CBA FX Strategy - New York Open
UK GDP expanded by 0.8% QoQ in QIII as expected, the German IFO eased back a little in October mirroring the pattern from the flash PMIs. But respective currencies ignored the economic news this morning. EUR/USD continues to consolidate around the 1.38 area although has dipped a little in the run-up to the US open. GBP/USD is likewise just under 1.62.
FX markets were generally quite stable, save a brief period of USD selling against JPY, EUR and GBP in the Asian afternoon aswell. We expect the dampening effect on the USD of the Fed’s decision to delay tapering to soon get exhausted. This conclusion is consistent with rough “fair value” estimates of EUR, GBP, JPY, AUD and NZD. It is difficult to make a case for further EUR/USD appreciation at this stage given how stretched we believe the Eurozone-US two-year bond spread is relative to the exchange rate. Further GBP/USD gains are going to be harder to achieve with quantitative easing firmly in place and the UK’s current account deficit at a wide 4.1% of GDP, a similar level to when GBP was forced out of the European Exchange Rate mechanism (ERM) in September 1992. With some moderation in the improving-trend of global
economic data, as well as an RBA continuing to talk down the AUD/USD in order to re-balance the economy, we believe AUD/USD is likely to consolidate between the 30-day moving average (0.9460) and the 200 day moving average (0.9744) over the next few weeks. The risk is now the USD lifts to claw back some ground ahead of next week’s FOMC meeting.
GBP/USD was volatile overnight as the Bank of England Governor Carney announced changes to the Bank's liquidity insurance program to provide greater access to cheaper funds. The changes include monthly market-wide indexed long-term repo auctions being expanded from 2014 and the bilateral Discount Window Facility being repriced with a lower, flat-rate entry fee. At the margin, the changes indicate looser monetary policy.
The weak monetary dynamics in the Eurozone remain a key concern for the ECB. Another soft credit reading, combined with the fragile Eurozone recovery, the disinflation environment in the Eurozone, the firm EUR and potential lift in Eurozone market interest rates driven by the reduction in excess liquidity below the ECB’s €200bn “line in the sand” all suggest the ECB will retain its easing bias for some time. The ECB next meets on 7 November. Various fundamental indicators, such as the German-US yield differential, suggest EUR/USD is looking stretched. A re-alignment with the fundamental backdrop should see EUR/USD ease back lower over coming months
USD/JPY has pushed back up to 97.30 through the morning after having dipped sub-97 late in the Asian session. We think USD/JPY is forming a base in line with a stabilising USD (see above). Japan’s CPI for September was the highlight today. Core inflation eased to 0.7%pa, well below the Bank of Japan’s end-2015 target of 2%pa. While Japan has generated inflation it is narrowly based on higher food and energy prices. Given recent public comments from Bank of Japan governor expressing reluctance to change BoJ policy, we see little risk of further BoJ easing on Thursday.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – Retail sales (29 October), FOMC meeting (30 October).
AUD – Private sector credit (31 October).
EUR – Economic confidence (30 October)
GBP – PMI manufacturing (1 November)
NZD – RBNZ Official Cash Rate review (31 October).
JPY – BoJ policy meeting (31 October).