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Euro has edged higher over the past week, reflecting a softer USD

Posted by Marge Maresca on Nov 18, 2013 8:36:00 AM

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The European morning has been very quiet to start the week. The Eurozone posted another sizeable current account surplus in September of EUR13.7b. , the EUR has inched higher to 1.3518 so far this morning. Equities are modestly higher to start the week. Elsewhere there is little to report.

USD is likely to consolidate this week, though our medium term indicator (the two year swap spread between the US and its major trading partners) suggests the USD will lift into year end.  Dovish statements from key FOMC voters and soft US economic data have shifted market participants’ expectations for the start of asset purchase tapering from December 2013 to early 2014.  The key US events this week – FOMC minutes, CPI and retail trade (all Wednesday GMT) – are all likely to be soft enough to keep tapering expectations firmly planted into 2014.  Speeches from outgoing FOMC chair Bernanke and vice chair Dudley are likely to maintain their view that the US economic recovery is still too fragile to start the taper process soon.  The talk on the timing of FOMC tapering will continue to drive US Treasury yields, and data surprises (high or low), will be tied back to talk on the timing of tapering.  As we saw last week, at the height of “optimism”, the 10 year US Treasury yield rose to an intraday peak of 2.8%.  At the trough in “pessimism”, 10 year US Treasury yields rallied to 2.5%, and were testing the low side (trading 2.47% in October).  We suspect this range will hold, for now.  We are currently sitting at 2.7%, and expect to end the year closer to 2.8% 2.9% as we expect tapering to commence from March.

AUD/USD has lifted modestly higher in Asian trade, but faces downsides risks this week and may test 0.9272 (100-day moving average).  The key risks for AUD this week stem from more potential jaw boning from the RBA about the “uncomfortably high” Australian dollar in the minutes from the 5 November policy meeting (7.30am EST/12.30am GMT Tuesday ) and a speech by RBA Governor Stevens on 30 years of the floating currency (Thursday).  But we do not expect the AUD to fall too far because the USD is likely to consolidate this week.  By contrast, Bank of England commentary is likely to be more upbeat about the UK economy, encouraging AUD/GBP lower (GBP/AUD higher) this week in line with our published strategy.  Further detail on economic reform from China’s “Third Plenum” was released last Friday, and is encouraging for the further development of the Chinese economy, but is unlikely to be an important driver of AUD this week.

EUR/USD has edged higher over the past week, reflecting the softer USD.  We do not think the lift in EUR/USD is likely to be sustained over the medium term (see above).  This week the EUR focus will be on the various business surveys including the German ZEW (Tuesday), flash estimates of the November Eurozone PMIs (Thursday), and the German IFO (Friday).  Expectations are centred on further modest improvement.  This would support our own and the ECB’s baseline assumption looking for a gradual Eurozone economic recovery.  That said, the gradual and uneven pace of the recovery won’t be enough to alter the ECB’s easing bias, particularly given Eurozone inflation is now tracking at only 0.7%pa.  This is a message the various ECB members speaking this week, including President Draghi (Thursday) are set to reiterate if policy is discussed.  Front end core Eurozone bond yields should remain capped.  The negative German US yield differential should remain in place and this should continue to limit EUR/USD gains.  In our view, upside in EUR/USD should be limited towards the 50 day moving average (1.3534).  Ultimately, we expect the relative fundamental divergences between the Eurozone and US will see EUR/USD ease modestly lower into year end.

USD/JPY remains above 100, and should continue to gradually grind higher this week following Japan recording its third monthly current account deficit last week and comments from Japan’s Finance Minister Aso about currency intervention. Japan’s October trade deficit is likely to ease following the record deficit in September but remain very large (Wednesday in Asia/Tuesday EST), while the Bank of Japan’s policy meeting (Thursday) is unlikely to make significant changes to the post meeting statement.  We are sticking with our earlier published strategy that USD/JPY will grind higher and touch 104 before the end of the year.

