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This week’s key FX themes

Posted by Marge Maresca on Aug 19, 2013 9:15:00 AM

CBA Foreign Exchange Research

  • USD focus this week will be on the minutes of the 30‑31 July FOMC meeting due Thursday AEST (Wednesday BST).  We anticipate some healthy debate of recent price disinflation among the FOMC, but a majority view by members that the outlook for tapering QE is drawing nearer.  We continue to believe that the Fed will begin the tapering process at the 17‑18 September FOMC meeting.  The USD is likely to be slightly firmer this week.  Challenging the recent rise in the USD is the fact that higher US bond yields are being broadly matched by rise in global bond yields, keeping bond spreads in a relatively tight range.  We don’t anticipate much of a market reaction to central bank comments emanating from the Fed’s Jackson Hole symposium that begins on Thursday and runs through the weekend.  Fed Chairman Bernanke is not attending this year’s event. fomc resized 600
  • AUD/USD has had little reaction to weekend news that China’s property prices rose again in July.  New home prices recorded monthly gains in 62 of 70 surveyed cities.  Chinese new house prices were higher than a year ago in all but one of the 70 surveyed cities.  The Chinese government also announced plans to ease restrictions on foreign investment in selected regions, including Shanghai.  The move to ease foreign investment restrictions appears to be in response to an unexpected but modest 3.7% decline in foreign direct investment (FDI) over 2012 from record high levels in 2011.  China’s rate of FDI is equivalent to about 1.4% of China’s GDP.  The easing in foreign investment restrictions will partly offset the moderation in Chinese business investment growth.  Over the course of this week, we expect the AUD/USD to edge modestly higher, encouraged by a number of factors, including details in the August RBA meeting minutes (Tuesday), which will provide some colour on why the RBA appeared to abandon a clear easing bias in favour of a neutral monetary policy stance.  We anticipate a higher AUD despite a slight firming in the USD.  Base metal and industrial commodity prices continue to firm after reaching a cyclical bottom in June‑July.  The Eurozone’s emergence from recession is consistent with the outlook for firmer global demand over the next twelve months.  We think AUD/USD could close the week back above 0.9200 and record gains against the major crosses.  The flash estimate of the August HSBC China manufacturing PMI is due Thursday.  Expectations are centred on an improvement in the HSBC PMI.  Such an outcome should prove to be AUD supportive. china resized 600
  • NZD/USD is likely to remain firm this week, with another weekly close above 0.8100 likely.  The RBNZ’s survey of inflation expectations (Tuesday) is the economic data highlight.  New Zealand inflation expectations have steadily declined since peaking at 3% in June 2011.  But the decline in the NZD since the Q2 2013 peak, along with a run of strong New Zealand economic indicators may prompt an upward revision to inflation expectations.  Such a development would further increase New Zealand swap rates, which are already pricing a rate tightening cycle by the RBNZ, and support further appreciation in the NZD.  Tuesday’s GlobalDairyTrade auction will be closely watched to see if the recent Fonterra contamination scare has had any impact on demand for Fonterra’s dairy products.  Tourism and migration numbers have been positive over recent months – an encouraging driver for economic activity (Wednesday).  New Zealand markets were impacted Friday afternoon by uncertainty following more large earthquakes in central New Zealand.  New Zealand interest rates and the NZD both fell in the immediate wake of the earthquakes, but it appears damage was relatively minor.  This saw support return to the NZD over the weekend, and New Zealand swap rates lift in early trade today.  Experts say aftershocks will continue, and New Zealand financial markets may be sensitive any news of further significant shocks.dairy resized 600
  • EUR/USD is tracking near the top‑end of the 1.2800‑1.3400 range it has traded in since mid‑March.  This week the key focus in the Eurozone will be the flash estimates of the August Eurozone PMIs (Thursday).  The Eurozone GDP data released last week confirmed the economy has emerged from recession.  The composite Eurozone PMI is in expansionary territory for the first time since January 2012, and at its highest level since August 2011.  Expectations are centred on further modest improvement in the PMIs in August.  This should reaffirm our own and the ECB’s baseline assumption for further economic recovery over H2 2013.  However, reflecting upon the ECB’s forward guidance and ECB President Draghi’s comments that higher market interest rates are not warranted by the baseline outlook, we think the market will be reluctant to adjust higher the Eurozone‑US two‑year bond spread (currently ‑12bpts) and in turn, EUR/USD much higher at this stage.  Despite the improved Eurozone economic outlook, in our view the risks appear to reside with a further grind up in the AUD and NZD vis‑à‑vis the EUR over the near‑term.  This is likely to be driven by the improved market sentiment towards the Chinese economic outlook, improvement in global economic momentum, a rebound in global commodity prices.  The details contained in the RBA minutes of a more neutral RBA policy stance as well as upside risks to New Zealand swap rates over the course of this week should support weekly gains in AUD/EUR and NZD/EUR. euro resized 600
  • GBP/USD continues to trade near its highest levels since mid‑June 2013.  Market participants continue to be encouraged by the recent run of positive UK economic data.  The Confederation of British Industry (CBI) industrial trends data (Wednesday) and the second estimate of Q2 UK GDP (Friday) are released this week.  The CBI data should reiterate that momentum in the UK is improving, while the GDP data should confirm that the UK economy grew by 0.6% (QoQ) in Q2.  That being said, there is a pattern for UK GDP to be revised higher from its initial estimates.  Nevertheless, in the face a firmer USD, we think GBP/USD could be approaching the top of its range.  Looking ahead, the tightening in UK monetary conditions relative to the BoE MPC’s expectations, as well as the recently announced forward guidance, suggests the risk of increased dovish rhetoric by the MPC is rising.  The next opportunity is a speech (and Q&A session) by Governor Carney on 28 August.  This will be Carney’s first public on‑the‑record speech during his tenure as BoE Governor. GBP resized 600
  • USD/JPY is likely to keep tracking higher this week because: (i) a firmer USD and higher US swap rates;  and (ii) a widening in Japan’s July trade deficit is likely to keep the current account surplus small.  Earlier today, Japan’s July trade deficit was considerably larger than consensus at ¥944bn (consensus: ¥741bn).  The 3% slump in Japan's industrial production suggested the consensus were too optimistic.  The last two times Japan's trade deficit was near these large levels (¥1,019bn in September 2012 and ¥1,051bn in February 2013), Japan recorded very small current account deficits.  We estimate Japan's current account surplus will shrink to less than ¥100bn in July (released on 9 September).  Bank of Japan Governor Kuroda is speaking at this week’s Kansas Fed’s Economic Symposium at Jackson Hole, though his speech is unlikely to be a major market mover (day unknown).  We maintain our view that USD/JPY should track higher over the medium‑term.  japan resized 600
  • USD/CAD is near the centre of its August 2013 range.  This week’s Canadian data is not expected to push USD/CAD outside this range.  June Canadian retail sales (Thursday) and July CPI (Friday) are the local data highlights.  Retail sales are expected to dip modestly in June, following May’s large 1.9% monthly gain.  However, firm consumer confidence bodes well for retail activity, and we do not expect CAD weakness unless the monthly drop in activity is larger than the 0.4% dip expected by markets.  Canadian CPI inflation is tracking near the bottom of the Bank of Canada’s 1‑3% target band.  We expect annual core inflation to tick up to around 1.5%pa in July.  The benign inflation in Canada at present will help keep the BoC on the sidelines this year.  In the absence of a major surprise in the Canadian data, we expect USD/CAD to drift modestly higher over the week, reflecting our firmer USD view.                           cad resized 600

 

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