CBA FX Strategy - NY Open
Industrial production numbers have been the main story in Europe through the morning. UK production fell back unexpectedly dropping by 1.1% MoM. The news hit GBP which spiked instantly back below the 1.60 level where it has since remained. In Germany industrial production surprised positively rising by 1.4% MoM but was largely ignored by EUR/USD which has sold off sharply overnight down to 1.3520. Equities are modestly higher this morning, bunds are also rallying modestly, while the CHF is easing lower. The VIX closed over the 20 level yesterday for the first time since June and still there is no discernible progress in Washington.
ECB President Draghi is scheduled to speak in Massachusetts at 11pm BST. In the UK the NIESR estimate of UK GDP for the 3 months to September is likely to show economic momentum accelerated in Q3 (10am EST/3pm BST). 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 USD was volatile overnight in the Asian session following headlines that current Fed Vice Chair Janet Yellen would be announced as President Obama’s nominee as Fed Chair. Initially the USD sold off, but then swiftly recovered and has pushed higher through the European morning. A formal announcement/press conference by President Obama regarding his nomination is set down for 3pm Washington time (8pm BST). The perception that Yellen is dovish and could maintain the Fed’s accommodative policy stance for longer than currently expected supported risk sentiment and cross/JPY. Nevertheless, the dip in the USD index could not be maintained. In our view, the nomination of Yellen was widely expected and should not cause too much additional market impact. Looking ahead, USD direction will continue to be dictated by the US fiscal issues. However, a speech by current dovish FOMC voting member Charles Evans on monetary policy (10 am EST/3pm BST) and the minutes from the Fed’s 17-18 September FOMC meeting (2pm EST/7pm BST) have potential to soften the USD, particularly against EUR, GBP and JPY. The minutes will include some more colour on the three main reasons why the Fed decided to delay tapering and how close the decision was. Given recent developments, the FOMC’s concerns about the then upcoming potential for a partial US government shut down were well placed.
AUD, NZD and CAD have been underperforming the majors (USD, EUR, GBP and JPY) as market nervousness about the lack of progress in resolving the US budget issues has increased. Yields on 1 month US Treasury bills have surged from 0.02% at the start of October to 0.33%, the highest level since November 2008. Yesterday’s 1-month bill auction drew the lowest demand since March 2009. Investors are concerned that if the US government were to default, the short-end of the curve may be the first part of the Treasury market to be affected: the increase in yields further out the US curve is smaller. The so-called ‘fear index’, the VIX, has lifted to 20%pa. The S&P 500 continues its slow bleed and has now decreased by 4% since reaching a record high on 18 September. AUD/CAD continues to lift, reflecting Canada’s greater exposure to US economic developments compared to Australia (and New Zealand), and weaker than expected Canadian trade data yesterday. However, once the US fiscal issues are resolved, AUD/CAD is likely to ease.
AUD/USD and AUD/cross rates could receive a boost tomorrow from a strong monthly Australian labour market report for September (data due 8.30pm EST/1.30am BST Thursday). CBA's forecast is +20,000 compared to consensus of +15,000. However, we think the risks are skewed to the upside because of part time employment related to the election* (more details at foot of email).
The NIESR estimate of UK GDP for the 3 months to September is likely to show UK economic momentum accelerated in Q3 (3pm BST). 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.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – US political developments; FOMC minutes today, 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 –Draghi speaks (Wednesday and Thursday); EZ aggregate industrial production (14 October).
GBP – BoE policy meeting (Thursday).
NZD – CPI (16 October).
*Potential election impact on the Australian labour market data for September
The September Labour market survey will pick up employment related to the Australian election held on 7 September. The labour force survey was in the field from 8 September (i.e. one day after the election). Survey participants are asked about their labour force status for 1-7 September, so accordingly, the survey will pick up those people that are employed by the electoral authorities.
The ‘election effect’ could be large. But, only those people that do not already have a job and work for the electoral authorities on election day will increase employment in the survey. Those people that already have a job and work for the electoral authorities on election day will not add to employment in the survey.
The last time an election coincided with the labour force survey was October 2004. During October 2004, employment increased by 43,700 (though it is now reported as 52,200 increase). However, background economic conditions matter. Employment had been strong the month before the election in 2004 (up 64,100) and in the following seven months (averaging 40,000). It is impossible to work out how big the election effect is. In the ABS’ own words: “ABS is unable to estimate the net addition to employment of this recruitment activity.” But the bottom line is the 2013 election could have a large positive though temporary effect on employment.