CBA FX Strategy
27 February, 2014
Thoughts from our Strategy Team
The USD spiked after reports of the Russian Defence Ministry launching military exercise amidst escalating tensions in Ukraine’s Crimea region. Developments in the Ukraine continue to be fluid, with earlier reports Russia will take part in discussions on an IMF financial package for Ukraine. Ukraine’s central bank intervened in the thin foreign exchange market to buy the local hryvnia currency, which extended its decline so far this year to 20%. The more-liquid Russian ruble (RUB) declined to a record low. It is likely the USD will remain firm. There remains also some additional upside risks to the USD and short-end US yields today as Fed Chair Janet Yellen testifies before the Senate on the economic outlook from 10:00am. Yellen is likely to stick to the FOMC script of progressing with the planned tapering of asset purchases. She is likely to sound confident about the medium term outlook for the US economy despite the poor run of weather-affected US economic data.
AUD/USD continued to weaken against a firmer USD and following the release of weaker than expected Australian CAPEX data. Australian Q4 private capital expenditure fell 5.2% in the quarter (consensus -1.3%). But what is really important is the first estimate of expenditure for the 2014/15 financial year, which came in at A$125 billion (consensus was A$139 billion of expenditure). The other area of somewhat lesser importance was the 5th estimate of expenditure in the 2013/14 financial year. This rolled in at A$167bn (consensus was A$166bn). The details of the first estimate of the 2014/15 financial year are very important. For non-mining business investment to provide a meaningful offset to declining mining capex in 2014/15, an estimate greater than A$60 billion was required. The actual number rolled in at A$50.7 billion, indicating non-mining capex was expected to be flat in 2014/15. The implications for the AUD are somewhat negative. The five-year realisation ratio implies a 17.2% fall in mining investment (no surprise) but only a modest pick-up in non-mining investment (no significant improvement yet). We think AUD/USD could decline towards the 30-day moving average of 0.8901. But we don't expect a sustained decline or a policy response from the RBA. The main focus in our view will remain on Australia's unemployment rate. The importance of today's capex number is what it may mean for Australia's unemployment rate. The RBA has forecast the unemployment rate to continue to rise, but has "comfortably" moved to a neutral bias. We anticipate AUD/USD will recover back towards 0.9000 early next week unless the recent decline in the iron ore price begins to weigh on the AUD and/or the USD puts in another series of strong days.
With regard to Australian rates, we believe the move has been too aggressive, with the two-year swap rate down 4 bpts to 2.86% and the one-year/one-year declining to 3.03%. Given we don't expect the RBA to provide a policy response, we believe this has provided a good opportunity to get short duration and pay swap rates. Our favoured point on the curve is to pay the one-year/one-year below 3.00%.
EUR/USD fell as USD regained strength. Also, today’s Eurozone monetary/credit data show that lending to households and firms fell again in January amidst subdued money supply growth. Weak loan and money supply growth point to an extremely fragile recovery in the Eurozone. The flash estimate of February German CPI is released (8:00am), and a raft of ECB members are set down to speak including ECB President Draghi (1:30pm). Should policy be discussed, the ECB officials are likely to repeat the ECB’s ongoing easing bias. Keen interest will be on the German CPI data as it tends to give a good steer on the Eurozone CPI data (released Friday). A lower than expected German EU-harmonised CPI print would raise the risk that the February Eurozone CPI data will be weak and in turn increase expectations of further ECB policy easing as early as next week. When mixed with our firm USD outlook, and persistently negative German-US two-year yield spread, the bias is for EUR/USD to ease lower. EUR/GBP should also remain under pressure, weighed down by the ongoing relative outperformance in the UK economy and diverging outlooks for ECB and BoE monetary policy.
NZD/USD rebounded in Asian trade and stayed firm, following Fonterra’s announcement in late NY trade of an increase in its 2013/14 milk price payout to farmers by 35 NZ cents to NZ$8.65 per kg of milk solids. Fonterra’s capacity constraints are still impacting the payout - whole milk powder prices imply a payout of NZ$9.35 per kg/ms. Nonetheless, today’s lift is still very good news. We estimate the NZ$8.65 per kg equates to around an extra NZ$600m in dairy incomes compared to previously lower NZ$8.30 per kg. The net higher payout adds to the terms of trade derived income in New Zealand’s economy and generates appreciation pressure on the NZD exchange rate. A larger than expected NZ trade surplus (NZ$306mn vs NZ$230mn consensus) for January also supported the NZD. AUD/NZD came under strong downward pressure today following the release of weak Australian Q4 capex data. AUD/NZD fell to its lowest level since 31 January following the Capex data and has remained heavy. 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.
