CBA FX Strategy
19 February, 2014
Thoughts from our Strategy Team
USD has been largely listless today, stuck in a relatively tight range. The USD index is trading currently close to its lows since last December, following recent run of softer economic data. Poor weather has been blamed for the poor results. On that note, the FOMC minutes are expected to contain the FOMC’s assessment of how much the poor weather is holding back the US economy and may reveal more colour on the pace of tapering and/or the Fed’s formal guidance (2:00pm). The new composition of the Fed – the very hawkish Fisher (also speaks on Friday) and Plosser now vote – may reveal a debate for quicker tapering of asset purchases. These events may provide some support for the USD ahead of Eurozone PMIs released tomorrow (4:00am, Thursday 20 Feb).
USD/JPY continued to grind lower, but remains above yesterday’s pre-Bank of Japan levels. Yesterday’s decision to loosen monetary policy is the first time the BoJ has announced a policy change since the “big bang” announcement by Governor Kuroda in April 2013. The change of heart – Kuroda has been vocal about not making policy changes – suggests the threshold is low for further policy easing (by lifting the monetary base target) around April if evidence builds that the tax increase is having a large negative effect on the Japanese economy. Japan’s January merchandise trade balance (6:50pm) is expected to slump by 31% to a record deficit. If realised, Japan would have its fifth consecutive and record monthly current account deficit. We expect USD/JPY (and AUD/JPY) to stabilise and edge higher, driven by the collapse in Japan’s current account surplus, the prospect of further BoJ policy easing and improved risk sentiment.
AUD was stronger on the day. Today’s Q4 Australian wages data was slightly stronger than expected, with public sector wages growth boosting the outcome. This is unlikely to persist, given intentions to tighten fiscal policy. More broadly, the soft Australian labour market is likely to keep wages contained, and offer little challenge to the RBA’s neutral policy stance. However, USD weakness is likely to support AUD. Also set to support AUD are: (i) upgraded global growth outlook; (ii) RBA’s neutral bias; (iii) a recovery in non-Japan Asian currencies; and (iv) an expected rebound in the AUD vis-à-vis EUR. We think AUD can track up to 0.9233. However, there are some downside risks to our AUD call: (i) the CAPEX survey; and (ii) any re-emergence of concerns about emerging market economies. The flash estimate of the February China HSBC manufacturing PMI is released (8:45pm). The HSBC PMI moved into sub-50 territory in January for the first time since July. Expectations are for another sub-50 reading.
GBP edged higher ahead of the release of February Bank of England (BoE) meeting minutes but fell quickly after both ILO unemployment rate and employment change from December underwhelmed. More specifically, unemployment rate unexpectedly rose in the fourth quarter to 7.2% from 7.1% in the preceding quarter, contradicting the BoE’s earlier projection for a sooner-than-expected fall below its 7% threshold in Q1 2014. While the introduction of BoE’s revamped “phase 2” forward guidance has arguably diluted the importance of the unemployment threshold, stalled improvement in the labour market, coupled with the softer-than-expected January CPI number, bolsters the case of keeping rates on hold for longer. On that note, the BoE minutes do not add anything substantially new. The MPC voted unanimously to keep the key rates and the asset purchase program unchanged. GBP has underperformed the USD and EUR so far this week reflecting a concurrent decline in UK swap yields.
USD – FOMC minutes (today), CPI (Thursday). FOMC speakers: Fisher (Friday).
EUR – Advanced PMIs (Thursday).
JPY – CPI, retail trade, industrial production (27 February).
NZD – RBNZ rates announcement (13 March).
AUD – China HSBC flash PMI (Thursday), CAPEX (27 February).
GBP – Retail sales (Friday).
CAD – CPI and retail sales (Friday).
9.30am UK Jobs data the highlight of the morning… Consensus was that this would be released better than the expected 7.1% survey, and thus Cable was paid up from the 1.6695 open to print a 1.6734 high during the first hour, assisted too by RHS WMR flow for 8am… we lounged and capped on these highs courtesy of the Option offers which have been ranging around the recent pivotal 1.6700 Gamma zone.
The release was then in fact worse than expected at 7.2% which saw the ‘figure trapdoors’ open and an instant bail of intraday longs… the first pocket of Gamma bids buying back shorts was found at 1.6675, but with intraday players still long, we soon buckled through to print a 1.6662 low where thicker Option buyers finally parachuted the fall… Game-over for the intraday spec accounts saw us eventually rally back up to 1.6695, before settling back around 1.6680 with Option pockets firmly lined… late morning GBP/NZD sales have assisted in Cable falling back to the lows, trading 1.6660 at time of writing.
We have, once again, been encapsulated in a tight trading range. Gamma buyers under 0.9000 earlier in Sydney now recycling their longs in the 0.9040 / 45 area. We have started to build a short term short here, looking to add at 0.9060 with a very obvious stop above 0.9080, looking for a move back towards 0.9000 later today…… however I do not hold my breath!
NZD trading bid this morning after basing in Asia on the 100 DMA at .8280… Gamma offers are currently being filled up through 8330 and more will loiter up to .8350… the revisit of yesterday’s broken downtrend comes in at .8360 which should ultimately cap, if not beforehand against the mentioned Gamma sellers… we get GBP/NZD late morning through 2.0000 which lifts the NZD leg up through .8340 and could explain the bid tone we have had so far this morning.
Drifting lower along with $ yields, should yields remain soft I look for 101.60, but little to get excited about at moment with the lack of interest in G10 space.
Distinct lack of interest this am, drifting lower. Range 1.3747-1.3762
AUD & NZD Today
Quiet session overnight for AUD and NZD with both easily staying within recent ranges as Option Desk trading contains each pairing …. AUD made a brief dip below 0.90c on the release of the Q4 Wage Cost Index which printed the lowest annual reading since the series began in 1997 of 2.6% which puts it 1% below the 10 year average … Exporters along with Options Desks were active buyers below 0.90c with the latter then turning sellers above 0.9040 … today 0.8980/0.9050 contains the interest with weak stops either side.
NZD also stuck in a range with good Exporter interest seen into session lows near 0.8280 which also contains the 100 day m.a …. We expect Exporter appetite to continue on any dips into the 0.8250/80 area while 0.8360/0.8400 remains strong resistance to the topside. Feb Consumer Confidence due out tonight in NZ however the Flash PMI in China is also out tonight (with expectations of another sub-50 reading) and will be more important for AUD and NZD’s immediate fortunes.