CBA FX Strategy
20 February 2014
Thoughts from our Strategy Team
EUR/USD gave up all its gains from the past two sessions after Eurozone Feb flash PMIs missed estimates. In particular, the manufacturing survey weakened more than expected in both Germany and France. As a result, the Eurozone composite PMI fell in February against expectations of further modest improvement in the Eurozone. We expect a firmer USD and persistently negative German-US two-year yield spread to weigh on EUR/USD medium-term. Moreover, the stronger momentum in the UK economy and diverging outlooks for the ECB and BoE should also limit EUR/GBP appreciation. EUR/AUD had a rollercoaster ride today. The pair strengthened following a weaker HSBC China PMI (see below) in Asian trading but retraced all its gains this morning after the disappointing Eurozone PMIs. We still think EUR/AUD should ease back further over a longer time horizon. The RBA remains firmly on hold, while the ECB is still more likely than not to provide additional support.
USD lifted late yesterday after the minutes of the FOMC’s 28-29 January meeting indicated the Fed remain un-phased by the poor weather and emerging market concerns. In our view, the FOMC are on-track to press ahead with tapering of around US$10 billion per meeting. The FOMC felt very comfortable in retaining the current forward guidance that a range of labour market indicators would be considered, and to maintain the current Fed funds rate “well past the time that the unemployment rate declines below 6.5%.” But the January minutes also discussed the need to further adjust forward guidance beyond what they adjusted at the previous December meeting. We continue to expect the USD to strengthen over the remainder of the week.
In US rates, yields climbed higher as the FOMC highlighted the need to adjust forward guidance (see above). Such an adjustment is needed as the unemployment rate reaches 6.5%. The sell-off in US rates (yields higher) merely reversed the rally posted in the previous trading session, (following the long weekend). US yields have struggled to recover from the weak January non-farm payrolls induced slump, as weather affects continue to play havoc with the US economic data. But it is likely US yields will grind higher as the Fed presses on with tapering and the US economic data improves once the weather clears.
AUD underperformed today. The mix of a firmer USD following the FOMC meeting minutes, weaker regional equity markets and a disappointing China HSBC flash PMI weighed on the AUD. The HSBC PMI printed at 48.3. This is its lowest reading since July 2013. The HSBC PMI appears to be converging down towards the official PMI for smaller enterprises which stood at 47.1 in January. The official manufacturing PMI which covers a significantly larger sample pool (compared to the HSBC PMI) and is skewed towards the larger state-owned enterprises was 50.5 in January. The next reading on the official China PMI is released on 1 March. The softer HSBC PMI should keep AUD/USD under downward pressure. AUD/USD may push down towards 0.8920, but we do not expect further large declines in AUD/USD. Despite the perceived "slowdown" in China's economy, Australian export volumes to China continue to lift to new records. With the RBA on hold, Australia’s yield advantage is another AUD supportive factor.
USD/JPY fell after Japan posted its largest merchandise trade deficit on record in January. On a seasonally adjusted basis, Japan's merchandise trade deficit was JPY 1.819 trillion. The very large trade deficit should see Japan record its fifth consecutive and a record current account deficit in January (released 10 March). Based on the trade data released today, we think the current account deficit could be JPY 500bn (compared to last month’s JPY 200bn deficit, which was the previous record). We expect USD/JPY to edge higher over the medium-term, driven by the collapse in Japan’s current account surplus, the prospect of further BoJ policy easing and higher US swap yields, but continued falls in the Nikkei are preventing the JPY from weakening at the current juncture.
GBP fell in sympathy with EUR into European trading vis-à-vis the USD. However, while momentum in the UK labour market may have slowed in late 2013, it remains positive. The UK labour market data shows that the path down to and beyond the BoE’s 7% unemployment threshold won’t be smooth, but given the improvement in the UK economy it remains a matter of time before the threshold is breached. The February BoE meeting minutes added little new, given the detail provided last week at the Inflation Report. We think GBP should remain firm, particularly on the cross-rates over the remainder of the week. The next major focus is the January UK retail sales data (Friday). The persistent retail price deflation and robust strength in the UK housing market imply that the reversal in retail sales volumes may not be as sharp as projected by consensus. This may add to the upward pressure on GBP/AUD over the remainder of the week.
