CBA FX Commentary - New York Open and the week ahead
The EUR has eased lower through the morning to start the week, but continues to hold over the 1.35 level. The Insee survey in France plunged unexpectedly in November, but was ignored by markets. Elsewhere there has been little of note to report in what is shaping up to be a relatively quiet Thanksgiving week. GBP/USD has dipped back under 1.62.
USD lifted a little through the Asian and European sessions, and is likely to consolidate this week. Market vol. is likely to be low as US participants wind down into the Thanksgiving holiday on Thursday with many taking a long weekend. Our bias is for the USD to edge slightly higher; we are inching closer to the beginning of Fed tapering, but there is little local economic data to drive USD or US rate direction this week. Nevertheless, US housing data, durables, and manufacturing surveys each have the ability to adjust tapering expectations. A perceived “hawkish” set of Fed minutes published last week pushed US ten-year Treasury yields to the highest level since September. The main catalyst impacting on the USD this week is likely to come from the Eurozone, with the release of the first estimate of the Eurozone November inflation data (Friday). Participants will be sensitive to the ECB’s policy guidance of low or lower interest rates, and the possibility that a lower than expected CPI could encourage the ECB to lower the deposit rate into negative territory. The second estimate of UK Q3 GDP is also due, which will provide firmer details on the mix of the solid 0.8% (QoQ) lift in UK real GDP (Wednesday).
USD/JPY lifted in the Asian session, and has traded above 101.80 for the first time since May. We think USD/JPY should continue to grind higher because of the collapse of Japan’s current account surplus, in line with our published view that predicts USD/JPY will touch 104.0
by year end. Expectations for Japanese October industrial production (Friday) look very high at 2.0% and risk disappointing, possibly sending USD/JPY higher. Downside risks to USD/JPY this week come from rising tensions with China over disputed islands. The US Defence Secretary has reminded China that the Senkaku islands, (Diaoyu in China), are covered by the 1952 US Japan security treaty. Under this treaty the US commits to help Japan to repel any "common danger". In turn, China's foreign ministry said it had requested the US "to correct its mistakes and stop making irresponsible remarks on China" (source The Guardian). Despite Japan’s smaller current account surplus, JPY is still a safe haven currency and will strengthen if tensions between Japan and China rise substantially further, as repatriation flows occur. Although we regard this geopolitical tension as potentially serious, it does not appear to have had any impact so far. In fact, Japanese shares have had a good session, and ironically, one of the reasons suggested for the “risk on” mood in equity markets is the reduction in geopolitical uncertainty due to the weekend’s surprise Iran Nuclear Deal between Washington and Tehran. The deal has also seen oil prices ease today.
AUD/USD was heavy in the Asian session, but has ground back higher through the European morning and should be able to recover a modest amount of the lost ground from last week. Global equity markets remain firm, base metal and industrial commodity prices are lifting (beyond the initial dip in oil and gold in the wake of the Iranian deal) and the Australia-US interest rate spreads are supportive. But the Q3 private CAPEX survey (Thursday) will be pivotal to AUD/USD intra-day direction. We estimate Q3 CAPEX decreased by 4.0% compared to consensus predictions for a decrease of 1.2%. We also expect the more-important CAPEX plans by non-mining industries to show some improvement because of the lower Australian dollar and the lift in Australian business confidence. A weaker than expected CAPEX report will likely see a strong bull-steepening in the Australian interest rate curve, all else equal. Long-end yields in Australia will continue to mirror offshore movements, but a poor Australian CAPEX survey is likely to strip out RBA rate hike expectations over late 2014-15, and flatten the very short-end of the curve. The Australian yield curve (3s10s) is the steepest we have seen since 2009, we would use any further steepening in the curve following a weak CAPEX survey to apply a corrective 3s10s flattening trade. Following RBA Governor’s speech last week, we view the risk of RBA intervention to weaken the AUD as very low, particularly with AUD well south of parity. The RBA Deputy Governor Phil Lowe delivers a speech to a conference on productivity on Tuesday. Given the topic, Lowe is unlikely to discuss monetary policy or the dollar unless he is asked. Should he be asked, we anticipate Deputy Governor Phil Lowe to toe the RBA line of wanting a weaker AUD to help re-balance the economy.
