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New York Open-Commonwealth Bank of Australia FX Strategy

Posted by Joseph Trevisani on Oct 10, 2013 9:29:00 AM

ScreenHunter 1898 Oct. 10 09.31

Good morning.

Positive sentiment has returned to markets through the European morning following some signs of minor progress from Washington late yesterday. According to newswires, Congressional aides to both parties have said House Republican and Senate Democratic leaders are open to a short-term increase in the debt ceiling. However, agreement on how to reach a short term deal remains lacking, with Republicans preferring to attach policy conditions to a deal, Democrats against any such moves. Still markets have latched on to the step forward, however modest. Equity indices have bounced 1%+ through the morning, bund yields are 3-4bps higher. In FX USD/JPY has pushed up to 97.88, although more generally the USD has consolidated yesterday’s gains. EUR/USD has dipped temporarily under the 1.35 level, softer than expected French and Italian industrial production numbers were ignored.


Overnight the USD was largely unaffected by the release of the FOMC’s minutes from its 17-18 policy meeting, because the minutes revealed little that was not already in the public domain.  Most FOMC participants still expect to begin tapering asset purchases this year and complete asset purchases in mid-2014.  We expect the FOMC to start tapering at the December (rather than October) meeting.  The current partial shut-down of the US government has delayed the release of important official US economic data and hence a read on the US economy is not currently available.  For now the focus remains on the political developments in Washington, and signs of progress should see US bond yields move higher, and support the USD.

AUD/USD and NZD/USD both slipped as the USD firmed through the Asian afternoon, but have recovered lost ground through the European morning and remain within recent ranges. Prior to the Asian afternoon weakening, the AUD received temporary support from the dip in the Australian unemployment rate to 5.6% in September, from 5.8% in the prior month. Other details of the labour force survey were less impresive. Employment increased by only 9,100 (consensus: 15,000), and there was no obvious effect on part time employment related to the election. The unemployment rate decreased from 5.8% to 5.6% because the participation rate fell by 0.1ppt to 64.9% (the lowest since the end of 2006), and was also affected by rounding.  Australian bonds have underperformed today, with the 7bp lift in the 10-year government bond yield in the Asian afternoon greater than the lift observed in similar sovereign bonds in other markets. Stocks in Australia as well as other Asian markets have been mixed as the US developments dominate local news.

EUR/USD has dipped as the USD outperformed over the past 24 hours, but EUR/GBP has extended yesterday’s gains pushing up to 0.8492. ECB President Draghi’s speech in Massachusetts did not impact EUR, nor did this morning’s soft IP numbers.  Draghi speaks again later today (12.20pm EST/5.20pm BST), and Asmussen is also scheduled to speak (3pm EST/8pm BST).  In line with recent rhetoric, if policy is discussed, we think Draghi and Asmussen will reiterate the ECB’s forward guidance and easing bias.  Dovish comments may exert some downward pressure on the EUR.  As we pointed out earlier this week, EUR/USD is being supported by US fiscal issues; however fundamental drivers such as the German-US two-year yield spread continue to suggest EUR/USD should be closer down to 1.3200.

GBP underperformed yesterday, and has spent the Asian and European sessions trading near its lowest level since 18 September.  The catalyst for yesterday’s drop was a disappointing August UK industrial production report.  The weaker industrial production print and wide UK trade deficit may have raised some concerns about the strength of the UK recovery.  However, looking through the monthly volatility, the broader trend remains one of economic improvement.  Despite the August monthly fall, industrial production should still provide a solid contribution to UK growth over Q3.  The NIESR estimate of Q3 UK GDP released yesterday indicates the UK economy grew by a strong 0.8%, this is an acceleration from Q2.  The NIESR estimate has historically had a high correlation with official data.  The first estimate of official Q3 UK GDP is released on 25 October.  Today, the BoE MPC meets (7am EST/12pm BST).  Given the improving broader trend in the UK data, we expect the MPC to maintain current policy settings.  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.  We continue to view the recent moves in GBP as a period of consolidation rather than a change in trend.  More specifically, we think the rise in EUR/GBP is likely to prove transitory


Upcoming Economic Calendar Highlights Important for Exchange Rates

USD – US political developments; Non-farm payrolls (release date unknown). The Fed’s Bullard and Williams speak today. 

AUD – Chinese monthly data trade balance (12 October), China Q3 GDP (18 October); RBA meeting minutes (15 October), RBA Governor Stevens speaks (18 October).

EUR – Draghi speaks (today); Asmussen speaks (tomorrow); EZ aggregate industrial production (14 October).

GBP –BoE policy meeting (today).

NZD – Q3 CPI (16 October).

JPY – BoJ Governor Kuroda speaks in New York today. 

Martin McMahon  Europe Economist


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