CBA FX Strategy - NY Open
EUR/USD spiked higher in European session, following a much-stronger-than-expected September reading of the ZEW survey. Both Current Situation and Expectation beat estimates significantly. The current situation index has risen to its highest level since June 2012, while the expectations index has lifted to 49.6. This is a high since April 2010. The rise in the ZEW illustrates the increased optimism among German investors about the outlook for the German economy. The better than expected data has been mildly supportive for EUR/USD and EUR/GBP. In terms of EUR/USD, given the looming event risk posed by the FOMC meeting, recent ranges should be respected. Adding to the near-term EUR/USD headwinds is the dovish rhetoric from various ECB speakers. Today, the ECB’s Nowotny (8am BST), Liikanen (9am BST) and Praet (9:30am BST) speak. If policy is discussed, dovish comments from the ECB members look likely.
We expect the USD to continue unwinding Monday morning’s slump generated by news Larry Summers had pulled out of the contest to be the next Fed chair in the lead up to the FOMC meeting. This has been the general theme in today’s Asian session. In yesterday’s New York session, President Obama’s spokesperson indicated an announcement of nominee for the next Fed chair will be made in September-November. Today’s US CPI (1:30pm BST), TIC capital flows (2pm BST), housing starts and building permits (Wednesday) are unlikely to change expectations for a modest tapering of asset purchases by the FOMC this week (Wednesday evening BST). Should the Fed do as we expect, we think the USD will soften later in the week. We expect Bernanke’s post-FOMC press conference to be dovish. We expect the Fed will want to temper market expectations that tapering will be rapid or that FOMC participants have brought forward their expectations for the first increase in the funds rate. For example, the Fed may choose to lower the unemployment rate threshold for the first increase in the funds rate from 6.5% to 6.0%. While the USD may soften after the FOMC meeting, our medium term view of a stronger USD is unchanged because of higher US yields, divergence between the US’s monetary cycle and the rest of the G4’s plus the RBA’s and the shrinking US current account deficit.
GBP has underperformed the firmer USD, and is now only marginally above last week’s closing level. August CPI rose by 2.7% as market had expected, but remain comfortably above the BoE’s 2% target. The GBP-focal points come later in the week, with the release of the September BoE MPC meeting minutes (Wednesday) and August UK retail sales (Thursday). In the short-term we think GBP/USD is likely to consolidate in the face of a firmer USD. That being said, we continue to think GBP will outperform EUR over the period ahead. The recent run of better than expected UK data has been a key source of GBP support. Momentum in the UK economy continues to outstrip that of the Eurozone economy, while the increasingly negative German-UK two-year yield differential should weigh on EUR/GBP. We would look to fade near-term rallies in EUR/GBP. We continue to think EUR/GBP can ease down to 0.8200 over coming weeks.
AUD was little changed from where it opened into European trading. The currency has been weighed down by two factors today: (i) a firmer USD ahead of FOMC meeting; and (ii) the minutes of the September RBA meeting. In a similar pattern to last month, the RBA re inserted its easing bias in the minutes after having left it out of the post-meeting statement. According to the RBA “members agreed that the Bank should again neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them”. The RBA again highlighted that a further fall in the AUD would be helpful in rebalancing the Australian economy. A fall in the currency is presumed to be the preferred avenue through which monetary conditions in the economy could be eased. Future RBA policy moves appear data and AUD-dependent. However, should the pick-up in the non-mining economy remain lacklustre, the fall in mining investment accelerates, and/or the AUD remains elevated, the risk of further RBA rate cuts remains. Further modest declines in AUD/USD are likely in the European session as offshore participants react to the RBA minutes and as participants adjust their USD positions leading into the FOMC meeting
In line with the broader market theme of a firmer USD, NZD/USD has eased lower. The New Zealand data flows picks up over the coming days, first with the Q2 current account (11:45pm BST) and then Q2 GDP (Wednesday 11:45pm BST). The market consensus is looking for the New Zealand current account deficit to remain at 4.8% of GDP. NZD is likely to be more heavily influenced by the GDP data. Our New Zealand economists expect a worse than consensus GDP outturn (CBA -0.2% vs market +0.3%). The projected contraction is being driven by the lingering impacts of the early 2013 drought. In today’s trade the New Zealand Treasury indicated that it expects the economy to have contracted by 0.2% in Q2. Although we think the weaker Q2 GDP will be transitory and expect a strong rebound in New Zealand economic activity over H2 2013, a weaker than expected GDP print may weigh on the NZD. Weaker GDP data may see some participants question the state of the New Zealand economy and extent of future RBNZ’s policy tightening. The risk is the NZD underperforms on the cross-rates later in the week if New Zealand GDP is as weak as our New Zealand economists expect.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – CPI, TIC capital flows (today), FOMC policy decision (18 September)
AUD – HSBC China flash PMI (23 September).
NZD – Q2 GDP (19 September).
JPY – BoJ Governor Kuroda speaks and trade balance (19 September).
EUR – ECB speakers: Nowotny, Liikanen and Praet (today). German IFO (24 September).
GBP – BoE September meeting minutes (18 September). August UK retail sales (19 September).
CAD – BoC Governor Poloz speech (19 September).