This week's key FX themes
USD resilience was notable despite the large decline in US long‑dated treasury yields on Friday. US yields appear to have reacted to the combination of weaker than expected US July new home sales and comments from the Jackson Hole summit cautioning against an aggressive tapering of asset purchases by the Fed. The concerns relate to the elevated levels in US and global long bond yields. It is possible the rise in US long bond yields is already affecting US new home sales although this appears at odds with other US housing data. But we know the rise in long bond yields is frustrating policy makers in Europe and other parts of the world. We anticipate more central bank officials to comment on the elevated level of long bond yields but for the Fed to persist with a policy of tapering asset purchases following their 17‑18 September FOMC meeting. Hence we remain of the view the USD will continue to edge higher both over the medium‑term and over the course of this week. Concerns in selected emerging market economies are likely to keep the USD well‑bid over the course of this week. And despite the unexpectedly soft US July new home sales data, participants should remain encouraged by the likely upward revision to US Q2 GDP when the data is released (Thursday). We also anticipate an improving trend in US July core durable goods (Monday), and the August Chicago PMI (Friday).
AUD/USD had its lowest weekly cose in three‑weeks. This week we think the bias is for AUD/USD to emain under downward pressure. As indicated last week, a close below .9000 is possible. Balance of payments concerns in selected Asian merging markets continue to negatively impact AUD/USD. In combination ith higher core global bond yields, accelerated capital outflows are occurring n Indonesia and India despite a capital inflow requirement. Further depreciation in the INR and IDR is likely over the course of this week, which is likely to continue to weigh on AUD/USD. On the Australian economic data front, the key focus will be Q2 CAPEX (Thursday). The Q2 report will include the 3rd estimate of 2013/14 capital spending. To confirm the CAPEX story remains on track, and for business investment to remain constant as a share of GDP, we estimate a dollar figure of around A$161bn is needed for the 3rd estimate of 2013/14 capital spending. Should the 3rd estimate for 2013/14 come in below expectations, or if the non‑mining components show little improvement, expectations or further RBA policy stimulus will increase, weighing on AUD/USD. GBP/USD could not convincingly break above 1.5700 last week and through the top of the six‑month range. The details of UK Q2 GDP were better than expected, with both broad‑based growth across the expenditure components of the economy and a 0.1% upward revision to 0.7% (QoQ) in headline GDP. We are not surprised of the inability of GBP/USD to convincingly break above 1.5700 because the combination of negative UK real bond yields and a wide UK current account deficit equivalent to 3.9% of GDP will remain heavy anchors on GBP/USD. Furthermore, the Bank of England (BoE) are likely to remain frustrated with the elevated lift in long‑dated gilts and UK market interest rates and take opportunities to talk down gilt yields, and possibly the GBP, in an effort to assist a re‑balancing of the UK economy. BoE Governor Mark Carney will receive such an opportunity on Wednesday this week, when he delivers his first speech since formally adopting “forward guidance” as a policy tool. In combination with a slightly firmer USD, we anticipate GBP/USD will drift back down to the 200‑day moving average of 1.5516 and probably the 30‑day moving average of 1.5417 over the course of this week.
EUR/USD continues to track within its recent range. We think a firmer USD and ECB commentary is likely to
see EUR/USD edge modestly lower this week. The August reading of the German IFO is the key Eurozone data release this week (Tuesday). Further modest improvement is expected, and should highlight the positive momentum in the Eurozone’s largest economy. A firmer German IFO should provide some intra‑day EUR support, but we expect the impacts to fade over the course of the week. While the recent improvement in the Eurozone economic data is positive, the developments are in line with our own and the ECB’s base line assumption looking for a very gradual recovery over H2 2013. There are a number of ECB members speaking this week (Weidmann 26th, Liikanen 26th, Coeure 27th, Asmussen 28th (27th BST), Nowotny 29th, Mersch 29th and Weidmann 30th (29th BST)). Overall, we think the consensus of the ECB speakers is likely to acknowledge the recent economic improvement, but reinforce the current policy of forward guidance towards low or lower interest rates in an attempt to rein in the rising Eurozone money market rates, which pose downside risks to the Eurozone economic recovery. The ECB next meets on 5 September.
USD/JPY remains in an upward trend, driven by a large reduction in Japan’s current account surplus and a firmer USD, despite persevering through some three‑months of consolidation. Our expectation of a firmer USD over the course of this week is likely to see USD/JPY edge higher. It is notable that last week’s balance of payments concerns in Indonesia and India leading to fresh large falls in INR and IDR didn’t generate a stronger “safe haven” bid for JPY over the course of the week. USD/JPY finished the week higher, not lower. In our view this reflects the yen’s reduced (but not eliminated) safe haven bid because of a reduced (but not yet eliminated) current account surplus. Interestingly, AUD/USD finished the week lower because of these Asian currency concerns, as did AUD/JPY. This week’s local Japanese economic data highlights include the July CPI (Friday) and July industrial production report (Friday) which always provides some insight into the upcoming July trade balance data (due 9 September).
NZD/USD showed little reaction to the release of the wider than expected New Zealand July trade deficit in early
Monday morning trade. The widening in the trade deficit was caused by irregular imported items (oil shipments and aircraft). Monthly exports were in line with expectations. This week we expect the local New Zealand economic data to be reasonably supportive for NZD, but this upward influence on the NZD is likely to be offset by a firmer USD. New Zealand August business confidence (Thursday) and July building consents (Friday) should both capture the strong construction theme in New Zealand stemming from the Canterbury rebuild. Headline business confidence reached the highest level since April 1999 in July. Encouragingly, although construction is the most bullish sector, the rally in confidence appears to be broad‑based across other sectors. We expect NZD/USD should find support above 0.7700 but there are a host of offshore downside risks including a possible renewed dairy contamination scare, Asian currency depreciation emanating from INR and IDR impacting both AUD and NZD, or a weaker than expected Australian Q2 CAPEX survey, which may trigger a renewed bout of concern about the Australian economic growth outlook, and generate NZD/USD weakness.
USD/CAD continues to trend higher in line with our forecasts. We expect USD/CAD can press above 1.0600 this week, a level last tested briefly in early July. The Canadian economic data highlights this week are the Q2 current account balance (Thursday) and Canadian Q2 GDP (Friday). We expect Canadian growth softened in Q2, with the seasonally adjusted annualised growth rate expected to halve from 2.5% in Q1 to around 1.2% in Q2. Flooding in Alberta during late June affected the province’s economy, and strikes in Quebec are also likely to have lowered output. The impact on Q2 GDP is expected to be significant, but a rebound in activity should take place over the second half of the year. Nonetheless, USD/CAD should continue to edge higher driven in art by this week’s contrast of lower Q2 Canadian GDP growth and upward revisions to US Q2 GDP growth.