CBA FX Morning Commentary
Monday 13 January, 2014
Thoughts from our Strategy Team
The USD was weaker in today’s trade, as Asian participants responded to the very weak non-farm payrolls report for December. We remain of the view that the USD is likely to grind higher this week, reversing the post-payrolls slump. Payrolls increased by only 74,000. The weak increase in payrolls reflects an extra (above an average December) 138,000 people unable to work because of bad weather rather than a slowing US economy. We consider the poor weather will have only a minor and temporary effect on the US economy. Therefore, in our view, the US payrolls result will not have lasting implications for Fed policy or the USD. We expect the US economic data released this week to show reasonable momentum, though there may be some temporary weather-related weakness.
US Treasuries rallied hard on Friday, led by the US 5-year note, as the much weaker than anticipated non-farm payrolls print threw a hefty spanner in the works. The 10-year is now trading at levels prior to the FOMC’s “taper” announcement in mid-December. As discussed above, the payrolls result is not as bad as the headline suggests. We believe the US recovery is sustainable, albeit patchy, and we would get short duration (seek higher yields) after Friday’s short-squeeze rally in rates. The long list of Fed speakers and Beige book is likely to put rates on the back foot, and see US yields end the week higher.
AUD strengthened over the course of the Asian and European morning sessions, in line with the weaker USD. Housing finance data in Australia showed a 1.1% (MoM) lift in the number of new loan approvals in November, in line with the 1.0% consensus forecast. We think the AUD is likely to grind lower this week as the USD re-firms. The next major piece of Australian economic news is the December labour force data (Thursday). December Job ads data released earlier today was weak, suggesting some downside to market expectations looking for 10,000 jobs growth. A sub-10,000 figure could see the unemployment rate edge higher to 5.9%, against expectations anchored at 5.8%. The prospect of a rebound in the USD, and weak Australian jobs report suggest the rally in AUD/USD may soon lose steam and ease back into week’s end.
The post US payrolls surge in EUR/USD has seen the pair move further out of line with a number of fundamental indicators, including the German-US yield differentials and Eurozone-US economic surprise indices. In our view, the expected rebound in the USD (see above) should see EUR/USD ease this week. There is limited Eurozone economic data released this week, with Eurozone industrial production (Tuesday) and a final reading of December CPI (Thursday) the highlights. Eurozone industrial production is set to pick up after a two months of contraction. While encouraging, this illustrates the fragile and uneven Eurozone recovery. When mixed with the low Eurozone inflation, the ECB’s easing bias should remain firmly in place for some time. This is a message the ECB members speaking this week are likely to reiterate should policy be discussed (Nowotny on Tuesday and Mersch on Wednesday). We think EUR/AUD should remain heavy, early in the week, but may rebound later in the week if the Australian labour data is soft.
USD/JPY weakened in today’s trade as fund managers responded to the non-farm payrolls outcome. We think the market response to payrolls is overdone, and the USD/JPY is likely to grind higher over the next few weeks. First, we expect a stronger USD as market participants look through the weather-effected weakness in non-farm payrolls. Second, Japan is likely to record a third consecutive (seasonally adjusted) current account deficit of JPY 150 billion on Tuesday (Monday 11:50pm GMT) – the largest monthly deficit on record. USD/JPY tends to rise for a sustained period five to ten days after Japan records a current account deficit, rather than immediately on the day of the data release.
USD/CAD should continue to strengthen following the dismal Canadian employment report (-45,900 versus +14,100 consensus) that was released at the same time as the US payrolls. USD/CAD weakened to a fresh 4½‑year high in the US session. Canada’s unemployment rate lifted +0.3%pts to 7.2%, taking it above the US unemployment rate for the first time since 2008. With few near term catalysts to shift perceptions, market participants are likely to strengthen views that the Bank of Canada is unlikely to tighten monetary policy anytime soon. This is likely to continue to see USD/CAD continue to lift.
Upcoming Economic Calendar Highlights Important for Exchange Rates Thoughts
USD – retail sales (Tuesday), Beige book, (Wednesday), CPI (Thursday), industrial production (Friday). Fed speakers: Plosser (Tuesday), Fisher (Tuesday), Bernanke (Thursday).
AUD – labour force (Thursday).
NZD – CPI (21 January).
JPY – current account (Tuesday).
CAD – Bank of Canada Business outlook survey (today).
GBP – CPI (Tuesday), retail sales (Friday). BoE speakers: Carney (Wednesday), Broadbent (Friday).
EUR – industrial production (Tuesday).
Thoughts from our Strategy Team
Aud & Kiwi back in favour as stops triggered.
€UR: Very tight range this morning as one would expect with $ lower, ECB committed to keeping rates in check & Vol lower = Euro/$ side-lined until the next set of figures, although bias remains to the downside as Euro crosses remain offered. Support comes in at 1.3650, 1.3620 remains pivotal and resistance seen at 1.3700 & 1.3720-40.
JPY: The JPY continued the post NFP move in Asia, trading lower overnight to a low of 103.26. Today we have been better sellers of the USD pair, with many market counterparts continuing to liquidate their long positions. We expect further weakness to continue, however identify 102.80 as a good place to enter into longs.
GBP: GBP weaker on the crosses as both GBP/AUD and GBP/JPY have broken key supports, leaving Cable trading in very sideways fashion, with even EUR/GBP stuck inside last week’s range with .8333 (1.2000 GBP/EUR) still providing the topside resistance.
*FONTERRA BRANDS NZ RECALLS 8,700 BOTTLES OF FRESH CREAM
*FONTERRA BRANDS NZ: TESTS SHOWED POTENTIAL E.COLI IN SOME CREAM
*FONTERRA COMMENTS ON RECALL IN E-MAILED STATEMENT
These headlines got the NZD market beared up under an .8337 REG offer which had capped in good size since late Asia… Just a few moments ago, the offer gave way, and it was a pure scramble of shorts which has seen us trade up through the 61.8% Fibo resistance at .8368 in very messy conditions…. plenty of disputes as to what the real high has been as .8384 traded in what looked like mishit price action.
AUD: The AUDUSD opened in Europe at 0.9035 / 40 and spent majority of the day sitting in a very tight trading range. It was not until NZDUSD broke the UK clearer offer at 0.8337, that the AUDUSD sprung into life, taking out the stops above 0.9050 to a high of 0.9073 at the time of writing this piece. Offers are now camped up to 0.9100, however with the ever corporate demand we expect the pair to be underpinned on the low 0.9000 handle initially.
TRY: Tested support again overnight at 2.1635 and held, so we are long smalls, but at slightly worse levels, look to build on another test of the support, with stops under 2.1525. Current account balance reported early tomorrow along with Unemployment rate on Wednesday.
AUD & NZD Today
Asia digested the weak NFP number by aggressively continuing to sell the Usd helping lift Aud firmly back above 90c. We have seen macro accounts buying overnight and our traders have gone long Aud this morning looking for a move today up to the 50 dma at 0.9094. Above there next resistance lies at 0.9140/50. In the order book corporate bids awaiting a dip back to 0.9000-0.8970.
Nzd - headlines of Fonterra recalling thousands of bottles of cream due to e coli contamination fears put an initial cap on the Nzd’s grind higher overnight. A large offer at 0.8340 was capping the topside in early London but ultimately Usd weakness prevailed seeing Nzd gap higher triggering stops up through 0.8380. Next resistance comes in at Nov highs of 0.8415, bids on dips should now surface just below .8300.