NZD outperformed over the second half of last week, with NZD/USD back up above its 50-day moving average (0.8305) and AUD/NZD grinding back down towards 1.1200.  Australia–New Zealand interest rate differentials suggest a higher cross rate, but in saying that, a number of factors could keep the AUD/NZD cross heavy this week.  The New Zealand Government’s partial sell down of its majority stake in Air New Zealand may generate some NZD buying, and further AUD jawboning from the RBA could weigh on AUD.  While these factors could see AUD/NZD dip temporarily below 1.1200 this week, we do not expect the moves to last.  The AUD/NZD cross is very interest rate sensitive.  The Australia New Zealand two year swap has widened to around  58bpts, but AUD/NZD still looks a little ahead of itself on interest rate differentials alone.  The early October lows in AUD/NZD coincided with an Australia New Zealand two year swap spread equal to 67bpts.  While we think the rate spread can widen to this level again, and AUD/NZD will eventually dip below 1.1200, we think that is likely a story for 2014 when the RBNZ’s rate tightening cycle is much closer, or RBA rate cut expectations get re priced.  For NZD/USD, the New Zealand data this week is unlikely to have a lasting influence, and movements will be a function of the USD side of the equation.  NZD/USD has found support around the 200 day moving average (now 0.8176) on three occasions, and this should continue in the near term on any USD rallies

GBP was firm over the second half of last week, with GBP/USD now trading near its highest levels of the month.  We think GBP should remain supported this week.  Market participants remain focused on the broader improving trend in the UK economy and growing view the Bank of England (BoE) could begin to normalise monetary policy earlier than previously expected.  The growing optimism emanating from the November BoE Inflation Report is set to be repeated in the minutes of the November BoE MPC policy meeting released on Wednesday.  Likewise, comments from the BoE’s Chief Economist Spencer Dale (Wednesday) and Weale (Thursday/Wednesday EST/GMT) may reiterate the perception that the BoE is now firmly on hold and that the UK’s economic recovery is gather steam.  More specifically, we think the growing macro and monetary policy divergences between the Eurozone and UK should keep EUR/GBP under downward pressure.

USD/CAD has drifted lower late last week mirroring the USD softness.  USD/CAD did dip modestly on a smaller than expected Canadian monthly trade deficit on Friday, but the data did not have a lasting effect.  In this vein, the Canadian data this Friday (October CPI and September retail sales) is unlikely to be CAD influential.  We expect annual core CPI to print around 1.2 1.3%, in line with last month, and retail sales growth of 0.4% also in line with last month’s growth.  We expect USD/CAD to remain within its recent 1.0400 1.0500 trading range this week.

Upcoming Economic Calendar Highlights Important for Exchange Rates

USD – FOMC minutes, CPI and retail trade (Wednesday).  Fed speakers: Dudley, Plosser (today), Bernanke (Tuesday), Dudley, Bullard (Wednesday & Thursday),

AUD – RBA minutes (Tuesday), RBA Debelle speech (Wednesday), RBA Stevens speech and China flash manufacturing PMI (Thursday), CAPEX (28 November).

EUR – German ZEW (Tuesday), Eurozone PMIs (Thursday), German IFO survey (Friday).  ECB Speakers: Mersch (Monday), Nowotny (Monday), Asmussen (Monday), Praet (Tuesday), Nowotny (Tuesday), Draghi (Thursday), Weidmann (Thursday) and Noyer, Praet and Nowotny (Friday).

GBP – BoE minutes (Wednesday).  BoE Speakers: Dale and Weale (Wednesday).

JPY – Trade balance (Wednesday), BoJ meeting (Thursday).

CAD – CPI and retail sales (Friday).  BoC’s Poloz speaks (Wednesday).

Thoughts from our Trading Team


Support       1.3440, 1.3410, 1.3380

Resistance   1.3510-20, 1.3550

Good Morning, Alas typical Monday Morning  1.3490-1.3518, $ weakness prevails and whilst I am still bearish on the single currency one has to be mindful of Euro catching a bid and trading through 1.3510, should this occur I just see a muddying of the waters and do not see this as a sign of strength for the single currency. Good Luck


The AUD has been encapsulate in an extremely tight trading range this morning in a very sleepy London. The pair has unable to even mirror the rest of the G10 complex’s moves, with us caught between large gamma offers above 0.9420 and corporateinterest to buy the pair from the start of the day. At the time of writing we have actually traded the largest move of the day (a whole 8 ticks!) with us trading below 0.9400, with the very short term market long some aud for the stops above 0.9420, it is not inconceivable that we may see a quick wash out to 0.9360 / 65 this afternoon.


Option strikes are dominating the start of the week as the headline pair struggles to break away either side of 100. We drifted lower on the London morning and hit a low of 99.78 as weak stops were triggered in the low 80’s. Unsurprisingly gamma players used the dip to get long and took us back to 100 quickly. We saw a fund sell a good amount usd/jpy near the figure, post bounce back to 100.


Cable has mixed fortunes today going bid in early trading and then going well offered as we approach New York coming in. We saw a fund sell gbp/usd on the london open at 1.6130 but despite this we went higher immediately posting a day’s high thus far of 1.6149. Into 10am however we saw sterling go well offered in the market with the headline pair heading down towards 1.6100. On the way down we saw a sterling exporter sell 30m gbp/usd but we have failed to go much lower. Stops are noted away in the market above 0.8400 in eur/gbp. 


