The USD has continued to consolidate, following the slump generated by the surprise FOMC decision earlier in the week. There is no top tier economic data released today in any of the major economies. We expect FX markets to remain relatively range bound to end the week after the recent moves. That being said, intra-day volatility may pick up around the time of the speeches by 2 FOMC voting members (George 5:30pm BST and Bullard 5:55pm BST). Both are speaking on the US economy but the two are perceived to be at the opposing ends of the spectrum. George is more hawkish and was the only dissenter to the FOMC’s actions in September, while Bullard is dovish and has recently voiced his concerns about the low US inflation.
GBP/USD slipped from Asian high of 1.6067 to below yesterday’s close of 1.6032 in early European session. We do not view yesterday’s underwhelming UK retail sales data as a change in trend. An unwind of the strong 2.7% (MoM) increase in food sales in July was the key driver behind the 1% (MoM) fall in retail sales in August. Significantly, in the three months to August, UK retail sales volumes rose by 1.8% (QoQ). Private consumption looks set to make a solid positive contribution to Q3 UK GDP. The run of recent indicators suggests UK GDP growth may have accelerated from the Q2 0.7% (QoQ) reading.
In the same vein, we would look to fade the lift in EUR/GBP. The Bank of England (BoE) looks to be comfortably on hold and broader momentum in the UK economy remains positive. Today the BoE’s Weale speaks (3:45pm BST). Weale is viewed as one of the more “hawkish” members of the MPC. 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. Moreover, the German parliament’s lower house elections (“the Bundestag”) are held on Sunday 22 September. The polls close at 5pm BST. Exit polls should be available shortly after. A more definitive result is likely to be known between 7pm BST and 9pm BST. The recent polling data suggests the final outcome is not clear cut. An uncertain election outcome could generate a knee‑jerk lift in market volatility, particularly in the EUR, in thin early Monday morning Asian trade next week. See attachment for more details.
Reserve Bank of India (RBI) surprised the market with raising benchmark rates by 25bpt, citing inflation concerns. The RBI said that there is no room for complacency on inflation an expect wholesale price inflation to pick up in coming months. By contrast, its outlook on growth is fairly benign, opining that the growth could pick up in second half of FY14. Repo rate rose to 7.5%, while cash reserve ratio was kept at 4%. Moreover, the RBI unwound the exceptional measures that it had implemented to support the INR, including cutting marginal-standing facility rate. The central bank appears to believe that a normalization in the domestic currency following the surprise delay in Fed’s tapering has taken place. We are not entirely convinced that a hawkish stance is warranted and believe the central bank’s growth projection is too optimistic. We believe that the fundamental woes that the INR faces remain and higher rates are unlikely to help bring in inflows which are predominantly in the equity markets. We maintain that the upside in the USD/INR cross remains vulnerable in the medium-term.
The NZD remains firm, with NZD/USD continuing to hold onto its post FOMC-induced gains. There are a number of reasons why we think the NZD should continue to perform strongly in the near-term. These include: (a) positive risk sentiment; (b) improving global economic momentum; (c) New Zealand’s growth outlook and yield advantage; and (d) positive NZD inflows. When these factors are overlayed with our long-held JPY view, we think NZD/JPY can continue to press higher. Should current market conditions be maintained, a re-test of the early April 2013 high (86.41) looks possible. See attachment for more details. In terms of AUD/NZD, the diverging RBA and RBNZ interest rate expectations should continue to keep the cross heavy. The Australia-New Zealand two-year swap spread is now -60bpts.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – Fed’s George, Bullard, and Kocherlakota speak today. Fed’s Dudley speaks (23 September) and the Fed’s Yellen speaks (1 October).
AUD – HSBC China flash PMI (23 September).
JPY – Japanese government decision on consumption tax increase (early October).
EUR – Eurozone PMIs (23 September). German IFO (24 September). ECB speakers: Draghi (23 September), Nowotny, Constancio, Coeure, Liikanen and Mersch (24 September).
GBP – BoE’s Weale speaks today.