NZD/USD has been surprisingly resilient especially against a firmer USD and weaker China HSBC PMI. There is little in the way of top-tier NZ economic data over the coming weeks in the lead-up to the 13 March RBNZ policy meeting. Offshore developments and USD movements should be the major influence on NZD/USD until then. As we noted yesterday, we think AUD/NZD has bottomed. Various metrics that we look at, such as the Australia-NZ two-year swap spread, suggest even at current levels AUD/NZD is “stretched” and should continue to grind higher. In our opinion fresh cyclical lows in AUD/NZD are unlikely.
USD/CAD was little changed, after surging more than 1.5% yesterday on M&A related activity in the resources sector and a firmer USD. The next major focus in Canada will be on the December retail sales and January CPI data (both Friday). We think the risks reside with a weak retail sales print and low CPI. This mix should reinforce the Bank of Canada’s recently updated easing bias. We anticipate the upward trend in USD/CAD to continue over coming months.
USD/CNH jumped today to its intraday high of 6.0667 or its highest level this year on a confluence of factors. First, USD strengthened overnight following the FOMC minutes and lifted USD/CNH through stop/losses above 6.05. Second, the HSBC China PMI weakened further. Third, the PBoC posted another higher than expected morning fixing this morning. According to our CBA fixing model, it was the seventh straight higher fixing. While the magnitude of difference remains modest, the pattern of consistently higher fixings points to unequivocally a weakening bias at present. Last but perhaps more importantly, the central bank has markedly intensified its FX intervention in the onshore spot market, lifting USD/CNY as a result off the bottom of its daily trading band of 1% below midpoint in the past weeks to around 0.60%. The rising USD buying by the central bank spilled over to offshore CNH market especially as USD/CNH had been trading some 300 points below its onshore counterpart. Against these backdrops and renewed talk of an imminent band widening, we expect USD/CNH to continue to catch up with higher USD/CNY in coming sessions.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – CPI (today). FOMC speakers: Fisher (Friday).
JPY – CPI, retail trade, industrial production (27 February).
NZD – RBNZ rates announcement (13 March).
AUD – CAPEX (27 February).
GBP – Retail sales (Friday).
CAD – CPI and retail sales (Friday)
Thoughts from our Trading Team
Euro drifted lower at our open from 1.3750s to 1.3730s pre European PMI releases. First up The French and weaker down to 1.3705, Next Germany, weaker as well down to 1.3685. Surprisingly no follow through. Talk European corps providing the support and possibly asian names. Short term shorts will bail above 1.3730, others above 1.3780. Demand needs to be satisfied with a price below 1.3680 to give encouragement to shorts.
CHf continues to be better bid. It would appear to me to be a combination of Eastern Europe Turmoil, Swiss repatriation flow and weaker $. Chatter, market is happy to buy the dips to 1.2170, failure there and market will become nervous of non performing longs again, which has occurred several times since the 1.2000 floor was put in place. Next level is 1.2120.
The USDJPY and JPY complex traded lower initially following the selloff in risk across the G10 currencies. We touched the important support seen between 101.65 / 70, before rallying to 102.00 on real money and hedge fund buying.
Weaker Euro PMI releases has seen EUR/GBP weaken from .8250 to .8218 this morning, which is also the range which has dominated since Tuesday this week… the cross remains sidelined inside the now well-defined .8150-.8350 range, which has been established this year by multiple failed attempts to leverage through the supports. Cable sidelined and just lounging the lows we saw yesterday around 1.6640/50… Key will be the Retail Sales data due tomorrow.
We have seen a bounce in the pair with us having an array of interest to buy AUD against a range of currencies. I expect there to be good offers placed between 0.8985 / 0.9000 and I will be looking to re-enter shorts here with a stop placed above yesterday’s high of 0.9045.
The Asia session saw NZD drop from .8310 to .8242, alongside the AUD following the weaker China data. The wider .8150-.8350 range continues to strongly dominate, and the London open has involved little else other than a weak short squeeze back up to .8290 where we greet the States.
AUD & NZD Today
No surprise that both AUD and NZD made session lows on the release of the lowest flash Chinese PMI for 7 months (Feb 48.3 v Jan 49.5) … we filled a good amount of Exporter/Real Money interest in both pairings on their falls below 0.8950 and 0.8250 respectively …. the subsequent snap-back in both (with Kiwi actually now nearly 25 pips higher then where it sat going into the Chinese data) has caught an intraday market out now which had established some shorts after the data release …. AUD today looks to be in a 0.8950/0.9010 range with stops around through 0.9020 … good offers remain above 0.9050. NZD today seems content to trade 0.8250/0.8320 with stops thru 0.8340. We continue to expect predominantly Exporter buyers to come in on both pairings on any dip as they top up their hedging and buy for dividend payments.