CBA FX Strategy - NY Open and weekly currency views
The week has started quietly in Europe. EUR/USD and GBP/USD have edged up through the morning, there has been no economic news of note. A joint US-UK press conference on the Syrian crisis passed off with no impact on markets. Equities are under modest downward pressure, the bund curve is relatively flat. The week ahead is a quiet one in terms of newsflow, next week’s FOMC meeting and expected tapering decision loom ahead.
USD is likely to consolidate this week as market participants re-evaluate the risk of the FOMC tapering its asset purchases at its 17-18 September meeting following the softer than expected non-farm payrolls report (particularly the downward revisions). We have not changed our view from the current International Economics Monthly released on 16 August: “We expect the Fed to begin tapering asset purchases in September 2013 but we acknowledge the risk of a one or two meeting delay”. The US retail trade is the only important data of the week (Friday). We expect a solid increase of 0.4% on the back of easing lending standards and positive growth in payrolls. The main risk to our view of a consolidating USD this week is if the situation surrounding Syria deteriorates, leading to a safe-haven rise in the USD.
AUD is likely to track higher this week if: (i) the USD consolidates; (ii) Australian employment increases in line with our economists’ above-consensus forecast (CBA: 12,000 versus consensus: 10,000). We retain our earlier published guidance that AUD can lift up to 0.9400. Risks to our higher AUD view are: (i) our slightly below consensus forecasts for the Chinese economic data, though we acknowledge the soft patch is likely over for the Chinese economy (Monday and Tuesday); (ii) the situation in Syria deteriorates, leading to a stronger USD. The election of a new Australian government is unlikely to have much effect on the AUD.
USD/JPY is likely to lift modestly this week, and could close the week above 100 for the first time since July. The second estimate of Japanese Q2 GDP released earlier today was revised up from 0.6% to 0.9%. This supports the view the Japanese government will decide on October 2 to increase the consumption tax in April 2014. In turn, this would raise the risk the Bank of Japan increases its asset purchases in October, supporting USD/JPY. Japan's current account surplus was ¥334bn in August, larger than the merchandise trade data suggested, though still small by Japanese standards. The risk to our near term USD/JPY view stems from the uncertainty in Syria. USD/JPY is likely to fall if the situation in Syria deteriorates.
EUR/USD has edged up to just shy of the 1.32 level this morning but is likely to remain in the bottom half of its recent range. The main data focus in the Eurozone this week is July industrial production (Thursday). Following the sharper than expected pullback in German industrial production last Friday, the risk is the aggregate underperforms expectations. Added to this the
various ECB speakers (Asmussen 10th and 12th, and Draghi 12th) are likely to reiterate the ECB’s dovish stance if monetary policy is discussed. Another potential headwind for the EUR this week is Italian politics. The Italian Senate committee is due to start discussing expulsion proceedings against former PM Berlusconi on Monday. Mr Berlusconi has in the past threatened that his party would withdraw its support for the current coalition government if he is expelled from the Senate. This could trigger the need for fresh Italian elections. In our view, when overlayed with the developments in Australia, and New Zealand, we expect EUR to remain under downward pressure against AUD and NZD over the week ahead.
GBP/USD continues to be supported by UK economic developments, with GBP/USD close to its recent highs around 1.5670 this morning. This week the focus will be on the UK labour market data (Wednesday). The Bank of England (BoE)’s forward guidance on interest rates is in part contingent on the outlook for the UK labour market. The ILO UK unemployment rate has tracked at 7.8% for the past four months. The market consensus is looking for no change in the UK unemployment rate in July. In our view, the risk is the UK unemployment rate dips slightly lower. Better than expected UK labour market data should be GBP supportive. However, any GBP gains may be tempered later in the week by the various BoE speakers. The MPC’s Miles speaks on Wednesday (Thursday AEST), while BoE Governor Carney, and MPC members Fisher, Miles and McCafferty are due to testify to the UK Parliaments’ Treasury Committee on the August Inflation Report on Thursday. UK market interest rates have continued to grind higher since the BoE announced forward guidance in August. In recent months, the MPC has highlighted the risks posed on the UK economic recovery by tightening monetary conditions. Interest will be on whether the MPC members look to re-align market interest rate expectations when they speak this week or whether they are comfortable with the developments. Dovish rhetoric from the BoE speakers will be a GBP headwind. However, unless market perceptions can be drastically changed by Carney (or other BoE speakers), we expect GBP to remain firm and continue to outperform EUR. A press below 0.8400 in EUR/GBP, and down towards 0.8200 over coming weeks is looking likely.
USD/CAD dipped below 1.0400 on Friday because of a 59,200 jump in Canadian employment in August. 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. Employment growth has averaged 20k per month over the past year, and the unemployment rate has dipped from 7.3 to 7.1%. July Canadian building permits (8.30am EST/1.30pm BST today) and August housing starts (tomorrow) are unlikely to sway USD/CAD, which we expect will stay trading near 1.0400 over the week ahead, in line with our view of a
NZD/USD can press higher over the week, reflecting our expectations of a consolidating USD, and some NZD support later in the week when the RBNZ meet on Thursday. We expect the RBNZ to leave the cash rate on hold at 2.5% at the September Monetary Policy Statement (MPS). Economic developments have
generally been positive in New Zealand since the June MPS, and we expect the meeting will re-focus the market on the RBNZ’s tightening bias. Markets are pricing in over 100bp of OCR increases over 2014. That is on the high side of the 75bp of tightening we expect over 2014 and the RBNZ’s likely MPS forecasts, but erring on the correct side of the balance of risks to our outlook at present. A re-test of the NZD’s August high of 0.8163 may be a stretch, but is possible over the week if the RBNZ is mildly hawkish and our view of a consolidating USD proves correct.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD - US Retail Sales (13 September). The House and Senate are back in session from 9 September to consider Syria and budget issues.
AUD - Chinese industrial production/retail sales (10 September). August Australian labour market (12 September).
EUR - ECB speakers: Asmussen (10 & 12 September), and Draghi (12 September).
GBP - UK labour market data (11 September).
NZD - RBNZ OCR Review (12 September).
CAD – BoC Governor Poloz speech (19 September).
CHF - Industrial Production (10 September).