CBA FX Strategy
25 February 2014
Thoughts from our Strategy Team
USD remained lethargic with USD index hovering around this week’s low. EUR/USD treaded higher again to the top of its recent range into European trading having stayed range-bound in the past 24 hours. Following a better than expected February German IFO, today’s data releases show that German exports growth expanded by 2.6% from a year ago, its fastest in three years. As a result, net exports contributed 1.1 percentage points to the headline growth of 1.4% after adjusting for working days, offsetting a drag of 0.7 percentage points from total domestic demand. On the other hand, despite the upward revision to Eurozone January CPI, the headline CPI, at 0.8%pa, remains well below the ECB’s 2% target. Interestingly, 12 of the 18 Eurozone nations now have annual inflation running sub-1%pa. By our estimates this is the largest ratio since late 2009. The preliminary estimates of February Eurozone CPI are released on Friday. Ongoing Eurozone disinflation remains a concern and focus for policy makers. Another low Eurozone inflation reading would reinforce expectations the ECB could provide further policy support as early as 6 March. Today the European Commission (EC) releases its latest economic forecasts (7:45pm). While the EC is likely to highlight the gradual improvement in the Eurozone economy, it may also reiterate the low inflation outlook. Against these backdrops, we maintain that participants should remain wary of chasing large gains in EUR from current levels and that the bias is for EUR to underperform this week. Barring a disastrous Australian CAPEX report (Thursday), EUR/AUD should grind lower.
AUD/USD pulled back today but remained around this week’s high after being buoyed yesterday by positive investor sentiment following the US S&P 500 lifting to record highs. Onshore USD/CNY opened above the fix this morning for the first time since September 2012. However, we believe the move was engineered by the People’s Bank of China (PBoC) which is determined to quell appreciation expectation arising from renewed inflows on a more benign economic outlook (January export growth and new CNY loans surprised substantially on the upside). In other words, the higher USD/CNY spot in onshore market was not driven by CNY liquidity crunch, as the interbank SHIBOR curve of shorter tenors actually fell by as much as 2% in o/n to 1% in 1m in the past three weeks despite a net liquidity withdrawal by the PBoC during the same period post-Chinese Lunar New Year. On that note, the PBoC conducted 14day repo of 100bn this week which was widely expected by the markets, which saw the SHIBOR curve actually shift further downwards. In other words, short-term liquidity conditions continued to improve. Interestingly, today's USD/CNY fixing is in line with our CBA model, confirming a reversal to the persistent higher than expected fixings witnessed before the G20 weekend. We maintain that PBoC’s “leaning against the wind” should meet more headwinds especially when trade surplus continues to widen and FX reserve accumulation accelerates.
NZD/USD has managed to sustain yesterday’s gains today. The RBNZ survey of inflation expectations showed two year ahead inflation expectations remained steady at 2.33% in Q1, while 1 year ahead inflation expectations edged higher. The result has not altered our, or the market’s, view regarding RBNZ rate hikes. We expect the RBNZ to lift rates by 25bpts on 13 March.
USD/CAD was marginally higher, after softening yesterday on weaker second tier US indicators and improved Canadian weekly consumer confidence data rose. USD/CAD has held above 1.1050, defying the fall in the US-Canadian 2yr bond spread. AUD/CAD consolidated near parity. 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 near-term downside risk to our view is soft Australian CAPEX plans (Thursday).
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – GDP second estimate (Friday). FOMC speakers: Tarullo (today), Kocherlakota, Stein and Plosser (28 February).
EUR – EU issues economic forecasts (today), Eurozone CPI Feb (Friday). ECB speakers: Mersch (Wednesday), Draghi, Weidmann, Liikanen, Nowotny, Praet (Thursday).
JPY – CPI, industrial production (Friday).
NZD – RBNZ rates announcement (13 March).
AUD – CAPEX (Thursday).
Thoughts from our Trading Team
Sidelined, lack lustre. The pair better bid from 8am going from 1.3738 to 1.3763 . The 60s again provided resistance and we trade back to mid 1.3740s
After a brief excursion to trade below 102.30 from overnight highs of 102.63 the pair finds solace yet again close to 102.40.
GBP bid from the 1.6660 open today, stalling against Gamma offers in the mid 1.6680’s, until BOE Comments: BOE WOULD CONSIDER SLIGHTLY EARLIER RATE RISE IF INFLATION PRESSURE BIGGER THAN EXPECTED - BOE'S MCCAFFERTY* saw us take out the highs and print 1.6707… amidst the rhetoric was also *Further pound strength would be a worry* so all in all a little mixed and just assisting the reported 1.6650+1.6700 Strikes on the day.
So quiet we are almost not trading in the European time zone in the AUDUSD. We have traded on the wide 0.9004 / 0.9030; but in realism we are more 0.9018 / 25.
NZD very sidelined with the AUD inside a .8318-.8338 range, with the majority spent inside .8320-30.
AUD & NZD Today
AUD - despite a another uneventful session Aud continues to hold on to gains made during NY session yesterday with chatter of M&A flows behind those moves, so be mindful of the possible continuation today. Our traders continue to hold on to their longs looking for an eventual move to 0.9250. Short term players have placed their stops just below 90c and in the order book corporate offers are situated 0.9050-0.9070. Ahead of Thursday's Capex looks like 0.8950-0.9070 range is likely to hold.
NZD- managed to sustain yesterday’s gains as well. RBNZ inflation report overnight showed two year ahead inflation expectations remained steady at 2.33% in Q1, while 1 year ahead inflation expectations edged higher. This has not altered markets view regarding rate hikes, and CBA continues its call for a lift of 25bps in March. Bulls will wait for dips to 0.8280 to get long with offers 0.8350 and then 0.8380-0.8400.