NZD/USD ground all the way down to 0.8125 (100-day moving average) on Friday, over 3.3% off the week’s high of 0.8407. RBNZ Assistant Governor John McDermott’s speech on Friday morning on the exchange rate was less dovish than markets anticipated; triggering a modest lift in the NZD, but the gains couldn’t be sustained. Similar to AUD/USD, the NZD/USD struggled in in the European and US sessions on Friday. From Friday’s lows, NZD/USD has lifted to trade back above the 200-day moving average of 0.8170, and back above 0.8200 in the Asian session today. The New Zealand economic data this week is unlikely to have a major influence on the NZD, although the RBNZ’s October credit aggregates on Friday will be studied for early signs of the impact of the macro prudential loan restrictions introduced on 1 October. Weaker than expected New Zealand October credit data could drive the front-end of the New Zealand interest rate curve lower and flatter (removing some of the RBNZ rate hikes), on what will be a relatively illiquid Friday (following the US Thanksgiving holiday). This would support our view that the two-year part of the New Zealand curve is currently cheap. Such a reaction in the New Zealand two-year swap rate would lift the AUD/NZD exchange rate, which has dipped below 1.1150 today. With regard to other NZ data, the October trade balance (Wednesday), ANZ business confidence (Thursday), and October building permits (Friday) will all provide important insights into the momentum of the economy, but are unlikely to have a lasting impact on the NZD. When combined with our USD view, we expect NZD/USD to consolidate near 0.8200 this week.
EUR/USD is looking stretched at levels above 1.3500 and is likely ease modestly this week. The Eurozone economic recovery remains fragile and the German-US two year bond spread remains low at -14 points. The risk of further ECB policy stimulus has been highlighted in speeches by ECB Board members for several weeks. The advance estimate of the November CPI (Friday) is likely to be low around 0.8% (YoY) well below the ECB’s 2% target. A low inflation print may raise expectations of further ECB policy stimulus at the 5 December meeting, where the ECB will produce new inflation and growth forecasts.
USD/CAD has continued to trend modest higher. Today’s weakness in the Asian session coincides with a dip in oil prices following the Iranian deal in the weekend. Friday’s Canadian economic data was mixed. Canadian October CPI inflation showed inflation pressures are extremely low in Canada at 0.7% (YoY), but retail sales growth was much stronger than expected at 1.0% (MoM). This week the focus is on Canadian Q3 GDP (Friday), where growth is expected to accelerate from the Q2 soft patch. We expect quarterly growth of 2% (saar), which is stronger than Q2’s 1.7% growth, but a touch softer than expectations centred on 2.5%
growth. Last Friday’s Canadian September retail sales data, and other partial indicators bode well for Q3 Canadian GDP and USD/CAD should consolidate near 1.0500 this week unless Canadian GDP prints on the weak side of our expectations and sends the cross higher.
GBP/USD is trading near its highest level for a month around the 1.62 mark. The data highlight is the second estimate of UK Q3 GDP (Wednesday). The release will provide further details on the mix of the solid 0.8% (QoQ) lift in UK real GDP. BoE speakers this week include two appearances of Governor Carney (Treasury Committee Tuesday, and Financial Stability Press Conference Thursday). We expect the comments and sentiment from Carney to maintain the recent positive tone from the BoE, reflecting the improving prospects for the UK. We think this positive economic backdrop is already priced into GBP at current levels, and although the data and developments should be GBP supportive, we think GBP/USD will meet resistance above 1.6250, as it has done each time it has traded near these levels in late September and October.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – ISM (2 December).
AUD – CAPEX (Thursday).
EUR – CPI (Friday), ECB policy meeting (5 December).
JPY – Current account (9 December)
CAD – Q3 GDP (Friday)
NZD – Trade balance (Wednesday), Credit aggregates (Friday), RBNZ Monetary Policy Statement (12 December).
GBP – UK GDP (Wednesday); BoE Carney speech (Tuesday and Thursday).