CBA FX Strategy - NY Open
USD continued to struggle after slumping in the New York session because the Fed did not taper its asset purchases as most analysts and market participants had expected. The Fed chose to keep its asset purchases at US$ 85 billion per month because it judges: (i) US economic data is not yet strong enough; (ii) financial conditions have tightened; and (iii) Federal government fiscal policy is restrictive and may become more restrictive, depending on upcoming fiscal debates in Congress. The Fed wants to “await more evidence that progress will be sustained before adjusting the pace of purchases”. We see the Fed’s decision to not taper asset purchases as a delay of the inevitable.
Bernanke was dovish at his press conference and the USD fell, in line with our published guidance. We have not changed our longheld view that the USD is starting a multiyear uptrend, though the Fed’s decision will keep the USD softer for a while longer. When it looks like the Fed will taper its asset purchases, US swap rates will lift, pushing up the USD. We still think the Fed will start the monetary policy ‘normalisation process’ before the ECB, BoE, BoJ, SNB and RBA. This should ultimately be USD supportive.
In line with our previous guidance, we recommended to buy dips in USD/JPY below 98.0, although the JPY cross rallied after BoJ governor Kuroda reassured that the easing steps so far have generated positive effects in the real economy and financial markets. "I expect the gradual economic recovery to continue and for upward pressure on prices to increase due to gains in corporate profits and wages," Kuroda said in a speech in Tokyo. Another BoJ board member Kiuchi, who has consistently been critical of the current supersized monetary easing, admitted in an earlier speech that the central bank may come under pressure to expand unprecedented easing. Data released earlier showed that while confidence among manufacturers slipped in September from a three-year high, exports posted their strongest growth in three years in August. However, we maintain our view that the USD is starting a multiyear uptrend, while the yen is in a multiyear downtrend because of the collapse of Japan’s current account surplus. There is a strong chance the Bank of Japan announces more policy easing at its next meeting on 4 October if the Japanese government decides to lift the consumption tax, helping to support further gains in USD/JPY.
GBP/USD has eased off its highest level since early January. Today, the August UK retail sales data came in significantly below expectations. Retail sales (ex-auto) declined by 1% (MoM) in August. Expectations had been centred on a flat result. An unwind of the strong 2.7% (MoM) increase in food sales in July was the key driver. The decline in August also comes after three months of gains. In the three months to August UK retail sales volumes rose by 1.8% (QoQ). This is close to double the amount in the three months to June. Hence private consumption still looks set to make a solid positive contribution to Q3 UK GDP. As noted yesterday by the BoE, its staff now projects UK GDP to expand by 0.7% (QoQ) in Q3, up from 0.5% (QoQ) previously expected. Today's UK data miss (admittedly the first major one in a while) has weighed on GBP, pushing EUR/GBP higher. In our view, given the FOMC announcement yesterday, GBP/USD should remain supported. In line with our recent strategy, we would still look to sell into this EUR/GBP rally. The BoE looks to be comfortably on hold, and broader momentum in the UK economy remains positive. By contrast, the Eurozone recovery (ex-Germany) remains fragile and the risk of more policy stimulus from the ECB to support the recovery or offset the declining excess reserves held at the ECB remains a genuine risk. The negative German-UK yield differential should also exert downward pressure on EUR/GBP. Alternatively, the generally mproved risk sentiment in global markets and our view that Japan's current account surplus is deteriorating suggests GBP/JPY should be bought on dips.
USD/CHF may soften further today. The Swiss National Bank’s (SNB) releases its Monetary Policy Assessment (MPA) today (8.30am). We expect the SNB to reiterate its EUR/CHF 1.2000 minimum exchange rate policy. However, there is a risk the SNB sounds slightly more “hawkish” compared to recent meetings. Risks in the Eurozone periphery have receded, economic momentum is improving, the recent Swiss inflation data has tracked slightly above the SNB’s June projections, and the Swiss property market continues to perform strongly. While such a turn by the SNB may generate some kneejerk CHF support, we continue to expect the CHF to weaken over the mediumterm. The improving global economic backdrop and positive risk sentiment should reduce demand for safehaven CHFdenominated assets.
AUD may track a little higher today and the following few days as participants react to the Fed’s announcement. By contrast, the RBA prefers the AUD to fall. The more the AUD lifts, the more likely the RBA will look to offset the tightening of financial conditions with a cash rate cut. There is only a modest amount of pricing for RBA rate cuts currently in the OIS curve. The OIS curve may include more pricing for RBA rate cuts if the AUD keeps lifting or the next Australian CPI (released on 23 October) is low. Given our medium term view that the USD will lift, and the Fed’s decision today only delays the inevitable tapering, we do not see a lot more upside to AUD from current levels.
Driven by the softer USD, NZD/USD rose sharply overnight, touching its highest level since May. Q2 New Zealand GDP, released after the FOMC meeting, was in line with market expectations (up 0.2%). The Q1 result was also revised higher, from 0.3% to 0.4%. We continue to expect the RBNZ to be the first major central bank to hike rates in Q1 2014. The positive New Zealand GDP data should help the NZD/USD maintain the gains generated from the FOMC meeting. New Zealand’s ongoing yield advantage, better relative economic performance, elevated commodity prices and ongoing re-insurance inflows should continue to support the NZD on the cross-rates.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – Fed’s Dudley speaks (23 September), Fed’s Yellen speaks (1 October).
AUD – HSBC China flash PMI (23 September).
EUR – German IFO (24 September).