CBA FX Strategy - New York Opening Commentary
There has been little new news of note this morning. Profit taking has been the theme across equity markets. USD/JPY has also dipped back lower in tandem from its overnight high of 103.38 to 102.65. EUR/USD has edged back up to 1.3570, GBP/USD is back over 1.64. The main news of note was overnight in Australia with the final RBA meeting of 2013.
AUD/USD eased into the RBA meeting in the Asian afternoon, and initially dipped in the wake of the announcement. But examination showed the RBA delivered a virtually unchanged monetary policy statement following its board meeting. Accordingly, AUD/USD moved back where it was before the release, and Australian interest rates were little changed after the RBA decision. Separately, AUD/USD fell 0.3% around an hour after the RBA meeting and remains near three month lows at the time of writing. On the AUD, the RBA repeated "the Australian dollar, while below its level earlier in the year, is still uncomfortably high. A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy." The RBA also repeated that "the Board judged that the setting of monetary policy remained appropriate. The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target." We see no interest rate or exchange rate implications from today's statement, and the focus now turns to tomorrow’s Q3 Australian GDP data (7.30pm EST/12.30am GMT). Today’s Q3 Balance of Payments data confirmed net exports will add 0.7 percentage points to QIII GDP. We expect to quarterly GDP growth of 0.8%, giving annual growth of 2.7% (market 0.7%QoQ, and 2.5%YoY). AUD/USD should garner some support from growth of this magnitude, but we expect that AUD will face the headwind of a firmer USD by the end of the week if our above consensus US non-farm payrolls forecast of 200K proves correct. In Australian rates, we believe the steepening pressure from US Treasuries will keep the Australian curve steep this week, but despite improving global and domestic economic data will look to enter flatteners next week after what is likely to be a strong payrolls print Friday night.
The USD lifted yesterday after a strong US ISM Manufacturing survey exceeded expectations. The employment index of the ISM surged to the highest level since April 2012 and gives us added confidence in our above-consensus forecast for Friday’s US non-farm payrolls (CBA: 200,000 versus consensus: 181,000). We expect the USD to grind higher into the end of the week.
In US rates, Treasuries were sold yesterday, led by the 7-year, and yields were up 1 to 6bps across the curve. The 2-year was anchored, as to be expected, but the 5-year yield managed to sell-off 5bps. The curve naturally steepened, with the 2s10s spread rising 5bps to 251bps. We expect the curve to steepen further into payrolls and for UST10s to hit 2.85% (currently 2.799%). The long-end of the curve flattened, however, with the 10s30s spread narrowing 2.5bp. The 30-year is likely to outperform (yields to rise by less) in the sell-off as Fed purchases have been focussed on 7-10-year section of the curve, and inflation (a key driver on long-term yields) remains well-behaved.
EUR/USD was the main under-performing currency yesterday, working as the main outlet for USD strength. EUR/USD has edged up to 1.3570 in the European morning. Economic data released in the Eurozone was near expectations, with the final November Eurozone PMI revised up 0.1 to 51.6. But the upward surprise to the US economic data reinforced the notion that the Fed is much closer to the end of its easing cycle than is the ECB, and EUR/USD declined. EUR/GBP dipped lower as the UK November manufacturing PMI rose more than expected, and the near-term bias is down, with the ECB meeting on Thursday the most likely upcoming event to have a significant influence.
USD/JPY has dipped back through the morning session to 102.70 through the European morning but remains in a clear uptrend for now. A strong US payrolls report (Friday) will highlight the divergence between the Fed, which is contemplating tapering its asset purchases, with the Bank of Japan, which is debating whether it will meet its 2%pa inflation target in time. Japan’s narrowing current account surplus continues to weaken the JPY.
NZD/USD has firmed over the week so far, with the NZD TWI up 1.2% and NZD/USD back trading near 0.8200. NZD sentiment received a boost from the strong Q3 terms of trade data yesterday. The improvement in global manufacturing PMIs yesterday is also a positive sign for near-term global growth, and in turn commodity exporters such as New Zealand. NZD has outperformed AUD, with AUD/NZD slipping back below 1.1200 again yesterday and trading down towards 1.1100 today. The next New Zealand data focus is building work put in place (4.45pm EST/9.45pm tonight GMT), which is another component of Q3 GDP. We expect a 3.2% lift in construction volumes after the unexpected dip in Q2. We expect local data this week should be positive for the NZD, but in the face of a firmer USD, we expect NZD/USD is likely to continue to consolidate within last week’s trading range. We expect NZD/USD will struggle to press beyond 0.8250 this week unless the USD unexpectedly weakens.
