CBA FX Strategy - NY Open
The UK labour market is improving and GBP reacted strongly to the move as would be expected. The ILO unemployment rate dipped unexpectedly to 7.7% in July, GBP/USD spiked up instantly to 1.5827. Forward guidance is of course now conditioned on the ILO unemployment rate, so the reaction is understandable. A drop to the 7% ILO unemployment threshold is still a long way off, but the UK labour market is moving in the right direction. GBP/USD has since eased lower to 1.5770, but remains comfortably in an uptrend. There was no important news-flow of note in the Euro-zone this morning, EUR/USD has been hovering over the 1.3250 level.
The USD index remains near its September lows. Concerns over an imminent attack on Syria continue to ease, helping oil prices decline, and reducing some of the safe haven demand for USD and JPY. The Russian Government’s proposal of placing any Syrian chemical weapons under international control and destroying them has been garnering support, and accordingly, the current perception is military action is less likely. President Obama gave a televised speech today. Obama said the US "will work together in consultation with Russia and China at the UN Security Council" via diplomatic channels to get Syria to ultimately destroy its chemical weapons "under international control". Furthermore, Obama indicated that he has asked the US Congress to postpone a vote on a possible strike. That being said, Obama stressed that the US military will keep the pressure on Syria and "will maintain readiness to strike". However Obama also stated that any strike would be limited, as the US "won’t put American boots on the ground". The reduced risk of military action should continue to support risk assets in the near-term. But if the situation in Syria re-ignites, it will cause a re-firming of the USD, JPY and
send oil prices back up towards recent highs.
AUD/USD has eased modestly off the Asian morning high near 0.9320, but is holding around 0.93 and can still press higher towards our near-term target of 0.9400. A positive surprise in tomorrow’s Australian labour force report for August could be the catalyst for another leg up for the AUD (data due 9.30pm EST/2.30am BST). Also supporting AUD is consolidation of the USD ahead of the 17-18 September FOMC meeting. AUD/JPY has outperformed AUD/USD (lifting by 7% so far this month) because of the improvement in the Chinese economy and receding risks of conflict in Syria has reduced the safe haven demand for the yen. But this could unwind if the situation in Syria deteriorates.
NZD/USD has also benefited from a softer USD, and has pushed up to 0.8070. We expect NZD can continue to press higher, with the RBNZ meeting less than 24 hours away (5pm EST/10pm BST). 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 100bpts of cash rate increases over 2014.
That is above the 75bpts of tightening we expect over 2014 and the RBNZ’s likely MPS forecasts, but on the correct side of the balance of risks to our outlook at present. A re-test of NZD/USD’s August high of 0.8163 may be a stretch, but is possible over the remainder of the week if the RBNZ is mildly hawkish and the USD continues to ease as Syrian concerns subside.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD - US Retail Sales (13 September). The US House and Senate are back in session this week to consider Syria and budget issues.
AUD - August Australian labour market (12 September).
EUR - ECB speakers: Asmussen and Draghi (12 September). Eurozone industrial production (12 September).
GBP - UK labour market data today. BoE Governor Carney’s parliamentary testimony (12 September).
NZD - RBNZ OCR Review (12 September).
CAD – BoC Governor Poloz speech (19 September).