CBA FX Strategy - NY Open
Euro-zone industrial production fell more than expected in July, dropping by 1.5 MoM. EUR/USD has edged lower through the morning to the 1.33 area. ECB President Draghi is set to speak at EST 7.40am/12.40 BST. Should monetary policy be discussed we would expect Draghi to reiterate the ECB’s dovish stance. In our view, the improving trend in the UK data, and risk of softer than expected Eurozone data should keep the downward pressure on EUR/GBP. As we noted over the past week, a press below 0.8400, and decline down towards 0.8200 in EUR/GBP over coming weeks is looking likely.
In the UK, various MPC members including BoE Governor Carney have been in testimony to the Treasury Select Committee this morning. The general message has been fairly sanguine, one of cautious optimism. Forward guidance has been re-iterated, the BoE will keep the asset purchase target at GBP375b. until at least the 7% ILO unemployment rate has been reached. The economy is picking up, stimulus is working, but the BoE will consider more stimulus if needed. Part of the rise in short rates is justified by the improving economic outlook. GBP rallied a little following the start of the session in response to the comments, GBP/USD has traded up to around 1.5820 and remains near 8 month highs.
AUD has underperformed in today’s Asian trade and remained subdued through the European morning, with AUD/USD falling by around 1% from its intra-day high. The catalyst was a weaker than expected August Australian employment report. Employment decreased by 10,800 in August (expectations were centred on a 10,000 increase), while the unemployment rate lifted to 5.8%. The unemployment rate is now at its highest rate since June 2009. The market probability of further RBA easing over the next 6 months has lifted after today’s data. We think the AUD will remain on the back foot earlier in the European session as participants react to the disappointing employment report. Another near-term hurdle for AUD is today’s Indian CPI and industrial production (8am EST/1pm BST) - high CPI and weak IP will likely put INR on the back foot again, despite the recent strengthening, and weigh on AUD given the correlation between AUD and ADXY. While AUD/USD may rebound on the back of a dovish FOMC next week, as we noted yesterday, we continue to think the medium term direction for AUD is down. In the coming weeks, there are several overseas developments (US budget issues, Syria and Germany’s constitutional court ruling) and the release of the RBA’s minutes that could generate further headwinds to AUD and lift implied volatility.
NZD/USD spiked higher early in the Asian session following a hawkish RBNZ Monetary Policy Statement and reached a high of 0.8156 a little while ago. The RBNZ held the cash rate (OCR) at 2.5% as widely expected. However, the RBNZ revised up its outlook for short term interest rates significantly: “official cash rate increases are likely to be required next year.” The RBNZ’s 90-day bank bill outlook implies the RBNZ will begin lifting rates in H1 2014 (previous: H2 2014) and the forecasts suggest an official cash rate peak of 4.5% in March 2016 (previous: 4.0%). The NZD was referred to as “high”’ rather than “overvalued’’. The RBNZ pointed to improved underlying factors, such as commodity prices, as reasons behind the high level of the NZD. However in the subsequent parliamentary testimony Governor Wheeler did note that the “overvalued currency is a problem and we would certainly, as a central bank, like to see a weaker currency”. The RBNZ also expressed a lot of concern about the risks from emerging Asia. This was kept as a risk, rather than being factored into the global outlook. We continue to expect the RBNZ to keep the cash rate on hold at 2.5% until March 2014, before gradually lifting the cash rate to 4.0% by late 2015. We expect the RBNZ will want to give the recently introduced loan to value restrictions some time, but the risks to our outlook remain skewed to an earlier start to the tightening cycle, or a greater extent of cash rate increases. We think the RBNZ commentary will continue to support the NZD over the rest of the week, and a retest of the August high of 0.8165 is possible. The mix of a hawkish RBNZ and weak Australian labour market data has seen AUD/NZD decline by close to 1.4% today. The diverging outlooks for the RBA and RBNZ and negative Australia-New Zealand two-year swap spread (now -64bpts) should keep AUD/NZD heavy.
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 various issues. FOMC policy decision (18 September)
AUD –September RBA minutes (17 September).
NZD – Q2 GDP (19 September).
JPY – BoJ Governor Kuroda speaks (19 September).
EUR – ECB speakers: ECB President Draghi (today), Mersch and Draghi (16 September), Nowotny, Liikanen and Praet (17 September). Eurozone industrial production (today) and German ZEW (17 September).
GBP –BoE September meeting minutes (18 September). August UK retail sales (19 September).
CAD – BoC Governor Poloz speech (19 September).