USD/CAD continues to trade above 1.0600, but CAD did outperform vis-à-vis the other majors yesterday. We expect USD/CAD and CAD crosses could be volatile over the coming days because of key data from the US and Canada, including payrolls in both economies. The main event is the Bank of Canada rate decision (Wednesday). The surprise in October was the BoC’s unexpected shift to a neutral policy stance because of increasing economic slack and downside risks to inflation. We expect the BoC to be dovish at this week’s meeting, which will likely weigh on CAD. However, on Friday, at the same time as non-farm payrolls, Canadian labour data is released. The Canadian labour market data has been very volatile over the past year. However, we expect the underlying picture is modest jobs growth circa 12k per month, and expect jobs growth of this magnitude in November (consensus 15k). But the release is likely to be swamped by a strong US payrolls report, and USD/CAD is likely to end this week higher, driven by a dovish BoC mid-week, then the USD side of the currency pair on Friday.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – trade deficit (Thursday), ADP employment (Thursday); ISM non-manuf. (Thursday); non-farm payrolls (Friday).
AUD – Australian Q3 GDP (Wednesday); October trade balance (Friday); China November Trade balance (weekend); China November CPI (Monday 9th).
EUR – ECB policy meeting (Thursday).
JPY – Current account (9 December).
CAD – Bank of Canada meeting (Wednesday); November employment (Friday).
NZD – Q3 Building Work (today) Manufacturing Volumes (9 December); RBNZ Monetary Policy Statement (12 December).
GBP – Construction PMI (today), Service PMI (Wednesday), BoE meeting (Thursday).
Thoughts from our Trading Team
Small lift higher, reversing some of yesterday’s losses (1.3550-1.3575). Very quiet ahead of ECB on Thursday.
JPY: €/Yen kisses 140 (140.03 High) and then reverses, $/Yen taking the slippage (103.15-102.53) having hit further overnight highs (103.38). Expect further short term $yen weakness sub 102.55. I reiterate RSIs are extremely stretched however market is in at very attractive levels.
GBP: Remains bid with another stellar set of numbers this time PMI Construction.
NZD: A reverse of yesterday’s down-move as London goes contra to the Asia days move again to trigger their momentum positions. We have climbed up hard from .8180 to .8236, with the last 20 points being a virtual straight line as the cross made a new low at 1.1080 in tandem. NZD/CAD has also broken multiple previous highs at .8750, and NZD looks to be on a firm note as New York enters the fray. The next resistance is seen at .8260.
AUD: The pair did what the AUDUSD does best… ignore all the rhetoric form the Central bank and go for maximum pain! Having opened in Europe around 0.9080 / 85 and with the Asian market nicely short, the first move was higher, triggering a raft of stops from 0.9100 up to a high of 0.9137. Offers are now coming into the order book from 0.9140 up to 0.9170, with the latter level being the high in Asia (0.9168) on Monday. For choice we are starting to build a short position from 0.9130 upwards, looking for us to top out and drift sub 0.9080 before the end of the day.
AUD & NZD Today
RBA continued its jawboning overnight when it left the OCR at 2.5% as widely expected and repeated that the AUD remains at uncomfortably high levels with lower levels needed to help rebalance the economy … AUD made session lows post the RBA falling just below 0.9060 where strong demand was seen by Option desks (defense of a 0.9050 barrier) and Exporters …. It has been all one way since as better Oct Retail Sales and a short market saw a squeeze of stops thru 0.9100/10 …. this morning AUD is pressing against selling interest into 0.9130/50 ahead of another round of stops with better selling interest then seen 0.9170/80+ … look for 0.9050/80 to continue to support AUD ahead of Friday’s Payrolls. NZD continues to defy gravity having found some Exporter support below 0.8160/70 overnight (200 day ma at 0.8166) and then has pressed higher against both the USD and the crosses with AUDNZD falling below 1.11c and tripping a round of stops in this latest move to a low of 1.1070… today we watch a mix of selling and stops 0.8250/80 while some resting bids sit around 0.8180 and then ahead of the 200 day ma at 0.8166.