CBA FX Strategy
Service sector PMI data have been the main interest through the morning. The Eurozone reading was revised a touch lower from flash estimates, the UK reading improved further rising to 60.5 a high since December 2006. GBP has been the main currency mover through the European morning on the back of this print, GBP/USD has rallied up to 1.5630, EUR/GBP down to 0.8430. Looking ahead, Thursday’s BoE policy announcement remains a key GBP focal point. The lift in UK market interest rates is unlikely to have gone unnoticed by the MPC, given the risks it is deemed to pose to the UK economic recovery. As we highlighted in our Weekly Currency Views, we think the risk is the MPC releases a detailed post meeting statement to temper market rate hike expectations. Firmer communication by the MPC to re-enforce its forward guidance would act as a GBP headwind later in the week.
EUR/USD and USD/JPY have essentially been treading water this morning as has EUR/CHF. There were no revisions to the Eurozone QII GDP print of 0.3% QoQ, but details revealed that growth was fairly broad-based. Consumer spending grew 0.2% QoQ, GFCF by 0.3% QoQ and government spending by 0.4% QoQ. We expect the ECB to modestly upgrade its Eurozone economic growth projections when it meets on Thursday, we think the risks reside towards increased rhetoric reinforcing their forward guidance in an attempt to rein in money market interest rates. The ECB want to be sure the Eurozone economic recovery is not stifled by a tightening in monetary conditions and are likely to emphasise that a normalisation of monetary policy remains a long way-off. When overlayed with a firmer USD outlook, we think EUR/USD risks easing back down below 1.3100 by the end of the week.
Elsewhere, there have been no new developments with respect to the Syrian situation so far this morning. AUD and NZD have extended their moves higher from overnight following the Australian GDP print (see below.) USD continued to firm yesterday after the US August ISM manufacturing survey lifted more than expected to 55.7, its highest level in more than two years. US bond yields edged higher and US equity markets rose following the news, only to come off their highs following information the US House leadership were expressing support for a US strike against Syria. The USD will strengthen if the US initiates a military strike. However, with the US economy leading the pick-up in global PMIs, investor sentiment is improving and the tide is turning for AUD, which outperformed again today. The FOMC will feel more comfortable beginning the tapering process at this month’s 17-18 FOMC meeting if the global economy is improving. US annual export growth has picked up for the last four months, but growth still remains relatively subdued at 3.2% (YoY). We get another update of US exports when the July trade balance is released later today (08.30 am EST/1.30pm BST). The release of the Fed Beige (2pm EST/7pm BST) will also make for extremely important reading because the Fed uses the Beige book as the analysis for their FOMC discussions. The likelihood is the USD remains firm.
AUD/USD has lifted to trade above 0.9160 in trade this morning, boosted by firm Q2 Australian GDP data, which showed the economy expanded by 0.6% over the quarter (a full review is in the attached pdf). The strong local data further boosted the AUD, which was already buoyed by improving global PMIs, higher global swap rates and a less dovish RBA statement yesterday. We expect the AUD to remain buoyant during European trade, and over the coming weeks. Clearly there are potential catalysts for a firmer USD in the near-term, particularly an escalation of the situation in Syria, and the prospects of asset purchase tapering at the FOMC meeting in September. But the environment is right for the AUD to outperform on the cross rates in particular, and for AUD/USD to keep pressing towards our end-Sept forecast of 0.9300. A lift to 0.9400 is not out of the question if global confidence continues to improve.
AUD/NZD lifted above 1.1650 today following the release of Australian Q2 GDP, but has since eased back lower to 1.1610 as the NZD quickly followed the AUD’s lead higher. Given the improvements in global PMIs, AUD/NZD could further lift this week, but a renewed focus on the RBNZ’s tightening bias next week will help guide the interest-rate-sensitive cross-rate back down towards 1.1450 over coming weeks. The move back down is likely to continue if the RBA’s easing bias is reinforced in the RBA meeting minutes on 17 September (as it was last month).
NZD/USD has pushed up to 0.79 this morning following the lead of the Australian unit. The NZ data so far this week has been encouraging – the 4.9% lift in the Q2 terms of trade was better than expected and dairy prices dipped only slightly from elevated levels in last night’s global dairy auction. This morning’s release of the NZ value of building work done did show a 0.2% (QoQ) dip in activity. However, we would not read too much into it, because the level of construction activity remains robust, and the quarterly dip comes after large gains of 5.4% Q1 2013, 2.0% in Q4 2012 and 9.5% in Q3 2012. The New Zealand economy is performing well, and this is likely to come into focus in next week’s RBNZ policy meeting and Monetary Policy Statement (12 September).
USD/JPY remains capped by the 100 level and is likely to remain in a range; caught between rising US swap rates and geopolitical risks in the Middle East. Japanese media is reporting the Japanese government will announce its decision whether or not to increase the consumption tax from 5% to 8% on 2 October. We expect the Japanese government to lift the consumption tax if Japanese Q2 GDP is not revised down significantly on 9 September. An increase in the consumption tax may encourage the Bank of Japan to increase its bond purchases, to offset the negative impact of the tax rise, on economic growth. Market participants may sell JPY if they believe the BoJ will increase quantitative easing. But that is a development for later in the year – no change is expected at tomorrow’s Bank of Japan meeting.
USD/CAD has dipped under 1.05 through the morning ahead of today’s focus on the BoC’s interest rate decision (10am EST/3pm BST). Full BoC forecasts are not due until the October Monetary Policy Report (MPR), so interest will lie in the BoC’s comments about recent developments, and whether the BoC retains its long dated tightening bias. We expect the BoC to keep the target rate on hold until H2 2014 and the BoC should retain its mild tightening bias at this policy meeting, which should see USD/CAD ease modestly lower. But the focus then turns to the August Canadian employment report (Friday). The Canadian labour market data has been very volatile over the past year, with the monthly employment change ranging from -39,400 in July, to +95,000 in May. One-off events such as flooding and strikes have added to the difficulty in getting a true picture of Canadian output, and the labour market situation. After July’s employment drop, a modest pickup of around 10K is expected in August. CAD could be volatile over the remainder of the week, particularly given the unpredictable nature of the Canadian labour market, as well as the fact that US non-farm payrolls is released at the same time. In the absence of a significant labour market surprise, we expect USD/CAD will remain trading within it recent 1.0470 to 1.0560 range this week, with USD/CAD resistance likely to continue to be found around the August high (1.0568).