CBA FX Strategy
26 February, 2014
Thoughts from our Strategy Team
The People’s Bank of China (PBoC) set the fixing this morning in line with expectation for the third straight session (see chart 1). However, the central bank lifted the onshore USD/CNY spot above midpoint immediately after market opened and had kept the pair well supported until the closing minutes (see chart 2). We suspected that the central bank could keep USD/CNY elevated to consolidate its “success” in quelling market expectation of continued CNY appreciation. However, buying USD/CNY aggressively normally leads to two outcomes. First, FX reserves rise further and the PBoC needs to recycle into other major currencies such as EUR. Second, domestically, the PBoC needs to withdraw additional liquidity injected through its intensified FX intervention. On that note, the PBoC withdrew a total of 658bn of liquidity through its open market operations (OMO) in the past three weeks, after injecting a total of 525bn in the preceding three weeks to relieve the seasonal cash crunch ahead of the Chinese Lunar New Year. Despite the net withdrawal so far this year, the interbank SHIBOR rates fell by an average of 2% in overnight to one-month tenor. In other words, short-term liquidity conditions remain flush and continue to improve. Coupled with the breakneck credit expansion in January, the central bank is likely to grow increasingly wary of continuing its “heavy lifting” in USD/CNY, in our view. Moreover, fundamentals, such as a widening current account surplus, should keep the domestic currency well supported.
Reflecting somewhat calmer sentiment and another in-line fixing, USD/CNH, lifted initially in tandem with a higher USD/CNY, then retraced all its earlier gains. Interestingly, USD/CNH is again trading at discount to its onshore counterpart by more than 100pts at the time of writing. We have faded the oversized move in USD/CNH 1m at 6.1200 and the position stands flat. We would add more shorts in the next couple of sessions if signs of PBoC intraday intervention subsiding more convincingly emerge.
AUD/USD was volatile intraday with a string of stop loss selling pushing the AUD lower early in the session. Though with limited follow through the AUD recovered to near its opening levels. Tonight’s Australian Q4 capital expenditure survey will be the major driver of AUD/USD this week (7:30pm). The consensus for a quarterly decline of 1.3% (CBA: -3.0%) in Q4 expenditure is largely academic. The focus will be on the first estimate of expenditure for the 2014/15 financial year. The small consensus provided an estimate of A$139 billion of expenditure in 2014.15 (CBA A$133bn). An outcome below this, particularly one sub-$125bn will be a sign the mining to non-mining growth transition is faltering. A weaker than expected 2014/15 expectations figure could be exacerbated if the 5th estimate for 2013/14 spending plans comes in below A$166bn, indicating both a downgrade to both near term and future spending. In our view, the risk appears to be for a lower estimate for both numbers. If realised, 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 3.09%.
GBP/USD trading was volatile into European trading but ended firmer ahead of the 2nd estimate of Q4 GDP data. The 2nd estimate had no major surprises, confirming that the UK economy grew by 0.7% (QoQ) in Q4 with recovery appearing balanced and broadening to all main sectors. The speech from BoE’s Broadbent, titled “The UK economy and the world economy”, said “pound level reflects relative UK strength” to slower growth in the rest of the world, Europe in particular. On that note, GBP/EUR edged slightly higher into European session. GBP/AUD was also firmer early in the session.
EUR/USD, following a customarily lethargic Asian session, endured more volatility in European trading. The next key Eurozone release is the February CPI inflation data (Friday 5:00am). The inflation data is the last key piece of data released before next week’s ECB meeting. Market expectations are centred on inflation coming in at 0.7%YoY in February. The ECB will release their updated forecasts at their 6 March meeting. Another low CPI number will raise expectations the ECB will provide further monetary policy support on 6 March, and would be a EUR headwind.
NZD/USD remained range bound through today’s session, shrugging off the volatility in the AUD. New Zealand trade data for January is released today (4:45pm), along with international travel and migration figures. Our NZ economics team is expecting the NZ trade balance to shift back from a surplus of NZ$523mn in December to a balanced outcome (zero), with exports softening more than imports. The consensus is expecting the same underlying trade trends, but with a small surplus of NS$230mn to remain in January. Neither piece of NZ economic news is expected to have a significant impact on the NZD. The next major catalyst for the NZD is the RBNZ meeting on 13 March. We, along with the market, expect the RBNZ to lift rates by 25bpts at the meeting.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – GDP second estimate (Friday), ISM Manufacturing Feb (Monday 3 March), Beige Book (Wednesday 5 March). FOMC speakers: Yellen (Thursday), Kocherlakota, Stein and Plosser (28 February).
EUR – Eurozone CPI Feb (Friday). ECB speakers: Mersch (Today), Draghi, Weidmann, Liikanen, Nowotny, Praet (Thursday).
JPY – CPI, industrial production (Friday).
NZD – RBNZ rates announcement (13 March).
AUD – CAPEX (Thursday), RBA rates announcement, Q4 2013 Balance of Payments, Building Approvals (Tuesday 4 March), GDP Q4 (Wednesday 5 March). RBA Governor Stevens appears before the House Economics Committee (7 March).
Thoughts from our Trading Team
Sidelined and lack lustre once again. We had a 12 tick range in Asia, with London only breaking this very slightly.
CHf continues to be better bid.
Once again gravitating around 102.40
The ‘as expected’ UK GDP data release today more or less took away any real chance of a re-test of yesterday’s 1.6643-1.6727 range, instead trading inside a far tighter version of 1.6660-1.6702… Vols softer alas the range has tightened with yesterday’s parameters now the secondary support/resistance levels.
After erratic price movement overnight, the AUDUSD has been constantly offered this morning, albeit in a tight trading range. We have a large amount of AUDUSD for a hedge fund, with there being no stand out sellers. Key levels once again are 0.8890 / 0.8925 and 0.9050/0.9100 topside.
NZD continues to range.8310/40… stops placed above .8350 continue to be a reach too far, with today’s AUD/NZD sales also failing to spark a break of the NZD range…. Trade data out tonight the next one to watch ahead of month ends flow on Friday.
AUD & NZD Today
Another range-bound session for AUD and NZD overnight content to remain in well-defined ranges …. 7 month lows for the Yuan and Iron-ore did weigh on AUD and with expectations of a potentially weaker Q4 Capex release later tonight we expect AUD to struggle to stay much above 0.90c on the day with only continued buying by Exporters for hedging and dividends holding us above 0.8960 … Aust TradeMin also calling for an 0.85c overnight to bring stability and competitiveness to the economy. Construction data released overnight was weaker indicating the transfer from the mining to non-mining parts of the economy may not be going to plan.
For Kiwi a continued low interest level keeps it side-tracked and near 0.83c … ahead of January Trade data tonight we expect it to remain well within the 0.8260/0.8330 range and may drift lower on the day if AUD continues to trade heavy.