CBA FX Strategy - New York Open
The morning has been very quiet ahead of the US labour market print. EUR/USD has clawed back some of its declines, induced by the surprising ECB rate cut rallying back up to 1.3425 despite a soft French IP print and S&P’s downgrade of France’s sovereign rating (see below). EUR/GBP has pushed back up to 0.8350. Effectively the decision by the ECB to cut the refi-rate to 0.25% and maintain the deposit rate at 0% has narrowed the interest rate corridor to 25bpts. In turn, this should help limit Eurozone money market interest rate appreciation pressures and help ward off any undue tightening in financial conditions (see chart below). In our opinion the key take outs were the fact that the ECB thinks there may be a “prolonged period of low inflation”, risks to the growth outlook remain on the downside and the fact that the ECB has retained its easing bias. Indeed, President Draghi noted that the ECB hasn’t reached the lower bound, and it discussed and remains technically ready to cut the deposit rate into negative territory. In the wake of the announcement the EONIA 1yr/1yr forward rate has fallen back down to its lowest level since mid-July. In our view, the ECB decision and shift in market interest rates should act as a EUR headwind. In line with our firmer USD view, we think EUR/USD should ease back down towards 1.3346 (100-day moving average) over coming sessions. Adding to the negative EUR sentiment, late in the Asian session, S&P announced that it has downgraded France's sovereign rating from AA+ to AA. The outlook on the new AA rating is stable. France is now rated AA by S&P, Aaa (with negative outlook) by Moody's and AA+ (stable outlook) by Fitch. According to S&P, today's decision was driven by France's weak economic growth prospects and fiscal policy constraints.
EUR/JPY had one of the largest intra-day moves since mid-September over the past 24 hours. The S&P decision regarding France may add some further downward pressure on EUR/JPY in the near term. Nonetheless, we don’t anticipate EUR/JPY will endure a large change in direction. The broader upward trend in EUR/JPY should remain in-tact driven by the collapse in Japan’s current account surplus (<1.0% GDP) and the Eurozone’s record current account surplus (>2.0% GDP). We therefore anticipate EUR/JPY will grind higher and recover yesterday’s declines over the next week or so.
USD has maintained strength in the aftermath of yesterday’s developments. In our view, the stronger than expected US Q3 GDP result (2.8%saar vs 2.0%saar expected) was encouraging. This is largely because growth was broad based, with all of the key areas contributing positively. Also supporting the USD is the weaker EUR (see below). In our view, the fact that the US Fed is closer to the end of its easing cycle compared to the other G4 central banks remains a key reason behind our firmer multi-year USD view. We received confirmation those macro drivers are operating yesterday. In line with our view from earlier in the week, we think he USD can continue to grind higher. Today the major focus is the October US labour market report (8.30am EST/1:30pm GMT). The data is likely to have been somewhat affected by the partial US government shutdown. The establishment survey (upon which the US unemployment rate is derived) will be more affected than the household survey (upon which non-farm payrolls is derived). Hence, we could receive an upward surprise to non-farm payrolls growth and an upward surprise to the US unemployment rate; clearly a mixed message on the labour market. Vol. is likely to remain elevated as participants absorb the details of the US labour market report. We suggest being guided more by the non-farm payrolls number (consensus +120k) because the volatility in the unemployment rate is unlikely to last and be somewhat explained away by the partial US government shut-down. Various leading indicators, such as the employment components of the ISM surveys, suggest there are upside risks to the market consensus payrolls expectations. In turn, we see upside risks to the USD.
AUD/USD briefly decreased after the RBA cut it medium term Australian GDP and inflation forecasts and stated that it was appropriate “not to close off” the chance of reducing rates in its quarterly Statement on Monetary Policy. The RBA considers the near term outlook for the labour market remains soft and revised down the profile for employment slightly because of the winding down of mining investment. The RBA considers the unemployment rate will begin to decline later in 2015. This suggests the RBA risks being on-hold for all of 2014 and part of 2015. On the AUD, the RBA said a depreciation similar in magnitude to that seen earlier this year could be expected to see growth return to trend, or even above trend, sooner than forecast and assist with the required rebalancing of growth in the domestic economy. This implies AUD falls into the mid-80s. In other developments in the Asian session, the Chinese trade surplus for October expanded far more than consensus expected (US$31bn v US$24.8bn expected). Chinese imports of iron ore (Australia’s largest export to China) declined by only 9% (MoM) in October, far less than the usual fall in October of 15-20%. However, iron ore shipments from Port Headland suggest a big rebound in Chinese iron ore imports is likely in November. Tomorrow (after US markets close) Chinese data on CPI, industrial production and retail sales for October are due. Chinese CPI inflation is expected to lift to 3.3% because of higher food prices, but core inflation pressures are expected to be more subdued, and remain under 2% (where they have been for nearly two years). Industrial production and retail sales growth in line with expectations should keep the market confident that growth in China can continue to modestly lift. In turn this should support AUD and NZD on Monday, although the influence of US non-farm payrolls may dominate trading in early Asian trade on Monday.
USD/JPY also had a volatile 24 hours, trading in a 1.8% range in a six hour period. The next event for the yen is US October payrolls (see above) and Monday’s Japan September current account balance. We predict Japan’s current account will return to a deficit for only the third time in three decades, and support an ongoing lift in USD/JPY. This should provide some support for EUR/JPY as well.
USD/CAD remains near the top of its 1.0400-1.0460 range, with the stronger than expected US GDP driving the USD side of the currency pair up yesterday. USD/CAD volatility looks set to continue today, with labour reports in both countries influencing the cross rate (both the Canadian and US labour market reports are released at 8.30am EST/1:30pm GMT). The Canadian labour market data has been very volatile over the past year, with the monthly Canadian 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. However, we expect the underlying picture is one of modest Canadian jobs growth circa 12k per month, and this is what we expect to see in this month’s report. Canadian jobs growth of this magnitude in isolation should help USD/CAD drift modestly lower. However, the labour market data in Canada could still spring another large positive (or negative) surprise and drive USD/CAD outside the week’s range. Furthermore, a significant upside surprise in US payrolls would likely push USD/CAD towards 1.0500, unless it was mitigated by even firmer Canadian jobs growth.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – October non-farm payrolls (today).
AUD –China industrial production, CPI and retail trade (Saturday). In addition to the Chinese activity data released, the Chinese Communist Party is set to conduct its Third Plenum Central Committee meeting. This is set to be held between 9 and 12 November. Key economic reforms are likely to get announced at the meeting. Members of the Party’s Central Committee attend the closed-door meeting.
EUR – Eurozone Q3 GDP (14 November).
GBP – BoE’s Inflation Report (13 November).
CAD – Employment (today).
JPY – Current account (Monday), Q3 GDP (14 November).