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FX Commentary: New York Open

Posted by Marge Maresca on Dec 19, 2013 7:56:00 AM

CBA FX Strategy: New York Open

Thoughts from our Strategy Team

The FOMC has finally begun the long-awaited tapering process.  USD and US ten-year treasury yields are both higher after enduring a period of volatility in the wake of the FOMC meeting (see chart below).  US 10-year yields have now settled around 2.89%, and the USD index is consolidating around 0.6% above the level it was pre the FOMC announcement.  The Fed decided to begin tapering in January 2014 by a total of US$10 billion per month (US$5 billion in US treasuries and US$5 billion in MBS) but indicated that “asset purchases are not on a pre-set course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook”. The Fed also maintained that the current exceptionally low Fed funds target rate will remain appropriate for a considerable time after the asset purchase program ends. Indeed, the Fed altered (lengthened) the “forward guidance” on the outlook for the current Fed funds rate.  Our full review is in the attached PDF.  Although the FOMC meeting was clearly the main event of the day, the news that the US Senate has passed a bill easing the degree of automatic spending cuts is also USD positive.  Today’s Weekly jobless claims (8.30am) is for the reference week for Non-Farm Payrolls, and a sub 350K print is expected (368 prior week).

From a rates perspective, the Fed’s statement does little to alter our view on the trajectory of US long-end yields (as well as long-end Australian and New Zealand yields) over 2014.  We continue to anticipate a gradual sell-off (higher yields) in US, Australia and New Zealand over 2014, generating a further steepening the curves. The sell-off is likely to see bouts of volatility around key data-points (e.g. strong payrolls reports) as the market inevitably tests the Fed’s timing on late 2015 rate hikes, but nothing like the market rout of 1994, as some pundits fear.  The Australian curve is likely to stay steeper relative to the Kiwi curve given the direction of local monetary policy in each country over 2014.  The RBA is likely to remain on hold at least into 4Q, whereas the RBNZ appears determined to hike interest rates in 1Q 2014. The RBNZ may even contemplate a January rate hike following a strong 1.4% (QoQ) rise in New Zealand Q3 GDP, particularly now that the Fed has kicked started its tapering campaign and the USD has resumed some strength. 

EUR/USD opened in European trading roughly where it started the Asian session.  The cross endured volatility and dropped to an intraday low of 1.3650 in Asia before recovering somewhat ahead of Eurozone October current account data release.  Eurozone October current account surplus widened to 22bn from an upwardly revised 15bn in the preceding month.  While we believe record high Eurozone current account surplus (equal to 2.2% of GDP) remains a key currency support and the reason why we don’t envisage more downward pressure on EUR/USD as the Fed-ECB monetary policy cycles diverge, EUR is likely to struggle following the post FOMC shock.  Our medium-term view that the divergent monetary policy cycles as the Fed comes towards the conclusion of its easing cycle, while the ECB remain firmly entrenched in their easing cycle, will guide EUR/USD modestly lower over the next twelve months, remains.

AUD/USD has mirrored broad USD move today.  AUD/JPY and to a lesser extent, AUD/EUR however lifted last night, indicating the Fed’s activities were not outright bearish for the AUD.  In fact we see the Fed’s decision to begin tapering as indicating some confidence by the US authorities that the world’s largest economy is strong enough to cope with the gradual withdrawal of extraordinary monetary stimulus. From this and a global growth perspective, it is one of the key reasons we don’t envisage a large depreciation in AUD. But we do anticipate some further modest declines in AUD/USD.

NZD/USD has been choppy but mostly heavy against a firmer USD today.  NZD/USD went into the FOMC meeting trading near 0.8220, but initially traded in a 0.5% range either side of that level as the market digested the FOMC news.  Subsequent to the FOMC volatility,  the NZD strengthened following a stronger than expected New Zealand Q3 GDP report (1.4% QoQ versus 1.1% anticipated, and CBA 1.3%).  Our full report is attached.  However, like the AUD, the firmer USD ultimately dominated and NZD/USD is trading under 0.8200.  AUD/NZD has declined to a fresh low for the year (1.0733) but has recovered back above 1.0800.  As indicated in our Global Currency and Interest Rate Outlook for 2014, there is a risk AUD/NZD declines to test the previous post-float low of 1.0468.  The firmer than expected New Zealand Q3 GDP report and the Fed’s decision to begin tapering increases the chances the RBNZ brings forward the timing of their tightening cycle to the January meeting and the interest rates market has adjusted accordingly.

