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Upside risks to USD and JPY imply downside risks to AUD and NZD

Posted by Marge Maresca on Sep 24, 2013 9:03:00 AM

CBA FX Strategy - New York Open

EUR/USD drifted again lower into European session and continues to track below last week’s close.  The September German IFO was mixed.  Despite improving from last month, the survey underwhelmed market expectations.  More specifically, the business climate/overall confidence index nudged up to 107.7 in September (from an upwardly revised 107.6 reading in August),  the highest reading since April 2012 and the 5th consecutive monthly gain.  Moreover, the IFO expectations index rose to 104.2 in September, a high since February 2013 and slightly above the market consensus.  By contrast, the current assessment IFO index eased back down from 112 in August to 111.4 in September.  Nevertheless, the September IFO provides further evidence that positive growth momentum is being maintained in the Eurozone's largest economy.  After the German IFO, today's EUR focus shifts back to various ECB speakers (Constancio 12pm BST, Coeure and Liikanen 12:30pm and Mersch 5:30pm BST).  Nowotny spoke in Vienna on “The Future of Monetary Policy”. He commented that it is too early for the ECB to go into exit mode and added that unconventional policy remains important.  We continue to expect the speakers to reiterate the ECB's dovish tone.  Dovish rhetoric, combined with the IFO "miss" should exert mild downward pressure on the EUR over the course of the day.  The August Eurozone credit data is released on Thursday.  ECB President Draghi’s dovish testimony to the European Parliament reaffirmed the ECB’s easing bias and early stages of the recovery.  Specifically, Draghi noted that the ECB is ready “to use any instrument, including another LTRO if needed” to maintain short-term money market rates at levels warranted by the ECB’s Eurozone economic outlook.  The reduction in excess reserves at the ECB and the impact on Eurozone money market rates is something we are monitoring and is a factor that could trigger a policy response from the ECB over the coming months.  We think the ECB comments will outweigh the IFO data and keep mild downward pressure on the EUR.

The USD index has continued to track broadly sideways.  Similarly, USD/JPY has oscillated between its narrow range of 50 and 100-day moving average.  The conflicting comments from the voting and non-voting members of the FOMC regarding Fed asset purchase tapering has been a market focus in otherwise quiet trade over the past 24 hours.  More specifically, Dudley (vice chair of the FOMC and a dovish voter) suggested the US economic headwinds are too strong for the Fed to taper its asset purchases.  Lockhart (non-voting dove) suggested the US labour market remains soft.  In the New York session, Fisher (non-voting hawk) repeated Bullard’s comments from last week that the FOMC’s decision on 18 September not to taper asset purchases was close.  Pianalto (non-voting dove) and George (voting hawk) speak today and may add some volatility to the USD (2:30pm and 6pm BST respectively).  In addition to the Fed speak, as we have highlighted this week, with time running out to finalise negotiations about the ceiling on US government debt and the continuing resolution to fund the US government, upside risks to the USD and JPY remain because of their safe haven status.

The upside risks to USD and JPY imply downside risks to AUD and NZD.  There was no economic data released in Australia or New Zealand today.  The flow-related weakening in the NZD intensified into the European session, following a brief reprieve by the announcement from New Zealand dairy giant Fonterra that it has upgraded its 2014 payout forecast from NZ$7.80/kg of milk solid to NZ$8.30/kg.  This would be a new record payout (see chart below).  According to our New Zealand economists, a payout of NZ$8.30 is achievable provided dairy prices hold up near current high levels over the rest of the 2013/14 season.  However, the positive Fonterra announcement failed to support the NZD, as recent outperformance on a trade-weighted basis started to unwind, especially after breaching support at 0.8297.  The next piece of New Zealand economic data due is the volatile August trade balance (11:45pm BST).  While not typically a market mover, our New Zealand economists are forecasting a larger than consensus trade deficit (CBA –NZ$1,100mn vs consensus –NZ$774mn).  A larger than expected trade deficit may exert some intra-day downward pressure on the NZD.

In terms of the AUD, the RBA’s six-monthly Financial Stability Review (FSR) is released on Wednesday (2:30am BST).  The FSR is usually ignored by market participants, but should the FSR highlight risks in property investment, the AUD may ease.  AUD/NZD has lifted off its recent lows so far this week.  Nonetheless, we do not think the rebound in the AUD/NZD cross can be sustained in the medium-term.  The diverging outlooks for the RBA and RBNZ, and negative Australia-New Zealand two-year swap spread (currently -58bpts) suggest the rally in AUD/NZD may peter out.     

GBP/USD has remained relatively stable so far this week.  Late in the New York session a Bank of England (BoE) policymaker, Ben Broadbent, noted that it isn’t the objective of the BoE to hold down market interest rates if the rise is being generated by improving economic data.  Today, a few other BoE MPC members speak (Miles 11:30am BST and Tucker 1:45pm BST).  In line with the recent commentary, if discussed, we expect the BoE policymakers to reiterate the BoE’s forward guidance but acknowledge the improvement in the UK economic data.  The limited efforts by members of the MPC to talk down market interest rates over recent weeks suggests they are not viewed as an impediment to the UK recovery.  This continues to contrast the ECB’s easing bias (see above).  When combined with the stronger positive momentum in the UK economy compared to the Eurozone, and the negative German-UK yield differential, we retain our recent strategy of selling into EUR/GBP rallies.  We think EUR/GBP could re-test its recent lows over coming weeks.

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Upcoming Economic Calendar Highlights Important for Exchange Rates

USD – Fed speakers: Pianalto, George (today), Dudley (26th), Kockerlakota, George, Evans, Rosengren (27th), Evan, Dudley (28th).

AUD – retail trade (1 October).

JPY – Tankan (1 October), Japanese government decision on consumption tax increase (early October). 

EUR – ECB speakers: Constancio, Coeure, Mersh (today), Asmussen, Weidmann (25th), Asmussen, Liikanen, Coeure, Constancio, Mersch (26th), Draghi (27th) (note: all ECB speaker dates are BST). 

GBP – Q2 current account (Thursday), BoE speakers: Miles, Tucker (today) and Bean (25th).



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