CBA FX Strategy - NY Open
The morning has again been very quiet with modest risk off the theme in equity markets, but not FX or currencies. The USD has been relatively flat through the morning, USD/JPY is back over 97, EUR/USD is still wedged in the 1.3550-1.3600 area. EUR/CHF has edged higher towards 1.23, while bund yields are a couple of bps higher. A soft German factory orders print was ignored by markets. Main excitement was a headline suggesting that the BoE will announce an LTRO tomorrow. GBP spiked 50 pips lower, but quickly recovered. In reality the BoE is simply offering 3-month money, a pretty standard liquidity operation for the UK money markets. It is nothing akin to the ECB’s 3-year LTROs, but plainly markets are sensitive to LTRO newsflow. There remains little positive to report from Washington, the main focus for markets.
USD has modestly declined since the last week’s close. Markets more broadly are beginning to adjust expectations to the likelihood of another stand off potentially running down to the wire. There remains no meaningful progress from US politicians in Washington and President Obama continues to indicate that he will not negotiate with the Republicans over funding the government or raising the debt ceiling. The US government remains partially closed for an 8th successive day. Yesterday’s stronger than expected US August consumer credit data did not impact markets. The rest of the week ahead is a relatively quiet in terms of economic news flow because the partial US government shutdown is affecting US economic data releases. The minutes from the Fed’s 17 18 September FOMC meeting are due tomorrow. The details will include some colour on the three main reasons why the Fed decided to delay tapering and how close the decision was. The FOMC’s concerns about the then upcoming potential for a partial US government shut down were legitimate. Today the IMF release will release their latest forecasts (9am EST/2pm BST). The release should not have a lasting impact on FX markets.
AUD/USD has pushed up higher to 0.9475 despite declines in global equity markets and base metal prices and a modest increase in market volatility. Participants dislike the uncertainty of the US government shut down. As yet, there is no need to undertake a large downward revision to US or global economic growth that would push AUD lower. AUD cross rates remain range bound (except AUD/CAD, which continues to appreciate). We continue to believe AUD/NZD can grind a bit higher as the Australia New Zealand swap spread narrows somewhat. The release of the Australian September labour force report on Thursday will be instrumental in driving near term direction in the AUD/NZD cross. We expect employment to increase strongly by 20,000 (consensus: 15,000) after last month’s 10,800 decrease in employment. However, there are upside risks to Australian employment because of temporary election related hiring that could provide a boost to Australian swap rates, and the interest rate sensitive AUD/NZD cross rate.
USD/JPY reached our near-term target of 96.73 (the 200-day moving average). In addition to the US political situation keeping USD/JPY heavy, the decline in US Japan interest rate differentials is also contributing. Since early September the US Japan two year bond spread has narrowed from over 0.33% to 0.23%, while the US Japan ten year spread has narrowed from 2.15% to 1.99%. We expect the US Japan bond spread narrowing to reverse once the market switches from US political concerns to the eventual timing of Fed tapering. But for now, the narrowing in the US Japan bond spread remains a headwind for USD/JPY, and USD/JPY is likely to remain heavy while the US government shutdown persists. Longer-term, the collapse of Japan’s current account surplus is a key factor in our weak JPY outlook. Today data showed another very small current account surplus was recorded in August (¥352bn seasonally adjusted).
NZD/USD movements over the week ahead, like other currencies, will largely be a function of US developments. However, we expect the local data to offer a degree of support. Today’s NZIER Quarterly Survey of Business Opinion (QSBO) showed business confidence in the economy has lifted to the highest level since 1999. The survey’s indicator of firms’ trading
activity, which closely mirrors GDP growth, rebounded from the soft patch in the June quarter. The survey provides confidence that New Zealand GDP growth will lift from the drought affected 0.2% (QoQ) growth in Q2. Ongoing confidence in the New Zealand economy is supporting New Zealand interest rates, and helping to keep the NZD in a firm trading range centred on 0.8300. As long as vol. remains contained, early next week NZD/USD should continue to respect its 0.8200 0.8400 range of recent weeks.
