CBA FX Strategy - New York Open
Currency markets have again been relatively quiet through the European morning. The German ZEW survey for November was mixed. The current situation balance dipped marginally to 28.7, the expectations balance improved marginally to 54.6 from 52.8. The EUR eased a little following the print, but is holding around 1.35. GBP/USD has dipped to 1.6060, USD/JPY is a little under 100. There has been little else to report from the morning session and a quiet afternoon also looks in store.
USD strengthened modestly in New York trade following a speech from the FOMC’s Dudley (dovish voter) that was perceived as mildly hawkish, namely his comment “I am getting more hopeful” about the US economy. However, a closer reading of Dudley’s speech suggests a firmer US economic recovery “remains a forecast rather than a reality at this point”. The decision to taper its asset purchases turns on the FOMC’s outlook for the labour market. On this measure, Dudley made his view clear, “growth not yet enough to ensure substantial job gains”. We retain our view the FOMC will not taper its asset purchases before March 2014. The USD index has reversed some of its gains in today’s Asian trade. We think the USD could continue to reverse yesterday’s gains as participants digest the underlying details of Dudley’s speech. The next USD focus is a speech by Fed Chair Bernanke on monetary policy and communication (7pm EST/midnight GMT). We expect Bernanke to stick to the recent Fed script. Dovish rhetoric from Bernanke would dampen the USD.
AUD has ground higher since the release of the RBA minutes from its 5 November policy meeting. The initial AUD reaction suggests market participants were short AUD going into the release of the RBA minutes, looking for a more dovish message. The minutes showed the key messages from the RBA remain unchanged in the past 5-6 weeks: (i) AUD is “uncomfortably high”; and (ii) The easing bias remains. The RBA would prefer the AUD to fall further rather than cut rates again but uncertainty regarding the transition away from mining led growth means rate cuts are still possible. This AUD theme may be repeated by the RBA Governor in his speech on Thursday. Before then, the next big event for the AUD is Bernanke's speech.
EUR/GBP has lifted 0.3% off its recent lows. We do not expect the move up in EUR/GBP to be sustained. The key focus in the UK this week is on the November BoE meeting minutes (released Wednesday). The growing optimism emanating from the November BoE Inflation Report is set to be repeated in the minutes. This should reiterate the broadening macro and monetary policy divergences between the Eurozone and UK. We retain our earlier published strategy of selling into EUR/GBP strength.
NZD outperformed yesterday, and at one stage NZD/USD temporarily spiked above 0.8400 as AUD/NZD dipped to 1.1200. The moves have reversed in trade today. In the near-term, comments from the RBA’s Debelle and Governor Stevens in speeches on Wednesday and Thursday respectively will have the greatest impact on the AUD/NZD cross rate. While further RBA jawboning could see AUD/NZD dip temporarily below 1.1200, we do not expect the moves to last. The Australia‑New Zealand two‑year swap has widened to around ‑60bpts, but AUD/NZD still looks too low 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 down 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.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – FOMC minutes, CPI and retail trade (Wednesday). Fed speakers: Bernanke (today), Dudley, Bullard (Wednesday & Thursday),
AUD – RBA Debelle speech (Wednesday), RBA Stevens speech and China flash manufacturing PMI (Thursday), CAPEX (28 November).
EUR – Eurozone PMIs (Thursday), German IFO survey (Friday). ECB Speakers: Praet (today), Nowotny (today), 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 policy meeting (Thursday).
CAD – CPI and retail sales (Friday). BoC’s Poloz speaks (Wednesday).