CBA FX Strategy
31 January 2014
Thoughts from our Strategy Team
We have lowered our AUD, JPY and CAD forecasts. Please see the attached note explaining our revised forecasts, which also incorporate changes to our global growth and Bank of Canada outlooks. Alternatively, Richard Grace explained them earlier today on Bloomberg TV (Link to Bloomberg interview).
USD held on to yesterday’s gains through the Asian and European morning sessions. In our view, the details of the first estimate of US Q4 GDP released yesterday tend to further justify the Fed’s decision to begin the asset tapering process. The combination of a stronger mix of US GDP growth and a narrowing US current account deficit is likely to keep the USD on a path of modest strengthening this year.
Emerging market issues are still playing out. Emerging market countries with large current account deficits, slow growth, and high inflation, will capture the attention of nervous investors. At this stage, the reaction in the investor community has been focused on specific economies. Our view is that the turmoil will likely pass. We believe the problems are specific to each economy, and the risk of full-blown contagion is currently low. Currencies in the emerging markets are likely to remain under pressure in a firm USD environment.
EUR has remained heavy today. The preliminary estimate of January Eurozone CPI came in softer than expected at +0.7% vs a forecast of +0.9%. Ten of the 17 Eurozone nations currently have annual inflation tracking in the perceived danger zone of 1%pa or less. Another historically low Eurozone CPI print today has added to expectations the ECB could provide additional monetary policy support in the near-term. The ECB should keep its dovish stance when it meets next Thursday. The contrasting perceptions around the outlook for ECB policy relative to the US Fed and Bank of England should keep EUR/USD and EUR/GBP under downward pressure.
NZD/USD weakened further in today’s trade, and is currently trading below the 200-day moving average of 0.8140. We recommend buying NZD on this dip because the RBNZ is likely to deliver on interest rate rises in March. Reserve Bank of New Zealand (RBNZ) Governor Wheeler spoke today, reiterating the message from yesterday’s RBNZ meeting. Key points include: Most of NZ’s economic indicators are positive; with the terms of trade at a 40-year high, business confidence is the strongest since 1993, and consumer confidence is at a seven-year peak. The next key catalyst for NZD strength is next week’s Q4 employment data (5 February), which is expected to show further strong jobs growth and a fall in the NZ unemployment rate.
AUD and AUD crosses gave back some of yesterday’s gains in today’s trade. The AUD pared back some of its strength as the Nikkei fell in mid-afternoon. AUD/NZD remained firm on comments from RBNZ Governor Wheeler, consolidating yesterday’s move in response to the decision by the Reserve Bank of New Zealand to keep the official cash rate at 2.5%. The cross has increased by 2 New Zealand cents in the past 24 hours. The next main downside risk to AUD/NZD in the near term is the Australian private capex report due for release on 27 February. There is great uncertainty about how much Australian mining capex will fall in the 2014/15 plans because mining capex has never been so large a share of the Australian economy. Because the Australian capex survey is forward looking, a big downward surprise to the 2014/15 plans has the potential to cause analysts to change their medium term view of AUD/NZD and Australian swaps.
USD/JPY weakened modestly in today’s Asian session, following a fall in the Nikkei in afternoon trade. However we remain of the view that USD/JPY should continue to track higher unless concerns about emerging markets return. December industrial production was slightly weaker than expected, rising 1.1%, though there was a pickup in housing starts and construction orders. Headline CPI for December was stronger at 1.6%pa. Both pieces of data indicate continued improvement in the Japanese economy but did not have a meaningful impact on USD/JPY. While Japan’s core CPI rose to 1.3%pa, it is still well away from the Bank of Japan’s 2%pa target after almost one year of an extraordinary level of monetary and fiscal stimulus. We see a risk the Japanese economic data provides some upside surprises ahead of the increase in the consumption tax from 5% to 8% in April. After the tax increase, downside surprises to Japanese economic data are likely, raising the risk the Bank of Japan provides more monetary stimulus.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – ISM manufacturing (Monday), non-farm payrolls (7 February).
AUD – China official manufacturing PMI (1 February), RBA February Board meeting (Tuesday).
GBP – UK manufacturing PMI (Monday), UK services PMI (Wednesday).
JPY – Monetary base (Tuesday).
CAD – Ivey PMI (6 February), payrolls, BoC’s Macklin (7 February).
Thoughts from our Trading Team
Month end USD buying against AUD & NZD
€UR: Two way action in the EUR, with the currency being initially sold on weaker inflation data, before a dramatic reversal triggering strops above 1.3560 to a high of 1.3573
CHF: Moving in line with the EURUSD move, with EURCHF stay in a tight trading range for the session.
JPY: Trading the levels well yet again, with the sell zone of 102.80 / 90 holding well overnight, before large AUDJPY sales saw us trade to 102.20.
GBP: Cable has been playing the same 1.6440-1.6510 range as it did yesterday, albeit it with an offered tone on the back of the Sellafield scares earlier this morning…. Despite this negativity, there remains constant demand each time we dip below 1.6450. Month end fixes will determine the remainder of the weeks’ price action, and for what it’s worth, Barclays month-end rebalancing analysis predicts a ‘Medium Sell Bias’ to Cable… following multiple recent lows, care should be taken in EUR/GBP through .8210.
NZD: NZD continued to lock horns with the Gamma loitered around .8150 as it had all day yesterday…. Month end USD buying in the AUD/USD pair has in turn weighed the NZD/USD down through the 200 DMA lows from yesterday, triggering stops from .8130 to .8102… The late November .8085 low remains the next target, but we will continue to be at the mercy of Month End flows, before fundamental views can be re-instated next week.
AUD: Extremely tough trading day in the AUDUSD. Having opened at 0.8760, we initially traded to the high 70s, before a compete reverse of saw the AUDUSD freefall to a low of 0.8704. We saw some late selling interest out of the corporate community which suggests that they over hedged for the month end. We have broken a key trend line at 0.8725 and now eyes are fixated upon bids from 0.8690 down.
AUD & NZD Today
AUD again failed above 0.8820 overnight with that making it the third time for the week that this level has easily held any attempts to trigger stops thru 0.8840/50 with AUD subsequently falling back to test the bottom side of the current range near 0.87c … going into month end which potentially will see some further selling pressure for AUD we still expect Exporter interest in the 0.8640/80 to provide strong support with intraday bids also likely as these type of accounts continue to play the current 0.8680/0.8820 range. NZD also under pressure this morning but not before it made a high near 0.8180 on the RBNZ Wheeler's comments where he reiterated that he expects to normalise NZ interest rates soon … Kiwi trade data overnight also showed record high exports to China … this morning 0.8080/85 looks to be the last line of support for the NZD with no real Exporter demand then seen until near 0.8040 …. Intraday sellers this morning sit above 0.8140.