GBP/USD, like other currencies, was volatile in the wake of the FOMC,  briefly pressing above
1.6400.  However, the cross managed to hold off a firmer USD and has been little changed today.  The combination of a larger than expected decline in the UK ILO unemployment rate to 7.4%, a stronger than expected Confederation of British Industry December retail sales survey and some consideration that now the Fed has begun the tapering process, the BoE could also bring forward their rate normalisation process if the ILO unemployment rate continues to surprise with favourable declines.  Moreover, UK November retail sales grew by 0.4% (MoM) in November from a downwardly revised -0.7% in October, broadly in line with market expectations.  The October contraction appears to reflect the impact of unseasonably warmer weather on clothing sales, hence transitory.  Nonetheless, we may have seen the high in GBP/USD for the week in the volatile aftermath of the FOMC announcement.  Having said that, GBP/USD should be able to close the week on firm footing, possibly above 1.6400.

USD/JPY has lifted above 104.00 in Asia today, and is likely to stay firm over the remainder of the week and continue on its long-run upward trend.  The most important influence on USD/JPY has been participants’ views of FOMC tapering and the FOMC decision as the Asian markets digested the news.  We do not expect the BoJ meeting and the BoJ’s Monetary Policy Statement tomorrow to have any influence on USD/JPY unless a surprise increase in asset purchases is announced. No economists within the Bloomberg survey expect a change tomorrow.  Note the BoJ do not have a specific time for policy announcements, or the release of the Monetary Policy Statement.

Upcoming Economic Calendar Highlights Important for Exchange Rates

CAD – CPI (Friday).

JPY - BoJ Meeting (Friday)

Thoughts from our Trading Team

€UR:

Well that’s that then, after the very erratic and volatile price action last night the market this morning has the feel of ‘done for the year’. Very quiet indeed 1.3667-1.3691 the range. My pre FOMC was for the post move to continue, however I am feeling a little reluctant this morning to jump in and rather think we may well gravitate back towards 1.3760 as year-end demand continues. Therefore I stand aside for now.  Opportunistic sellers will be evident 1.3700-30 with
support seen in the 1.3625-1.3645 area. Good Luck

JPY:

After last night’s antics we’ve seen very little movement or interest in the London session. We’ve been happily trading either side of 104.00 as the market seems content to hold its ground and drift into Christmas and the New Year. Stops are noted to the downside through 103.50 but as yet we haven’t even been below 103.80. 

GBP:

Like the rest of the market we’ve been range bound even though the UK had the data event of the day in the form of Retail sales. Expectation was for a 0.3% print and it came in slightly higher at 0.4%. But in a winding down market this “miss” was not enough to give the market any momentum. Cable is still a buy on dips and positioning for a move higher through 1.6500 in the New Year I think is the way to play it.

NZD:

A very quiet morning in London as .8850 + 1.0800 Strikes in AUD & AUD/NZD have dominated… NZD/JPY remains above the uptrend support line which has now raised up to 84.25, above the 84.00 previous highs support line for the first time. A little closer to the money, break traders maybe glutton for punishment as they gingerly once again eye up a potential break entry trade of 3 support lines which all coincide at .8160 (200 DMA, Uptrend & Ichimoku), see both charts below:

new zel resized 600

AUD:

Support: 0.8820, 0.8800, 0.8750

Resistance: 0.8890, 0.8945, 0.8970

The day of reckoning came yesterday and it certainly did not disappoint in terms of erratic volatility in the FX market! The FED delivered their decision to start the tapering process by 10 bln, which saw the algos heavily sell into an already offered market place; this saw us trigger the barrier at 0.8850 touching a low in the mid-0.8820s. The extreme nervousness of the vasty short market, saw us rally hard into the BB press conference and resulted in us tripping stops above the week’s high of 0.8920, touching 0.8945 before large sell orders from hedge fund type names saw a bruised and battered market (and dare I say extremely chopped out of their short positions) collapse back to the lows. Asia has been in a very tight 40 tick range and for today I fully expect rallies to be sold once again, with 0.8870 / 90 providing the first hurdle of
resistance the AUDUSD needs to volt if there is going to be any recovery today. However with an extremely disjointed market and taking into account is  the 19th of December, I expect a range of 0.8800 / 0.8890 to hold today, away from any large headline surprises.

AUD & NZD Today

AUD again held on the move into 0.8820/40 overnight as Aust Exporter and Real Money buyers continued to soak up selling interest from the shorter term accounts, today we expect this region to again be strong support with good buying interest noted to as low as 0.8780 before stops kick in … look for macro and option desks to fade any move towards 0.8900 with the more patient waiting to nearer 0.8940 with stops now seen thru 0.8950. NZD by comparison has been a little disappointing after the stronger Q3 GDP print ( +1.4% v +1.1% exp ) with selling against the AUD cross a noted feature and the pairing nearly up 1 cent from session lows and back over 1.08c … this morning plenty of talk of significant buying interest into 0.8160/65 should it be challenged ( 200 DMA, Uptrend & Ichimoku ), stops have built just below here …. Sellers today into 0.8240 with stops then thru 0.8260.

 

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