CBA FX Strategy - New York Open
After a relatively quiet Asian session, USD strengthened across the board as European trading got underway. We expect the US fiscal issues to be resolved, though while the political brinkmanship continues, the USD and JPY are likely to be supported by safe haven flows. There are a number of Fed speakers today that may add some volatility to the USD. Fed’s Lacker (non-voting hawk) speaks on the risks associated with unconventional policies. Lacker repeatedly voted against the Fed's decision to expand its stimulus when he was a voting member last year. More important will be the speech and Q&A session by Jeremy Stein later today (3:10pm BST). Stein is currently a voting member of the FOMC, and is perceived to be slightly hawkish. Stein (voting hawk) speaks on the topic of “Yield-oriented investors and the monetary transmission mechanism” (10.10am EST) while the topic of Kocherlakota’s speech (non-voting dove) is unknown (12.15pm EST).
USD/JPY spiked almost 100 points higher and cross JPY has lifted in Asian trade on speculation that Japan’s government will study a corporate tax cut and the public pension fund will announce it will increase its allocation to risk assets. In its interim report, the Japanese pension fund advisory panel has advised the Japanese government to: (a) re-examine its domestic bond portfolio; and (b) add new assets. The new assets are slated to include REITS, and infrastructure investments, but may also include commodities, real estate and private equity investments. The advisory panel aims to boost returns and limit risks in the pension fund. Over recent months, there has been a shift in the asset allocation of the Japanese public pension fund. In June, the JPY 111.9 trillion GPIF stated that it was increasing its Japanese
stock allocation from 11% to 12%, reducing its JGB weighting from 67% to 60%, lifting its allocation in foreign stocks from 9% to 12% and foreign bonds from 8% to 11%. Today's interim report may have disappointed some market participants looking for an explicit reference regarding increased allocation to foreign assets. This has seen USD/JPY retraced a large amount of its early gains after the detailed recommendations hit the wire.
Following a lethargic Asian session, the GBP/USD fell sharply in early European trading following the release of Q2 GDP figures. As expect the Q2 UK GDP was confirmed at 0.7% (QoQ). However, there were some downward revisions to previous quarters, specifically Q3 2012, Q4 2012 and Q1 2012. The revisions pushed the annual rate of growth in Q2 2013 down from 1.5% (YoY) to 1.3% (YoY). Following the revisions the UK economy is now 3.3% below its 2008 peak (previously 3.2% below). The Q2 UK current account deficit was also larger than expected, printing at GBP13bn in the quarter. Previous quarters were also revised to show a large current account deficit. The UK current account deficit is now running at 4% of UK GDP. While this is an improvement from the near 25 year high in Q1 (which was revised from 3.9% of GDP to 4.4% of GDP), the UK's current account deficit remains historically wide. The UK’s large external imbalance should cap any GBP appreciation over the medium-term. The UK’s large current account deficit could come back into focus should the UK economic recovery begin to falter. In addition to the UK data, US fiscal issues should influence near-term GBP/USD
direction. If uncertainty around the US fiscal issues picks up we would expect the USD to be supported, and for GBP/USD to retrace some of its recent gains.
Similarly, EUR/USD dipped quickly after trading mostly in a narrow range in the Asian session. Lending to the private sector in the Eurozone fell in August by 2% from a year ago, its 16th monthly decline and the biggest since the start of the single currency in 1999. Eurozone monetary dynamics are a key focus for the ECB, given the fragmentation in the Eurozone
monetary policy transmission mechanism. The outlook for monetary dynamics is also part of the ECB’s forward guidance. Another soft set of Eurozone credit numbers could add to building expectations the ECB could provide further policy support over coming months. In addition, there are a few ECB members speaking today. In our opinion, the most likely to generate a market impact is ECB Vice President Constancio who he is speaking on “liquidity and monetary policy” (10:10am EST). The reduction in excess liquidity in the Eurozone banking system has become an increasing focus for the ECB, given its implication for Eurozone money market interest rates and the Eurozone recovery. Constancio may add to the recent dovish commentary, which should limit EUR appreciation pressures. Given the building divergence in the outlooks for the ECB and BoE, we continue to think EUR/GBP can edge lower over the period ahead.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – Fed speakers: Stein, Kockerlakota, Pianalto (26th), George, Evans, Rosengren, Dudley (27th).
AUD – Retail trade (1 October).
JPY – Tankan (1 October), Japanese government decision on consumption tax increase (early
EUR – ECB speakers: Coeure, Constancio, Mersch (26th), Draghi (27th)
GBP – Q2 current account (26th). Manufacturing PMI (1 October).