CBA FX Strategy
The BoE Inflation Report and press conference has been centre stage this morning, although another fall in the UK ILO unemployment rate to 7.6% also impacted GBP. GBP/USD popped up a little following the release and then spiked up to 1.60 following the publication of the BoE’s new economic forecasts. Crucially the BoE have now brought forward their expectations for when the ILO unemployment rate will reach the 7% threshold to QIII 2015. This is over a full year earlier than previously expected and brings the BoE’s forecasts roughly in line with those of most commentators, ourselves included. GDP growth is now forecast at 1.6% in 2013 and 2.8% in 2014. Mr. Carney acknowledged that the economy is growing robustly, pointing out that one does not have to be an optimist to see “the glass half full.” The general tone of the press conference has been positive as expected, EUR/GBP spiked back down under 0.84, although has since back higher a little. In the Euro-zone industrial production dipped by 0.5 MoM, but was ignored by markets.
USD/JPY drifted modestly lower in Asia today and has held steady through the European morning. However, we expect USD/JPY will continue to grind higher in line with higher US yields and our guidance earlier in the week that Japan’s return to current account deficit would encourage yen selling. Ben Bernanke speaks at 7am EST/12am GMT. Bernanke will take questions and his comments, as always, could influence US yields and the USD. Janet Yellen’s appearance at the Senate Banking Committee on Friday (Thursday US time) for her nomination to become the next Fed Chair is the next event for USD/JPY. We see a risk Yellen is not as dovish as some market participants perceive, and hence we see some modest upside risks to the USD, and USD/JPY.
AUD/USD showed little reaction to news from China yesterday, and today’s Australian data also had little lasting impact on AUD. The Chinese Communist Party’s Third Plenum Central Committee did not deliver a detailed plan for economic or financial reform as hoped by some. Australian Consumer sentiment rose by 1.9% in November to be 5.8% higher than a year ago, and around its three year high. The Australian Wage Price Index rose by 0.5% in QIII and 2.7% in annual (sa) terms. This result was the fifth consecutive quarterly moderation. Wages growth is slowing further and is well below its 10 year average of 3.8%. Moderating wages growth, combined with a rising unemployment rate, helps underpin the RBA’s mild easing bias.
NZD/USD had a knee-jerk 0.7% dip on the headlines from the RBNZ’ Financial Stability Report released in the New Zealand morning. The move was surprising, given none of the headlines were particularly dovish, or “new” in terms of market information. In contrast, NZ swap rates did not move following the release. We wrote at the time that the currency reaction was an over-reaction, and the move has since fully reversed. The key messages of the FSR remains the same: New Zealand’s financial system remains sound, and “the main threats to the financial system are the risks associated with growing imbalances in the housing market”. Once more, the RBNZ stressed it is still too early to draw conclusions on the effect of the recently introduced policy initiatives (high LVR housing loan restrictions and increased capital requirements for banks’ high LVR loans). However the RBNZ notes the initial evidence suggests “there has been a change in market behaviour”.
In line with the expectations in our Weekly Currency Views EUR/USD has ground up off its post ECB meeting lows so far this week. Looking ahead, the next key release for the EUR is the advanced estimate of Q3 Eurozone GDP (Thursday). Barring a large surprise in today’s industrial production data, we think the leading indicators and partial data point to slightly stronger growth than the consensus expects (consensus 0.1% (QoQ)). Nonetheless, we do not think this is the start of a significant reversal higher in EUR/USD. The German-US two-year yield spread is now -22bpts. This is its most negative reading since mid-July. At that point EUR/USD was trading sub 1.3200. The fragile and uneven Eurozone recovery, coupled with the expected prolonged period of low Eurozone inflation, suggests the ECB’s easing bias will remain in place for some time and hence there is limited upside in German two-year bond yields. The perceptions around the ECB are in contrast with the views regarding the outlook for the US Fed. As such, we do not think the negative German-US yield differential will change by any large extent. The negative yield differential should act as a EUR/USD headwind and ultimately weigh on the currency pair.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – Initial Jobless Claims (Thursday); Industrial Production (Friday); Bernanke speaks (Thursday); Yellen speaks (Friday).
AUD – RBA minutes (Tuesday), RBA Stevens speech (21 November).
EUR – Eurozone Q3 GDP (Thursday).
JPY – Q3 GDP (Thursday).