EUR/USD has eased off its recent peak but remains within 1% of its early February high (1.3711).The pair ignored a softer than expected German factory orders print this morning. In the short term, while the US political uncertainty persists, the highly liquid EUR looks set to be a beneficiary of the US government uncertainty, and a generally softer USD. The Eurozone’s record current account surplus (2.2% of GDP) is another supportive factor in this environment. While EUR/USD is near its 2013 highs, we don’t expect ECB President Draghi to talk down the currency unless EUR/USD trades up towards 1.4000, around a 6% deviation from the ECB’s EUR/USD modelling assumptions. President Draghi speaks on Thursday and Friday (Wednesday and Thursday BST). Other ECB speakers that could generate market interest are Coeure (Thursday/Wednesday BST) and ECB Chief Economist Praet (Friday). The European data calendar is light over the week ahead. A lift in German industrial output is expected in August (Wednesday) following the unexpected fall in July. The improving Eurozone survey data suggests the gradual recovery should continue. This is our own and the ECB’s baseline assumption. According to the ECB, it will take a better than expected recovery to change its forward guidance and easing bias. The risk of further ECB policy action over coming quarters, particularly to temper any further rise in Eurozone market interest rates, remains. If policy is discussed, the various ECB speakers this week are likely to reiterate this message. While EUR/USD may be supported in the near term by the softer USD, over the medium term fundamentals suggest EUR/USD should ease lower. The German US two year yield spread is currently suggesting EUR/USD should be down closer to 1.3200.
GBP/USD has drifted lower over the past few sessions and is now around 1% below last week’s high. We view the recent decline as a period of consolidation and not a change of trend. We expect GBP to remain firm over the week ahead, boosted by ongoing improvement in the UK data, and a more sanguine Bank of England (BoE). The lift in the UK manufacturing PMI points to an increase in August UK industrial production data (Wednesday). The NIESR estimate of UK GDP for the 3 months to September is likely to show UK economic momentum accelerated in Q3. The UK economy grew by 0.7% (QoQ) in Q2, which was the strongest quarter of growth since Q2 2010. Given the improving trend in the UK data, we expect the BoE Monetary Policy Committee (MPC) to maintain current policy settings (Thursday). The MPC does not yet appear to perceive the tightening in financial conditions brought on by the firmer GBP and higher UK market interest rates as a headwind to the UK economic recovery. Accordingly, it is unlikely there will be a detailed post MPC meeting statement designed to talk down market rates this week. The greater positive momentum in the UK economy, compared with the Eurozone, and building divergence between the ECB and BoE policy suggests EUR/GBP should ease lower over coming months.
USD/CAD remains range bound within a narrow band centred on 1.0320, but has shown a tendency to depreciate modestly due to the uncertainty related to the partial US government shut down. We expect this to continue over the early stages this week. The uncertainty of the timing of US data releases means USD/CAD vol. is likely to remain low while the US data (particularly non farm payrolls) remains on hold. But by the end of the week we will at least receive the September Canadian labour market report (Friday). In isolation, we expect CAD should receive a boost if Canadian jobs growth of around 15K is recorded, and the outsized 59.8K gain in August is not revised lower. The underlying trend is one of gradual jobs growth, but the unemployment rate is expected to remain around 7.1%. USD/CAD vol. may pick up at the end of the week, given the unpredictable nature of the Canadian labour market, as well as the fact that US non farm payrolls may be released around the same time depending on US political developments. But in the absence of a significant labour market surprise (in either report), we expect USD/CAD will remain trading within its recent range. Firm labour market data in both the US and Canada should keep USD/CAD towards the bottom of the range.
USD/INR had little reaction to the Reserve Bank of India’s decision to cut interest rates for the second time in three weeks. The RBI cut the marginal standing facility (MSF) from 9.5% to 9.0%, while the benchmark repo rate was left unchanged at 7.5%. Nevertheless, the cut in the MSF is significant for two reasons: (1) because the MSF has (temporarily) taken over as the benchmark interest rate due to the dramatic reduction in the RBI’s willingness to lend via the repo rate, and; (2) it signals the RBI is more comfortable with the apparent stabilisation of the INR. However, the main factors generating the multi year depreciation in the INR, namely slowing GDP growth, persistent inflation and a widening current account deficit (5.3% GDP) have not changed.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – US Congress developments; Non-farm payrolls (release date unknown).
AUD – September labour report (Thursday); Chinese monthly data trade balance (12 October), Q3 GDP (18 October); RBA meeting minutes (15 October), RBA Governor Stevens speech (18 October).
EUR – German (and other Euro nation’s) industrial production (Wednesday); Draghi speaks (Wednesday and Thursday); EZ aggregate industrial production (14 October).
GBP – BoE policy meeting (Thursday).
NZD – CPI (16 October).