CBA FX Strategy
23 January 2014
Thoughts from our Strategy Team
US Treasury yields are lingering near the bottom of the recent 2.82% to 3.05% range. We expect the FOMC to continue tapering at next week’s 28-29 FOMC meeting by another US$10bn. Leading into the FOMC announcement, we expect the yield on US 10-year notes to push back towards 3%. The ongoing perceived divergence between the US Fed and other major G4 central banks should continue to support the USD.
EUR/USD lifted to its intraday high of 1.3642 after flash estimates of the January Eurozone PMIs outperformed significantly market expectation of just modest improvement, although the rally stalled at around its 50-day moving average. The Eurozone services PMI has risen to 51.9, the manufacturing PMI to 53.9, and the composite PMI to 53.2. The composite Eurozone PMI is now at its highest level since June 2011. The lift in the Eurozone PMIs is indicative of ongoing improvement in the Eurozone economy. From a policy perspective, this is unlikely to change the ECB’s dovish stance and easing bias. The Eurozone recovery is fragile and uneven, while inflation in the Eurozone is low. The lift in Eurozone money market rates is another bubbling issue that may trigger an ECB response over coming months. EUR is being supported by today’s better than expected PMI data. But the medium-term drivers/fundamentals (particularly the German-US yield differentials) continue to point to a lower EUR/USD. A big focus over the next week will be on the USD side of the equation, with the release of the first estimate of Q4 US GDP and the FOMC policy meeting. The partial data suggests US GDP should be firm, while we expect the FOMC to announce another US$10bn step down in the pace of its asset purchases (from US$75bn to US$65bn). In our view, these developments are likely to be USD supportive.
GBP lifted in sympathy to the EUR post-PMI rally, after outperforming yesterday following the better than expected UK labour force figures. Following the January BoE meeting minutes, which reiterated that the MPC “saw no immediate need to raise the bank rate even if the 7% unemployment threshold were to be reached in the near future”, MPC policymaker Ian McCafferty suggested the UK’s neutral unemployment rate may be falling. In a speech, McCafferty added further weight to suggestions that the MPC may look to lower its 7% unemployment threshold, saying that “the equilibrium neutral rate of unemployment may be coming down as we speak. So even if unemployment is coming down rapidly, it may not be closing the gap between where we are now and the neutral rate of unemployment quite as rapidly as you might fear”. Echoing his colleague, the MPC member Fischer reiterated that rate increase is still “some way off”. The UK ILO unemployment rate declined to 7.1% in November, its lowest reading since March 2009, and is running around a year ahead of the BoE’s November 2013 forecasts (see chart). This would bolster expectations that the BoE could lower its unemployment rate threshold, which in our view may occur as early as the February inflation report (12 February). We expect the higher UK yields and positive UK data to continue to support GBP in the near-term. When mixed with the relative outperformance in the UK economy compared to the broader Eurozone, the German-UK two-year swap spread should remain in negative territory. This should continue to exert downward pressure on EUR/GBP.
USD/CAD continued to edge higher. Bank of Canada (BoC) Governor Poloz made further comments in an interview acknowledging the BoC’s shift to a more dovish policy stance. According to Poloz, "the BoC has taken a more dovish stance" and the door is "slightly more open" to a rate cut. His comments add to the comments (and shift) by the BoC yesterday. The more dovish stance by the BoC should keep CAD on the back foot (supporting USD/CAD). More specifically, the perceived divergence between the RBNZ and BoC, and BoE and BoC, should keep NZD/CAD and GBP/CAD firm.
AUD/USD has returned to its pre-CPI level, falling sharply on the release of a weaker than expected HSBC China flash manufacturing PMI. The flash estimate of the HSBC China manufacturing PMI came in at 49.6, a 6-month low, which implies softening growth momentum for China’s manufacturing sectors. As we have stated before, we prefer to look at the official China manufacturing PMI as it covers a larger sample (approx 3000 firms) and larger state-owned enterprises, compared to about 400 smaller sized enterprises by the HSBC PMI. On that note, the official PMI for smaller enterprise has consistently underperformed its HSBC counterpart, having stayed in the contraction territory since March 2012 (see charts). However, with limited data flow, the "miss" in the HSBC PMI exerted downward pressure on the AUD. The next important local event for the AUD is the RBA’s 4 February policy meeting. We expect the RBA to re-confirm its neutral bias and its concern about the elevated AUD. Before the RBA meeting, the main influences on the AUD will be from offshore such as next week’s FOMC meeting. We expect the FOMC to taper its asset purchases by US$10bn to US$65bn and for US yields to track higher. Higher US yields should keep the AUD under pressure.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – FOMC policy meeting (Wednesday), Q4 GDP (30 January).
EUR – CPI (31 January).
AUD – RBA February Board meeting (4 February).
