CBA FX Strategy - New York Open
Euro-zone business confidence improved again in October according to the latest set of EU sentiment surveys, while the German unemployment rate held steady at 6.9% also in October. The EUR has edged higher through the morning, EUR/USD has traded up to 1.3768 so far. Elsewhere USD/JPY has inched up to 98.30. Markets are awaiting the FOMC statement later in the afternoon (EST 2pm/GMT 6pm).
Although the USD index has edged modestly higher over the week, it remains less than 1% off the year’s lows. The USD and US 10-year Government bond yields continue to suggest the market is positioned for a dovish FOMC meeting . No change in monetary policy is expected. But some fresh guidance in the FOMC’s accompanying statement regarding the timing of tapering is hoped for. Yesterday’s US retail sales data was in line with expectations, with ex auto sales lifting 0.4% MoM. US households were still spending prior to the government shutdown: but the interest lies in seeing if the shutdown-induced consumer confidence drop in October weighs on future spending. Although today’s data will take a back seat to the FOMC, it is still important. September CPI is due at 8.30am EST/12.30pm GMT, and the October ADP employment report (7.15am EST/11.15am GMT) will provide its usual early guidance to October non-farm payrolls which is due next week. We maintain the view that there is a lot of negative USD sentiment now in the price and further large USD declines appear unlikely. A less dovish than expected FOMC statement, in our view, should be US supportive.
NZD/USD dipped in the Asian afternoon on headlines Moody’s Investors Service considered lowering NZ’s AAA sovereign rating. However, the NZD soon bounced back on the details: Moody’s obviously did not to downgrade NZ (Moody’s confirmed its stable Aaa rating for the nation on Sept. 2), or even change the NZ rating outlook which is still “stable”. Of more importance, next year's review by Moody's will use a new methodology which would put more weight on NZ's large negative external position (which is a factor behind the lower AA stable ratings with Fitch Ratings and S&P). Now the focus turns to the RBNZ October OCR review (4pm EST/8pm GMT). We expect the RBNZ to leave the cash rate (OCR) on hold at 2.5%. It is too early to accurately gauge the impact of the recent home lending restrictions which were introduced in October, but the RBNZ is once again likely to voice its concern about house price inflation. Overall, we do not think the developments since the September MPS will significantly change the tone of the October Review statement, though the risks lie to a slightly softer tone given the buoyant NZD over the past six weeks. Even with the last week’s underperformance, the RBNZ will likely highlight the unhelpful nature of the high NZD in regards to the tradable sector. But the RBNZ will also repeat the warning that cash rate increases will likely be required next year. For the coming 24 hours, the FOMC meeting and its impact on the USD will likely be a more important influence on the NZD. AUD/NZD has back under 1.1500 over the past 24 hours. We think this move could reverse, and AUD/NZD can still press back towards our published target of 1.1600 if the RBNZ releases a slightly more cautious assessment.
AUD/USD has continued its downward drift., trading under 0.9500 in the Asian session although it has edged back up to this mark through the European morning. AUD/USD is now over 2.5% below its 23 October highs, trading back near levels from mid-October. We continue to think the FOMC meeting will be the dominant influence on AUD/USD in the coming sessions. In our view, given the skew in market expectations towards a dovish FOMC, there is a risk of a positive USD surprise (see above). This should keep the AUD under downward pressure. But beyond the FOMC meeting, the official China manufacturing PMI released on Friday should offer a degree of AUD support. Further improvement is expected in the China PMI and this should provide further evidence that momentum in the Chinese economy is picking up into year-end.
EUR endured a volatile period yesterday, but has ultimately drifted lower against a firmer USD over the past 24 hours. The volatility in the EUR was a function of comments from the ECB’s Nowotny. According to Nowotny, in his opinion the possibilities for monetary policy are limited “especially with regards to interest rates”. That being said, Nowotny suggested that anothet injection of liquidity via a LTRO is possible and that the ECB’s accommodative policy stance should remain appropriate for an extended period. In our view, Nowtony’s comments do not alter the ECB’s easing bias. They are a single opinion of a wider committee. The fragile nature of the Eurozone recovery, weak credit dynamics and disinflationary environment should see the ECB retain its forward guidance, which includes a downward bias on interest rates, for some time. Market focus and EUR/USD movements over the remainder of the week should be contingent on the reaction to the FOMC meeting (see above). Given our positive USD outlook, we think EUR/USD will continue to ease lower, back into line with fundamental drivers, such as the German-US yield differential.
USD/JPY has lifted to trade above 98.00 for the first time in a week. As is typically the case, USD/JPY has showed little reaction to the Japanese data today (Industrial production rose a softer than expected 1.5% in Sept, but is up 1.8% QoQ). The Bank of Japan meet tomorrow (no scheduled time for an announcement). BoJ Governor Kuroda has indicated he is reluctant to further increase asset purchases. In our view, given the softness in Japanese economic indicators, there is risk the BoJ cuts its GDP growth forecasts and considers lifting asset purchases. On balance, we think the BoJ will decide not to increase asset purchases because the upcoming increase in the consumption tax will be offset with tax cuts elsewhere and public spending increases. Over the next 24 hours, USD/JPY is likely to be hostage to USD developments, with the tone of the FOMC key to USD/JPY direction. Nonetheless, we continue to expect USD/JPY can push significantly higher over the near-term. The slump in Japan’s merchandise trade deficit to a record of ¥1,091 billion in September 2013 is likely to foreshadow another Japanese current account deficit. Japan’s current account for September 2013 is released on 11 November. If Japan records another current account deficit as we expect, for only the third time in the past three decades, USD/JPY is likely to break above 104 before the end of the 2013.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – ADP employment and CPI (today); FOMC meeting (Today/Thursday morning Asia); ISM manufacturing (Friday). Fed’s Bullard speaks on monetary policy (Friday).
AUD – Private sector credit and building approvals (Thursday). China manufacturing PMI (Friday).
EUR – Confidence indicators (today), unemployment rate (Thursday).
GBP – Manufacturing PMI (Friday).
NZD – RBNZ Official Cash Rate review (Thursday NZ time).
JPY – BoJ policy meeting (Thursday).