CBA FX Strategy - New York Open
USD eased somewhat in the Asian afternoon trading but has remained relatively stable into European session. It was largely unaffected by a speech by FOMC’s Ester George, a voter who has opposed the monthly asset purchases of US$ 85 bn, earlier in the morning session. George said the fundamentals of the US economy have improved substantially and she unsuccessfully pushed for the FOMC to taper its monthly purchases to US$ 70 billion at the 17-18 FOMC meeting. Hitting the wire also, Fed’s Evans, in an interview in Oslo where he is scheduled to speak at a central bank conference later, opined that he wanted to see faster economic growth and lower unemployment before he felt comfortable about the health of the US economy. Evans is a voting member and a staunch proponent for Fed’s asset purchase program.
US budget issues are still unresolved though Bloomberg is reporting the US Senate may accelerate work on a bill to avert a government shutdown from Tuesday (US time). If a budget or continuing resolution cannot be passed by the end of Monday (US time), non-essential parts of the US Federal government will be progressively shut-down. A government shutdown has the potential to increase volatility and lead to safe-haven flows into USD and particularly JPY, and add downside pressure to AUD and NZD. The prospect of a further tightening in fiscal policy was one reason the FOMC decided against tapering asset purchases at the FOMC’s 17-18 September meeting. There are a number of Fed speakers today; the most important speaker is New York Fed’s Dudley (see below). Dudley is typically dovish and is likely to talk about the softness in the US labour market and the risks posed by tight fiscal policy, which may provide some temporary short term selling pressure on USD.
AUD/USD slide quickened into European session, although 100DMA of 0.9307 continues to hold. The news that Fitch has downgraded South Australia's credit rating is not overly surprising, although Fitch had had it on negative outlook since October 2012. The downgrade to AA (stable outlook) puts Fitch's rating of South Australia in line with S&P and 1 notch below Moody's rating (Moody's currently Aa1, which is equivalent to AA+). The downgrade of South Australia should have no impact on Australia's sovereign rating, which is rated AAA (with stable outlook) by all 3 major ratings agencies.
EUR/USD topped at just a tad above 1.3500. A firmer USD was one factor behind this move. Eurozone centric factors also weighed on the EUR. (1) August Eurozone credit data was again disappointing. On an annual basis, private sector credit growth contracted for the 16th straight month in August. The weakness in credit will remain a concern for the ECB. (2) The ECB’s Constancio added to the recent dovish commentary, stating that the ECB still has “several policy instruments” in its toolbox and the ECB will “use them as needed”, specifically if declining excess liquidity puts “undue upward pressure on short-term rates”. The ECB next meets on 2 October, while ECB President Draghi speaks today (10am). Further dovish rhetoric appears likely. (3) Italian politics is moving back into market focus. The Italian President released a statement overnight stating that the People of Freedom's (PDL) threat to resign is "worrying" and that he is worried about the "pressure to dissolve parliament". On Wednesday, members from former PM Berlusconi's PDL party threatened to resign from parliament if Berlusconi was expelled from the Senate. The cross-party Senate committee is set down to vote on whether Berlusconi should be stripped of his Senate post on 4 October. The current coalition government in Italy requires the support of the PDL. Should support be withdrawn, Italian elections could be needed. Italian bond yields have edged higher across the curve yesterday. Overall, we think the mix of political uncertainty in Italy and a dovish ECB should limit EUR appreciation pressures. At this stage a further modest decline in EUR looks likely over the coming week.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – Fed speakers: Rosengren, Dudley (today), ISM (1 October), non-farm payrolls (4 October).
AUD – RBA policy meeting, retail trade (1 October).
JPY – Tankan (1 October), BoJ policy meeting (4 October), Japanese government decision on consumption tax increase (early October).
EUR – ECB speakers: Draghi (today), ECB meeting (3 October), ECB policy meeting (2 October).
GBP – Manufacturing PMI (1 October), BoE policy meeting (10 October).