CBA FX Strategy - NY Open and the week ahead
EUR drifted lower in European session despite a better-than-expected Eurozone PMI data and Merkel’s convincing win in Sunday’s German elections. While the Eurozone manufacturing PMI has come in slightly weaker than expected (51.1 vs consensus 51.7), and nudged slightly lower from last month’s reading (August 51.4), the services PMI has risen to 52.1, this exceeded the market consensus and is the highest reading since June 2011. Overall, the Eurozone composite PMI has lifted to 52.1. Moreover, in line with the services measure, the composite Eurozone PMI is now at its highest level since June 2011. The quarterly average for the Eurozone composite PMI was 51.4 in Q3 2013, this is up from 47.8 in Q2 and 47.7 in Q1. Our PMI based Eurozone GDP equation suggests another quarterly of positive growth in the Eurozone economy in Q3. Nevertheless, as the improving survey data has yet to fully translate into broad based improvement in the hard economic data, President Draghi is likely to highlight this point when he testifies to the European Parliament later today (2pm BST). Draghi is also likely to reiterate the ECB's forward guidance and downward bias in interest rates. Dovish rhetoric from Draghi should keep the German-US yield spread negative, which in turn should weigh on the EUR this week.
At the same time, the USD is likely to be supported by negotiations over US budget issues and expectations for Fed policy this week. The USD is likely to receive safe-haven support if negotiations over two outstanding US budget issues are acrimonious: the continuing resolution to fund the government (due 1 October) and the debt limit (due around mid-October). Fed policy expectations will be influenced by twelve speeches from FOMC members this week. A FOMC voter, James Bullard, on Friday indicated the FOMC’s decision not to taper asset purchases in September was ‘borderline’ and that tapering may occur at the Fed’s next policy meeting in October. We are reluctant to read too much into individual Fed speakers after last week’s decision to not taper, but acknowledge that the USD can be influenced by Fed speeches. In our view, the Fed’s decision last week to keep monthly asset purchases delays the inevitable tapering of asset purchases, which we expect in December. There is no ‘top tier’ US economic data released this week.
As a result, AUD and NZD are likely to ease this week reflecting a firmer USD. AUD and NZD received a small boost in the Asian session from a firming in the HSBC flash China PMI from 50.1 points in August to 51.2 points in September. Nevertheless, the PMIs in emerging Asia are softer than in the US and the Eurozone (see our forthcoming International Economics Monthly). The RBA’s six-monthly Financial Stability Review is usually ignored by market participants, though may soften the AUD on Wednesday if risks in property investment are highlighted. See attached note for how AUD may be influenced by US budget issues.
USD/JPY is likely to tread sideways, though may dip if US budget negotiations turn acrimonious. Japan’s CPI will highlight all inflation reflects higher prices for fresh food and energy rather than an improving economy edging closer to capacity (Friday). In a speech on last Friday, BoJ Governor Kuroda appeared confident the Japanese economy is recovering. His comments suggest he is not thinking of supplying extra policy accommodation at the next BoJ meeting on 4 October. The BoJ policy meeting on 31 October, which includes the BoJ’s updated economic forecasts, is more likely to provide extra policy support if it is judged necessary to offset the economic effects of the proposed increase in the consumption tax. In our view, the Bank of Japan will be eventually forced to increase its policy stimulus, supporting a rise in USD/JPY.
GBP/USD has performed strongly over recent weeks. Last week GBP/USD touched its highest level since early January 2013. In line with a firmer USD, we think GBP/USD is likely to consolidate some of its recent gains this week. There is very little top tier UK economic data released this week. The final estimate of Q2 UK GDP should remain unrevised and Q2 UK current account is also released (Thursday). The UK current account deficit is currently 3.9% of UK GDP, its widest since H1 1990. While the UK current account deficit is expected to narrow in Q2, it should remain historically wide. The UK’s large external imbalance is one factor that should limit GBP appreciation pressures over the medium-term. There are also a number of Bank of England (BoE) speakers this week (see below). In line with the recent commentary, if discussed, we expect the BoE policymakers to reiterate the BoE’s forward guidance, acknowledge the improvement in the UK economic data, but stress that the UK economic recovery remains in its early stages. While the comments are likely to provide some GBP support through the week, we do not think they will offset the anticipated firming in the
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – Fed speakers: Dudley (23, 27 September) and Yellen (1 October).
AUD – retail trade (1 October).
JPY – Tankan (1 October), Japanese government decision on consumption tax increase (early October).
EUR –German IFO (24 September). ECB speakers: Draghi 23rd, Nowotny, Constancio, Coeure 24th, Mersh, Asmussen 25th, Weidmann, Asmussen, Liikanen, Coeure, Mersch 26th, Constancio, Coeure, Draghi 27th.
GBP – Q2 current account (Thursday), BoE speakers: Broadbent, Miles, Tucker (24th) and Bean (25th).