Commonwealth Bank - FX Strategy
Chinese Industrial Production comes in much stronger that expected with Chinese data again supporting the Australian Dollar.
AUD/USD was relatively stable in the Asian trading session around 0.91 despite the release of the RBA’s Statement on Monetary Policy and the monthly Chinese data dump. AUD tracked modestly higher in the London session above our near term target of 0.9140 to a high of 0.9172. AUD has gained from a short squeeze this week and we reiterate our strategy of selling AUD into rallies above 0.9140. In its Statement on Monetary Policy (SMP), the RBA cut its GDP forecast for 2013 from 2.75% to 2.25% by cutting its mining investment forecast. As a consequence of cutting its GDP forecast harder than expected, the RBA left its underlying CPI forecast for the year to December 2013 at 2.25%, rather than lift its CPI forecast modestly because of the weaker AUD. The RBA forecast for year to June 2014 GDP of only 2.5 compared to its previous estimate of 2-3% (mid-point of 2.5%). The CPI forecast for the year to June 2014 is lower at 2.25% compared to its previous estimate of 2-3% (mid-point of 2.5%) because of the lower AUD and weaker GDP growth in 2013. The SMP did not give a strong signal of future moves in the cash rate. However, because the RBA expects the unemployment rate to increase amid weak GDP growth, the balance of risks remains for more RBA rate cuts this year/next year.
Overall, the Chinese data provided a modest positive surprise and some support for AUD. The positive surprise from the 9.7% increase in industrial production (CBA: 8.5%pa, market: 8.9%pa) outweighed the negative surprise from the 12.2% increase in retail trade (CBA and market: 13.5%pa). Fixed investment virtually matched expectations (20.1% v 20.0% expected). The month on month data showed an immaterial decline in momentum in retail from 1.26% in June to 1.23% in July and modest increases in momentum for industrial production and fixed investment. The data covers July so gives a hint of Chinese economic growth after the disappointing Q2 GDP growth of 1.7% (released on 15 July). The July data suggests in Q3 China's economy has not decisively strengthened but is showing some positive signs. This is unlikely to spook Chinese policy makers too much because they want sustainable growth and so does not have great implications for Chinese macro policy, particularly because inflation is under control.
USD/JPY firmed in Asia and range traded in London following the brief dip below 96.00 yesterday. We retain our guidance to accumulate long USD/JPY positions when it dips below 96.00. 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; (ii) Fed tapering asset purchases in September 2013 (or December 2013 at the latest); and (iii) higher US real bond yields.
USD/CAD was very weak yesterday, possibly triggered by ongoing improvement in US jobless claims being a good omen to today’s Canadian payrolls. Canadian payrolls have been very volatile in recent months, but the unemployment rate has been fairly steady around 7.1% since late 2012. The consensus expects Canadian payrolls to lift modestly in June by 10k, following the outsized 95K gain back in April, though we see downside risks that could be supportive for USD/CAD today.
EUR/USD dipped modestly after French industrial production slumped by 1.4% in June compared to expectations for a 0.3% increase. The weakness in French industrial production is in sharp contrast to Germany’s very strong 3.8% increase released on Wednesday. The French economy has generally underperformed the German economy significantly in the past few years. The broader Eurozone economic developments continue to track in line with the ECB’s baseline expectations. As noted by ECB President Draghi developments have to be “significantly better than our baseline” for the ECB to change its forward guidance on interest rates. The ECB’s reiteration that it “expects the key ECB interest rates to remain at present or lower levels for an extended period of time” and that they “have not reached the zero bound” should continue be a headwind to further strong gains in EUR.
AUD & NZD Today
AUD has again been able to push up another 0.5%+ overnight by ignoring the RBA downgrade to GDP in their August Statement of Monetary Policy and instead focused on the better Chinese data as was the case earlier this week when Aust Employment data was largely ignored in favour of Chinese Trade data … with plenty of Aust Corp selling interest lined up 0.9180/0.9220 the topside will be slow going especially as Macro and Option accounts continue to sell into this move higher, some stops have built up thru 0.9230/40 …. Intraday buyers sit patiently now below 0.91c …. NZD had another night on the sidelines sitting 20 points either side of 0.80c and fairly low interest for the pairing, accounts still continue to favour selling rallies but have decided to remain patient for better levels closer to the 0.8050/0.8080 region which in summer markets makes a lot of sense … some buying interest this morning into 0.7940/60.
Thoughts from our Trading Team
AUD: AUD shorts continue to feel the pain. There has been very good demand for AUD on the 11 am fix this week. I think we will see this squeeze to .9240. EUR/AUD reversed sharply from 3 year highs of 1.5000 reached last week. The cross looks to have another 1 % move to the downside and will be well supported at 1.4460.
NZD: NZD has found resistance near .8050. Brazil announced that they have halted imports of Fonterra milk powder yesterday. AUD/NZD profit taking have slowed the NZD rally. I prefer to sell NZD closer to .8100 and stop out above .8150. .8128 is the 100 day MA. .8105/40 has capped Kiwi rallies several times since mid-May.
JPY: 97.00 has capped USD/JPY in Asia each of the past 2 days. Yesterday afternoon saw recent USD shorts taking profit throughout the entire afternoon. USD selling on the 11 am has been the theme all week. USD/JPY should continue to trade 96-100 for the near term.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – US retail sales (13 August), CPI and industrial production (15 August), FOMC minutes (21 August) and Jackson Hole summit (22-24 August).
AUD – Treasury releases the Pre-Election Economic and Fiscal Outlook (13 August), RBA minutes (20 August).
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 – 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 – the next key release in Canada is retail sales (23 August).