CBA FX Strategy - New York Open
The new week has started in relatively quiet fashion in Europe. The Eurozone manufacturing PMI was unchanged from the flash estimate at 51.3 in October. EUR/USD has held steady around 1.35, other major currencies have likewise been directionless through the morning.
USD strength continues to gather momentum after being over-sold between the mid September and late-October FOMC meetings. A recovery in the US TWI back to the upward sloping 200 day moving average (81.76) is likely over coming weeks supported by higher US real long-bond yields, a narrowing US current account deficit (2.5% GDP) and the fact the Fed is closer to the end of their easing cycle than is the rest of the G4. We anticipate the US economic data, namely the first estimate of US Q3 GDP (Thursday) as well as the October non-farm payrolls (Friday) will be the key bits of US economic data that drive currency direction this week. We don’t anticipate comments by Fed Chairman Ben Bernanke will make on an IMF panel on Friday about “Policy Responses to Crisis” will significantly move markets. The collection of Chinese October economic data due this coming weekend is likely to be of more interest to market participants. The European Central Bank (ECB) and to a lesser extent, the Bank of England (BoE) meetings, may well be a factor supporting demand for the USD.
AUD/USD will this week face the headwind of a firming USD. But we anticipate further gains in AUD against the major cross rates. Locally, the release of both Chinese and Australian economic data will generate an impact on AUD direction. The release of firmer than expect Chinese services PMI data for October over the weekend helped AUD to a firmer open in early Asian trade today. And in the Asian afternoon the September Australian retail sales data for both the month and the quarter was better than expected. The 0.7% increase in volumes in Q3 illustrates that consumption should be a positive contributor to Q3 Australian GDP (released in early December). The retail sales data should provide a modest boost to the AUD early in the week (full preview attached). Over the rest of the week the Reserve Bank of Australia (RBA) meeting tomorrow (8.30 pm EST/1.30am GMT ) and the Australian October employment data (Thursday) will be local data highlights that influence AUD. We anticipate the RBA will maintain its view that it would like to see a lower AUD in order to help re balance the Australian economy but there will be no changes to interest rate guidance. There will also be a collection of Chinese October economic data released this coming weekend. We anticipate AUD/USD to end the week largely unchanged, close to the 30 day moving average of 0.9485. The risk is AUD/USD finishes the week higher, supported by mildly higher Australian rates.
NZD/USD has ground modestly higher in Asian trade today, and at 0.8250 is near the centre of its range over the past 4 trading days. This week’s focus is the NZ Q3 labour market report (Wednesday), where we expect a robust 0.7% lift in employment (consensus is a 0.5%
gain). However, we expect that the unemployment rate may only dip 0.1% to 6.3% (consensus -0.2% to 6.2%), reflecting a lift in labour market participation. NZ labour data is notoriously volatile, and accordingly NZD intra-day vol. should lift. If the labour data prints near our expectations, the NZD should receive some mid-week support and drive AUD/NZD temporarily lower. However, we expect any NZD/USD rallies over the week ahead to fade, reflecting our firm USD view, and AUD/NZD to be well-supported for now at the 30 day moving average of 1.1387 underpinned by firmer Chinese and Australian economic data.
EUR/USD has eased over the past week, and is now 2% below its 23 October peak. This week, the GBP-centric focus is on the UK data, namely services PMI (Tuesday), industrial production (Wednesday), trade balance (Friday), as well as the Bank of England policy meeting (Thursday). Overall, we expect the UK data released this week to provide further evidence that the positive momentum in the UK economy is being sustained. Given the improvement in the UK economy, we expect no change from the BoE. While we do not think GBP will be able to buck the trend of a firmer USD, and GBP/USD should continue to ease lower, we do think GBP should outperform the EUR and so for EUR/GBP to dip below the 30 day moving average of 0.8469. The diverging economic outlooks of the Eurozone and UK remains apparent, and the risk of more policy action by the ECB contrasts the BoE which appears to be comfortably on hold.
GBP/USD continues to drift lower, and is now 2% below its 23 October peak. This week, the GBP-centric focus is on the UK data, namely services PMI (Tuesday), industrial production (Wednesday), trade balance (Friday), as well as the Bank of England policy meeting (Thursday). Overall, we expect the UK data released this week to provide further evidence that the positive momentum in the UK economy is being sustained. Given the improvement in the UK economy, we expect no change from the BoE. While we do not think GBP will be able to buck the trend of a firmer USD, and GBP/USD should continue to ease lower, we do think GBP should outperform the EUR and so for EUR/GBP to dip below the 30 day moving average of 0.8469. The diverging economic outlooks of the Eurozone and UK remains apparent, and the risk of more policy action by the ECB contrasts the BoE which appears to be comfortably on hold.
USD/JPY has been very stable in today’s trade, but should grind higher this week in line with a firmer USD (see above). There are no significant Japanese economic data scheduled for release this week except for a speech by Bank of Japan Governor Kuroda (5 November). The next major Japanese data release is the current account 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 finally break above 100, and touch 104 before the end of the 2013.
USD/CAD has eased 0.7% since 31 October, despite the firmer USD. CAD is benefitting from improved US economic sentiment: Canada sends over 70% of exports to the US, so the increasing confidence in the US economy is good news for Canada, and in turn CAD-positive.
This week’s labour market reports in both the US and Canada will be important for USD/CAD (Friday). The Canadian labour market data has been very volatile over the past year, with the monthly employment change ranging from -39.4K to +95K. One off events such as flooding and strikes in Canada will add to the difficulty in getting a true picture of Canadian output, and the labour market situation.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – ISM non-manufacturing (Wednesday), Q3 GDP (Thursday), October non-farm payrolls (Friday).
AUD – RBA policy meeting (Wednesday), October employment (Thursday), China industrial production and retail trade (Saturday).
EUR – ECB policy meeting (Thursday).
GBP – Services PMI (Tuesday), BoE policy meeting (Thursday).
NZD – Q3 unemployment (Wednesday).
CAD – Employment (Friday).
JPY – BoJ Governor Kuroda speaks (Tuesday), current account (11November).