CBA FX Strategy
24 February, 2014
USD is likely to maintain a bias to grind a little higher this week. The highlight of the week is likely to be Fed Chair Janet Yellen’s delayed testimony on monetary policy before the Senate Banking Committee as part of the Fed’s semi-annual monetary policy report (Humphrey Hawkins) on Thursday. We anticipate Yellen will stick to the current script and provide no major surprises. There is no significant US economic data apart from the February measure of US consumer confidence (Wednesday) and US January durable goods orders (Friday). US rates are also likely to show a bias for yields to lift higher this week.
AUD/USD endured some volatility in the Asian session because of renewed concerns about property lending in China. We think the concerns are overblown and initiated a new trade to sell USD/CNH 1‑month forwards at 6.1200 with a target of 6.0510 and stop/loss of 6.1500 (see attached for details). AUD/USD will remain heavily influenced by the local economic data this week; namely the Australian Q4 private capital expenditure survey (Thursday). The consensus for a quarterly decline of 1.3% in Q4 expenditure is largely academic. The focus will remain on the first estimate of expenditure for the 2014/15 financial year; consensus is A$139 billion of expenditure. The other area of somewhat lesser interest will be the 5th estimate in the 2013/14 financial year; consensus is A$166bn. All the risk appears to be for a lower estimate for both numbers. If realized, a lower estimate will generate a decline in AUD/USD and a decline in Australian rates; we believe one of the more sensitive rates will be the one‑year/one‑year, currently 3.11%. However, consistent with our published view, we don’t believe the outcome of the Australian Q4 capex survey will be enough to generate a fresh low in the AUD/NZD exchange rate, which remains more than 3 cents above its previous cyclical low (see attachment).
NZD/USD is likely to remain in a relatively tight range and close to the 30 day moving average of 0.8276 this week. While there is list of partial economic data out this week (international trade, net migration, business confidence and building permits), the highlight will be the RBNZ’s Q1 survey of inflation expectations (Tuesday). A lift in the two-year rate of inflation above last quarter’s 2.3% is simply going to give the RBNZ more confidence in lifting interest rates at their next meeting on 13 March. We don’t anticipate there will be a large reaction in the NZD or in New Zealand rates to the RBNZ inflation survey because a rate rise remains fully priced and the survey is unlikely to sway the RBNZ in either direction.
EUR/USD rebounded to its pre-FOMC highs on Monday after the February German IFO outperformed market expectation effortlessly. The business climate index rose to 111.3 in February, its fourth straight gain and strongest since July 2011, despite a pullback in the German manufacturing PMI from the same month. Historically, the IFO has had a strong correlation with moves in the German manufacturing PMI. By contrast , there is no surprises to the initial estimate in the January Eurozone CPI. While the final reading was a touch higher than the initial estimate of 0.7%, it remains the fourth straight below-1% finish. A number of ECB officials are also set to speak later this week. We would expect them to repeat the ECB’s dovish bias should policy be discussed. Overall, we think EUR should edge modestly lower this week. EUR/AUD continues to consolidate above its 50-day moving average (1.5333). In our opinion the bias is for EUR/AUD to grind lower this week given the outlook for a benign Eurozone CPI data and chance of dovish ECB rhetoric and if Australian CAPEX report comes in close to expectations.
EUR/JPY may dip this week, but over the medium-term, we believe it will push higher. The main driver behind our EUR/JPY view is the growing divergence between the Eurozone and Japanese current accounts. While Japan’s current account surplus has collapsed, the Eurozone’s current account surplus has increased sharply. A continuation of these trends should be supportive for EUR/JPY over the medium-term. See attachment for more details.
USD/JPY softened again on Monday in line with a weaker Nikkei. Japanese CPI data for January is released this Friday. Japanese CPI (excluding fresh food) is approaching the Bank of Japan’s 2%pa target, in part due to the significantly weaker yen and higher fuel prices. A stabilization is expected in January. However the recent sharp slowing in the Japanese economy – GDP growth averaged only 0.3% in the second half of 2013 – suggests that CPI growth may start to ease. A soft CPI raises the prospect the Bank of Japan will introduce further monetary policy support, particularly if the April tax increases further depresses the economy. Preliminary Japanese industrial production data for January is expected to rise strongly, with the weaker yen assisting exports. However Japanese industrial production remains 15% below the peak level reported in 2008. We believe USD/JPY will grind a little higher this week.
AUD/CAD continues to grind higher towards our near term target of 1.0125. On Friday, USD/CAD and AUD/CAD spiked higher after the release of a far weaker than expected Canadian December retail sales (-1.8% outcome versus -0.4% expected). However, poor weather can be blamed for the softness in retail sales and Canadian core CPI has rebounded in recent months to 1.4%pa in January. Given the diverging outlook between the RBA (neutral bias) and the Bank of Canada (risk of further easing if Canada’s economy keeps underperforming), we still expect AUD/CAD to reach our target of 1.0125. However, a downside risk to our view is soft Australian CAPEX plans (Thursday).
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – GDP second estimate (28 February). FOMC speakers: Fisher (today), Tarullo (Tuesday), Kocherlakota, Stein and Plosser (28 February).
EUR – EU issues economic forecasts (Tuesday). ECB speakers: Mersch (Wednesday), Draghi, Weidmann, Liikanen, Nowotny, Praet (Thursday); Eurozone CPI Feb (Friday),
JPY – CPI, industrial production (28 February).
NZD – RBNZ’s Q1 survey of inflation expectations (Tuesday); RBNZ rates announcement (13 March).
AUD – CAPEX (27 February).