JPY – Trade balance, BoJ minutes (Monday 26 January).
GBP – Q4 GDP (Tuesday).
CAD – retail sales (8:30am), CPI (Friday).
Thoughts from our Trading Team
Eur/Crosses rally as European PMIs are better than expectations, CHF strengthen
The pair starts the morning at 1.3545 and hits a high of 1.3646 post stronger European PMI’s. Next level for further pain is price above 1.3650. Since we broke 1.3620 there appears to be a buyer in the 1.3620s
CHF Strengthens as Swiss tighten controls on lenders to cool real estate market – RTRS
Swiss banks will have to hold 2 percent extra capital against mortgage risk-weighted assets from June 30, 2014, up from the 1 percent they were required to hold by the end of September last year. The government action comes as the result of a request from the Swiss National Bank, which has repeatedly expressed concern about overheating house prices. $/Chf drops from 0.9100 to a mornings low of 0.9019. & €/Chf to a low of 1.2306
The key levels of 104.00 / 104.80 are still holding near term.
It’s all been about the EUR this morning following the better than expected Eurozone PMI releases… With EUR/GBP Gamma still rife at .8200, Cable has been dragged up by the stronger EUR/USD, as EUR/GBP has only been able to stretch as far as .8220 from its .8200 Strike. Subsequently Cable has traded up through that lofty 1.6609 previous high seen during thin trade on Jan 2nd, and just managed to print a new 1.6616 high on light SL fuel…
Fisher comments that the ‘BOE is “some way off” raising rates and MPC must avoid choking off the recovery’ came a little later, but had little effect apart from taking a couple of spreads off spot from 1.6605 to 1.6595… I think it will continue to be all about EUR/GBP this afternoon; either the Option flow will drag us back down to the figure area, or we go and test the resolve of yesterday’s break entry sellers, with stops likely to be above .8235, 50 & 65.
NZD/USD lacking direct interest, thus playing along to USD and AUD tones today… .8250-.8350 Gamma remains firmly in control ahead of next week’s RBNZ meet…
Having opened at .8300, we have traded a brief .8262 low first thing on AUD weakness… Following a subsequent grind back up to opening levels, 10am hourly flows appear to have been behind the complete reversal of the morning trend, trading up to .8325 on very thin volume.
Having opened around 0.8800 this am post weak china data, we saw an initial violent move to the mid-week low of 0.8775. This bought gamma players out of the wood work as well as corporate bids. There is talk of a large 0.8800 rolling off tomorrow and I feel we will trade around this until 3pm tomorrow.
For the first time in a while the Turkish CB has intervened directly into the Spot Mkt after we touched 2.2950, Turkey Central Bank Sold About $1.5b in Intervention: Yardimci(ING Bank's head of trading in Istanbul) That's been backed up by Babacan on the wires noting: There is no Exchange rate target, the Lira is undervalued FX debt amongst SMES is low, Banks and Public Companies have minimal exposure, and that volatility will fall as political stability returns. Clearly we don't know if this action by the Turkish CB is a one off, or the start of a more concerted defence of the Lira. Support is below at 2.2275, a 38% retracement combined by a rising 200 hour Moving average that has proved quite resilient.
USDRUB is just a one way show this month, helped of course by the decision of the CB to abolish its daily FX interventions. For what it’s worth support lies way down below at 33.4175 but we are going to need a major shift in sentiment to get there. Interestingly enough the RUB is behind the game compared to the performance of its two non-China BRIC peers, Brazil -14.21% yoy, India -13.38% yoy, vs RUB which is only off 11.32% , so perhaps still room on the upside.
We think some Banks who found themselves long of USDTRY exited their risk positions via USDZAR, hence the correction from the new highs of 10.9795 back to the low 90's. The much heralded strikes across the mining sector started today, not great timing as it coincided with the poor China numbers. Support is coming in at 10.8350, which again the 200 hour moving avg, which has held perfectly over the last 10 days on a closing basis, and now coincides with a rising channel from late December.
AUD & NZD Today
AUD back well below 0.88c this morning as NY walk in giving back all of the CPI gains after the sub 50 print (49.6 v 50.3 exp) for Chinese HSBC PMI overnight …. The low so far to 0.8763 has seen a good deal of Exporter bids sub 0.8780 filled in the process, we have further interest this morning down to 0.8740 before the interest from this segment of the market starts to thin out, barrier protection at 0.8750 is also expected first up as well … expect 0.8820/40 to again offer significant resistance like it did earlier this week with stops now positioned above here from an intraday market that is now net short. NZD remains fairly stuck to 0.83c by comparison, ahead of the RBNZ meeting next week we really do not expect much beyond 0.8250-0.8350 as intraday names continue to play the range. Consumer sentiment hit a 7 year high in NZ overnight in the last of significant domestic data released before the RBNZ meets next week.