CBA FX Strategy - NY Open
Markets await anxiously the FOMC announcement (7pm) and Chairman Bernanke’s press conference (7.30pm). We expect the Fed to taper its asset purchases by US$10 bn to US$75 bn (consensus: US$80bn), though there is a 20% chance the Fed does not taper (see attached for more details). We expect Bernanke’s post-FOMC press conference to be dovish and for the USD to ease. 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.
EUR is little changed as EUR/USD topside appears well-capped for now. However, we expect the cross to rise post-FOMC if Fed turns out dovish as we expect. By contrast, GBP/USD rallied strongly following the September BoE MPC meeting minutes with its 50DMA climbed above 100DMA. The BoE was unanimous on keeping both rates and bond program unchanged. Moreover, no member believes more stimulus is warranted at the current juncture. On that note, the recent run of better than expected UK data has been a key source of GBP support. We continue to think GBP will outperform EUR in the near term. Momentum in the UK economy continues to out-perform 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.
We recommend buying dips in USD/JPY below 98.0 after the FOMC announcement because we consider the USD is in a multi-year uptrend while the JPY is in a multi-year downtrend because of the sharp slump in Japan’s current account deficit.
AUD traded in a very tight range, ignoring the downgrade by S&P of Western Australia’s credit rating from AAA to AA+ and a panel discussion including RBA Assistant Governor Malcolm Edey. AUD is likely to be more heavily influenced by the FOMC announcement. We see risks AUD lifts up to our near term target of 0.94 if the FOMC is dovish as we expect.
NZD also traded in a tight range, ignoring the modest improvement in New Zealand current account deficit from 4.5% of GDP in Q1 to 4.3% of GDP in Q2. NZD is likely to be more heavily influenced by the FOMC announcement and New Zealand GDP data tomorrow. Our New Zealand economists expect New Zealand GDP to be below consensus because of the drought (CBA: -0.2% versus market +0.3%). On Tuesday, New Zealand’s Treasury indicated that it also estimates the economy contracted by 0.2% in Q2. Weaker GDP data may see some participants question the extent of pricing for RBNZ 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, though NZD/USD is likely to strengthen if the FOMC is dovish as we expect.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – FOMC policy decision (19 September)
AUD – HSBC China flash PMI (23 September).
NZD – GDP (19 September).
JPY – BoJ Governor Kuroda speaks and trade balance (19 September).
EUR – German IFO (24 September).
GBP – BoE September meeting minutes (today). August UK retail sales (19 September).
CAD – BoC Governor Poloz speech (19 September).