This morning we have had what appeared to be a mishit in NZD… .8378/80 doing nothing, with a sudden gap to .8407 paid… next to no volume went through up here, with the mid .8390’s a more realistic level to call the high as AUD/NZD also based at 1.1212 in tandem. NZD will today likely be dominated by AUD direction as it fights a tug of war between strikes at and below .9400, and the small build-up of stops above .9420 with the former currently winning thus dragging NZD back into the mid .8370’s.


Strong open for USDTRY into the start of the week despite all the recent bearish comments. Currently  at 2.0265.  We are now close to a very strong support below 2.0200-2.0220 and I still like being long USDTRY with a tight stop below there. Locals should also start buying this week which should give support to the pair, with the only risk remaining is a surprise hawkish stance by CBRT tomorrow. 2.0350 will be the first resistance above for the day.

AUD & NZD Today

Aud is higher overnight as Chinese equities hit one month highs on optimism for China’s Third Plenum reform. Market still feels short Aud with stops lined up 0.9420-0.9435 today. The 50 dma is at 0.9444 and should provide resistance especially ahead of the RBA minutes later this evening and potential for more jaw boning from the RBA. Little in the way on the downside, with exporters waiting for a dip back to 0.9330-0.9300. Nzd rallied overnight following strong local data with Oct services rising to a 6 year high however is struggling to break 0.8400 with stops lined up just above the figure.  Nzd mostly benefiting on the cross with AudNzd making new lows. We still are watching strong support at 1.1200, traders are looking to buy down there with a stop at 1.1170.

China’s Economic Reforms and Implications for Commodities

Highlights from Third Plenum reform blueprint

‘Decisive’ results to be obtained by 2020


State‑owned enterprises (SOEs) are required to contribute 30% of
  capital to the central government by 2020, up from 15% today


Pricing reforms in water, oil, natural gas, electricity, traffic
  and telecommunication markets in order to establish competitive market prices


Hukou reforms to help urbanise China’s rural residents. This
  will entail lifting restrictions for rural residents to help settlement in
  tier 2 and 3 cities, as well as plans to improve their healthcare, social
  security and education support.


Start the implementation of a policy where it is permitted to
  have two children if either a husband or a wife is an only child. Previously,
  a second child was only allowed if both parents were an only child.


Develop environmental protection markets, implement energy
  saving and carbon emission rights.

From here, we anticipate over the coming days and weeks that even more detail will emerge on the reform roadmap, which will allow participants to better judge likely implications.

Implications: Early signs are good

The reform roadmap released on Friday features encouraging signs for medium‑to longer‑term commodity demand, largely driven by urbanisation of poorer cities and provinces related to proposed Hukou reforms. We offer some observations of potential impacts on commodity markets below.

The Hukou reforms suggest that fixed‑asset investment will still form a significant part of China’s economic growth in the medium to longer term, as China develops tier 2 and 3 cities to aid urbanisation of China’s rural population. This investment should support commodity demand, as these smaller cities will require commodity‑intensive infrastructure to support larger populations.

Rural‑urban land reform, including ascription of property rights to peasant farmers, combined with an improved social security, education and healthcare system would allow lower precautionary savings, higher consumption and reduced investment across the economy. This would help re‑balance the economy away from exports and investment and towards consumption, boosting domestic demand for commodity containing property, consumer durables and capital goods.

Moving to a more market‑oriented approach to allocating resources could ration funding to loss‑making SOEs, and gradually reduce excess capacity across the economy. The impact on commodity demand and pricing is ambiguous at this stage, and will depend on timing, and whether producing assets or non‑producing excess capacity assets are closed. The increased contribution requirement from SOE profits to the central government will help increase competition, but conversely, the reform blueprint still indicates strong support for the public sector.

China’s energy and electricity prices would likely rise if reform were to take place in these markets as proposed in the reform blueprint. This could particularly see costs escalate and margins squeezed amongst China’s energy‑intensive industries still located on China’s east coast. As we highlighted in our nickel market review, we believe China’s nickel smelting industry is at significant risk to energy cost escalation.

The relaxation of the one‑child policy rule shows that China is increasingly aware of the challenges posed by a growing elderly population that is supported by a shrinking workforce. A larger Chinese population will help support stronger long‑term economic growth than otherwise, and in doing so, promote stronger commodity demand.


Commonwealth Bank of Australia


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