks dissipate. However, the RBA will maintain a close eye on the unemployment rate and the Q3 inflation date (due late October) before being tempted to cut again. Front-month IBs (one-month cash futures) are likely to adjust to the pause in the easing cycle. The AUD/USD has lifted temporarily back above 0.9000 this morning (and could get back above the 30-day moving average of 0.9140). However, the RBA is maintaining that the AUD is still at a "high level" and a further depreciation "would help foster a rebalancing of growth in the economy". Furthermore, the other variables pressuring the AUD lower have also not changed. Hence, we would maintain a strategy of selling into AUD rallies, but would wait until AUD/USD lifted back above 0.9140 before establishing fresh AUD/USD short positions.
NZD/USD has recovered from yesterday’s losses incurred in the wake of the whey contamination scare trading up to 0.7890 so far this morning. Fonterra has confirmed the trade restrictions on NZ dairy exports to China, and they are less severe than initially reported yesterday. Chinese authorities have only temporarily suspended imports of whey powder and whey-based powder used in infant formula (whey exports to China are approximately 0.8% of New Zealand’s dairy exports). Chinese Imports of whole milk powder and skim milk powder from New Zealand have not been suspended (around 60% of NZ dairy exports are powders – see chart below). Today’s GlobalDairyTrade auction will garner much attention (from 7pm EST/12pm BST). Fonterra have reassured the product sold on this platform is not affected. Nonetheless, some near-term distortion in prices remains possible, reflecting the uncertain nature of the situation. We expect the NZD will be more sensitive than usual to any weakness (or strength) in prices at today’s auction. The NZD focus then turns to Q2 Labour market data (6.45pm EST/11.45pm BST tonight). The New Zealand labour market data has a history of being somewhat unpredictable, and accordingly has the potential to add to NZD volatility over the next 24 hours.
GBP/USD received another boost this morning in the wake of better than expected IP numbers, following on from the much better than expected UK Services PMI yesterday. GBP/USD is back trading around 1.5350 after having pushed up to 1.5390 earlier in the morning, but we expect GBP will fade later in the week. The key focus is the August BoE Inflation Report (Wednesday), where the Monetary Policy Committee (MPC) is set to provide its assessment on forward guidance. The extent of the impact on GBP will depend on the type of forward guidance announced (i.e. time contingent or based on intermediate economic thresholds such as unemployment and inflation). In its May Inflation Report, the BoE noted that a 25bpt rate hike “was not fully priced” until “late 2016”. The commentary by the BoE in July indicated that the lift in market rates relative to this benchmark was not justified by the recent economic developments. Hence, it appears that the market pricing of a first rate hike in late 2016 is the perceived line in the sand for the BoE MPC. Forward guidance based on economic thresholds that reinforces the MPC’s previous guidance should weigh on GBP.
The USD initially lifted yesterday, with the USD index spiking to an overnight high after the release of a better than expected July US ISM non-manufacturing index (56.0 vs. 53.1 expected, 52.2 prev.). However, the USD faded through the New York session, and during Asian and European trade. With no major economic events slated for the week ahead, the USD is likely to continue consolidating.
USD/INR was a big mover today, spiking 0.5% higher in the Asian afternoon. The drop coincides with weakness in the Indian sharemarket, which is down over 1% at the time of writing, with basic materials and financial stocks leading the decline (both sectors down over 2%).
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – The Fed’s Evans speaks in Chicago on 6 August.
AUD – The July employment report is due 8 August.
JPY – The BoJ holds its next policy meeting on 8 August and current account data for June is due on the same day.
NZD – Q2 New Zealand labour market data is released on 7 August.
EUR – There is no more important data this week.
GBP – The BoE Inflation Report is due on Wednesday 7 August.
CAD - The July Canadian labour market report is due 9 August