CBA FX Strategy
7 February 2014
USD edged higher in European trading ahead of tonight’s non-farm payrolls. Today’s US January non-farm payrolls (8:30am) will be larger than the 180k consensus in our view. There appears no dramatic weather effects to distort the change in monthly payrolls, and the US senate has not yet extended the duration of unemployment benefits. This could generate a discouraged-worker effect and a drop in the participation rate, leading to a lower unemployment rate than the no-change consensus of 6.7%. We see upside risks to the USD today. In US rates, market participants are focussed on US non-farm payrolls. The risk is a strong number leading treasury yields sharply higher across a bear-steepening curve.
EUR/USD lost ground into European session, after German constitutional court (Verfassungsgericht) said it “sees substantial reasons to suggest OMT programme exceeds ECB mandate”. OMT refers to Outright Monetary Transactions by which the ECB will purchase, under certain conditions, bonds issued by Eurozone member-states. While the constitutional court doesn’t exactly have jurisdiction over the ECB, the decision to refer the complaint to the European court is expected to dampen market sentiment and erode investor confidence which had been largely soothed by ECB’s pledge of “whatever it takes”. EUR/USD spiked up close to 1% overnight at its intraday high. The lift in the EUR was triggered by the ECB policy meeting/press conference. The underlying message of the ECB was not too dissimilar to the cautious tone presented over recent months. The ECB firmly reiterated its forward guidance and easing bias, and low inflation outlook. The lift in the EUR and front-end EUR interest rates suggests some participants were positioned for more aggressive easing action, which the ECB did not deliver. In our view, the overnight lift in EUR should continue to unwind. The medium-term picture remains unchanged and further policy action by the ECB still looks likely. ECB Board member Yves Mersch speaks in Dublin on Reviving Growth in The Euro Area today. Mersch may mention yesterday’s ECB policy meeting in any Q&A. However, market focus will be squarely on the nonfarm payroll data. A firm US payrolls report, as we are envisaging, should support the USD and in turn weigh on EUR/USD.
AUD/USD initially spiked higher following the release of the release of the Reserve Bank of Australia’s quarterly Statement on Monetary Policy (SMP), but ultimately drifted lower. The RBA lifted their inflation and GDP growth forecasts as expected. The rise in GDP growth forecasts is offset to a large degree by the RBA's comments that they expect the upward drift in the unemployment rate to continue into early 2015. We anticipate further AUD/USD weakness, particularly if we are right about the upside risks to tonight’s January US non-farm payrolls (see above). We see more risk/reward in being long AUD/EUR (especially as EUR/USD corrects lower tonight after a strong US non-farm payrolls release). We anticipate AUD/EUR will lift from current levels 0.6595 to 0.6625. We also still hold a strong conviction toward further gains in USD/JPY.
USD/CAD was relatively steady through Asian trade ahead of US non-farm payrolls. Canadian employment data for December is released tonight, at the same time as US non-farm payrolls. A dismal December outcome contributed to CAD weakness through January, along with a string of other soft economic data. Expectations are for jobs growth of 20,000 and a fall in the unemployment rate to 7.1% (which would still be higher than the US unemployment rate). A much stronger than expected Canadian employment outcome could see USD/CAD weaken intraday, in line with the US-Canadian two-year bond spread. However, we remain of the view that the medium term direction is for the USD/CAD to push higher, given the Bank of Canada’s shift to an easing bias and a firmer USD.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – Non-farm payrolls (8:30am).
AUD – employment (13 February).
JPY – Current account (10 February).
CAD – Canadian payrolls and BoC’s Macklem (today).