Iron ore prices have fallen for six sessions in a row, with the benchmark price falling to USD117.8/t (see chart below). Our commodity strategists have highlighted the risk of a gap lower in iron ore prices, driven by a short-term buyers strike in response to an unwanted inventory build-up. However, any near term gap is not expected to be enduring, as declines below USD110/t places significant pressure on Chinese domestic suppliers that produce at the upper end of the cost curve. Around two-thirds to three-quarters of China’s high cost marginal domestic production is needed to satisfy China’s iron ore demand this year. While near term iron ore price weakness would place pressure on the AUD, this is unlikely to be sustained as prices recover.
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 (Today), Kocherlakota, Stein and Plosser (28 February).
EUR – Eurozone CPI Feb (Friday). ECB speakers: Draghi, Weidmann, Liikanen, Nowotny, Praet (Today).
JPY – CPI, industrial production (Friday).
NZD – RBNZ rates announcement (13 March).
AUD – 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
$ Safe Haven as The World Watches Ukraine. Risk off sentiment rises as Russia puts fighter jets on combat alert. EMFX Falls as Tensions over Ukraine Rise
$ strength and Euro weakness prevail as market seeks safe haven from Ukraine situation.
Bids in the 1.3640-50 region were sufficient to slow the decline this morning.
CHF continues to be better bid over The Ukraine situation. Non performing Eurchf longs begin to bail. Points to the downside being eroded with 1.2120 to watch, a break of 1.2080 likely to see a run for the door ahead of SNB Floor at 1.2000
Safe haven status reaches Japan as $ yen follows the CHF move. The pair finally moves away from 102.40 and trades through resting bids of $400mln + in the 101.80 area.
Cable sidelined today, heavy on the general USD buying across the board, and pinned to yesterday’s lows in the 1.6620’s
After the overnight movement in the AUDUSD due to the capex data, we have continued the move lower on the European woes. NAB was the huge seller below the Asia low of 0.8916, trading to 0.8903, but the pair was not really there and we quickly climbed back to 0.8920. We have been sidelined ever since at 0.8915 / 30.
Weaker CAPEX & better than expected NZ Trade numbers saw AUD/NZD take a 70 point tumble in Asia. London opened on its lows around 1.0720 and continued to the move down to 1.0677 which in turn triggered stops above the recent multiple highs in NZD/USD through .8350… AM sales have since capped the NZD selling back through .8350+8340, lifting the cross back up to 1.0700.
USD/RUB making new multi years highs, but no major acceleration of the decline, The high back in 2008/90 was 36.5585 - we've clipped 36.1115 first thing this morning.
Meanwhile South Africa s headline PPI prints +7.0 % vs +6.5% in December, higher than expectations and giving USDZAR a slight nudge back under 10.8000
EURPLN heading higher, 4.1880 paid, still way off the highs seen back at the end of Jan (4.2621 ) we have broken up through the 38.2 FIB of the move down form those highs, as well as what looks like the break of a head and shoulder neckline to the upside - so perhaps we got the momentum to reach 4.2010 and then 4.2150
AUD & NZD Today
Overnight AUD has held in well considering the weaker Capex, continued softer Iron Ore prices (fallen 6 sessions in a row now) and the stronger US dollar due to the geo-political concerns with Russia and the Ukraine … Q4 Australian Capex fell 5.2% for the qtr vs 1.3% exp with the more important first estimate of 2014/15 weaker as well (A$125 v A$139 exp) … this result will be a drag on Q4 GDP to be released next week … this morning interest into 0.8880/0.8920 is very strong from Exporters, Intraday Accounts and Option Desks with a mix of stops and further buying then down to 0.8840/50 … with the market short further selling interest will be seen 0.8950/70 on the day which protects a number of stops above here.
NZD in contrast has had a strong overnight session boosted by a N$306 mio Trade Surplus for Jan coming on-top of an upgrade for farmgate milk forecasts to a record high N$8.65kg which has seen Kiwi break through resistance that had capped the pairing into 0.8340/50 for the last week and a half … NZD also picked up gains against the AUD up over 1% to highs last seen in late January … this morning we watch selling interest in Kiwi 0.8380/0.8400 which will be tough to break having held on four attempts since October 2013 …. No real Exporter interest in Kiwi till below 0.8280.