Commonwealth Bank - FX Strategy
EUR/USD has drifted a little higher this morning reaching month highs around 1.3370. Germany posted another sizeable external surplus of EUR17.3b. in June. There has been little else of note on the calendar. GBP/USD has consolidated around 1.55 following yesterday’s spike higher. The lift in UK yields and GBP suggest the market expects the 7% unemployment threshhold will be reached much sooner than the BoE is forecasting. The BoE may not be comfortable with the bond and GBP reaction, but over the coming sessions we expect GBP will remain buoyant while participants adjust to the recent developments. Governor Carney is not scheduled to speak until 28 August, and next week’s BoE August Board Meeting minutes are of less significance than usual, given the major changes announced in the August Inflation Report. The remainder of the week is very quiet in Europe.
AUD/USD was choppy in Asian trade, but ultimately pressed higher and has extended those moves through the European morning reaching a high of 0.9090 so far. Weaker than expected Australian July Australian labour market data weighed on the AUD, but that weakness was reversed on better than expected headline Chinese trade figures for July. Details on China's July trade data show China's non-seasonally adjusted imports of iron ore lifted to 73.1 million tonnes in the month, a record high. Imports of coal were also the strongest this year. Collectively these are Australia's two largest exports accounting for 42% of total exports. This news comes as participants continue to assess their short-term interest rate outlook to incorporate the RBA’s neutral stance. The RBA are no longer indicating that the inflation outlook may provide them with some scope to cut interest rates should it be required. However, this does not mean the risk has changed that the RBA will cut again. 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. We believe the AUD/USD can get back above the 30-day moving average of 0.9140. But 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.
USD/JPY remains heavy, and has dipped to a low below 96.10 through the European morning. As expected, the BoJ made no change to monetary policy and virtually no change to its statement. The only slight change to the statement is the BoJ is becoming more confident about the uptrend in the CPI, which reflects the recent increase in inflation (ex. fresh food) to 0.4%pa in June from 0.0%pa in May. However, Tokyo inflation for July suggests national inflation will ease a little when it is released on 30 August. We maintain our long-held view that USD/JPY will head higher over the medium-term because of: (i) Japan's shrinking current account surplus (the June result released this morning was weaker than expected, printing at ¥646bn sa ); (ii) Fed tapering asset purchases in Sept 2013; and (iii) higher US real bond yields.
AUD & NZD Today
AUD quickly shrugged of the effects of a weaker print for July Australian Employment data (-10k v +5k exp with a lower participation rate keeping the Unemployment rate steady at 5.7%) which saw a brief dip below 0.90c but has since rallied over 1% on the stronger Chinese Trade data with a surge in Imports (+10.9% v +1% exp) the main catalyst for the move … AUD was able to fill the large Corporate selling interest we had on our books in the 0.9040/80 region who have been rewarded for their patience instead of chasing AUD lower under 0.90c over the last week …. the combination of further Corporate selling combined with Macro/Real Money and Intraday account interest to sell rallies into the 0.9080/0.9120 area on the day will make it hard going for much higher levels in AUD on the day esp if the Jobless Claims continue their recent good showing, buying interest is seen on the day just below 0.9020. NZD by comparison has bounced around in a rangy 0.7940/90 range finding some support from NZ Exporters near the session lows but continuing to run into intraday profit taking ahead of 0.80c Macro accounts still continue to favour selling rallies into 0.80c with the more patient waiting for any move into 0.8020/50 region before acting.
Thoughts from our Trading Team
AUD: The move lower after weaker than expected jobs data was short lived due to the stronger trade numbers in China. We are seeing offers .9090-.9120 area that should cap rallies for today. I will fade the move to .9100 with a stop above .9130.
NZD: Quiet overnight session with .8000 offers capping the recent rally and the .7920 pivot providing support. I think we will consolidate in between for today. I will wait and sell kiwi closer to .8080 for a move lower medium term.
JPY: Lower lows continue. Long term long USD positions continue to get squeezed out. The USD index broke the 200 day MA yesterday at 81.58 and looks vulnerable to further weakness. I think we could see USD/JPY test overnight lows and break 96.00 today. Support comes in at 95.00 and 93.80 thereafter.
GBP: 200 day comes in at 1.5537. There are stops above 1.5580 and more at 1.5605. I will look to buy a break of 1.5550 today with a stop below 1.5510 looking for a spike to 1.5700.
CHF: Very good support comes in at .9180 in USD/CHF and 1.2230 in the cross. Longer term USD longs will look to stop out below .9100. We are square looking to buy the cross on dips to 1.2250.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – US consumer credit (June) and weekly jobless claims are due today. Fed Governor Pianalto also speaks on monetary policy today.
AUD – The next key releases are Chinese CPI, industrial production and retail sales on Friday.
JPY – Q2 GDP on 12 August is the next top-tier release.
NZD – The next key New Zealand release is the Q2 retail trade survey on 14 August.
EUR – There
is no more important data this week. The next key economic release in the
Eurozone is June Industrial Production on 13 August.
GBP – June CPI data is due on 13 August, and BoE minutes from the August meeting are released on 14 August.
CAD – July monthly labour market data tomorrow is the next key release in Canada.