FX Commentary: New York Open
4 March, 2014
Having stayed firm over most of the Asian session on heightened tensions between Ukraine and Russia, USD softened into European trading on report stated that Russian troops participating in exercise had just been ordered to return to their bases. The situation in the Ukraine/Russia remains fluid. Further headlines are likely during today’s trade. Broadly, Asian equity markets shrugged off the weak overnight lead, following comments from the head of a panel reviewing Japan’s pension funds that less of Japan’s pool of retirement savings should be allocated to domestic sovereign debt. USD/JPY rose on comments from Bank of Japan central bank Governor Kuroda that momentum was spurring the yen carry trade. EUR/CHF rose, and is currently holding around Friday’s closing levels. Gold dropped from the highest price in more than four months and will likely continue to be driven by events unfolding between Ukraine and Russia.
AUD has had a volatile session today, following the release of partial data feeding into tomorrow’s Q4 GDP release and the RBA rates announcement. The Q4 Balance of Payments and Government spending figures were close to our economists’ expectation. While net exports were slightly weaker (0.6ppt vs CBA 0.8ppt), government spending increased against our expectation for a small fall. Our economists have updated their forecast for tomorrow’s GDP (7:30am) to 0.8%QoQ (2.7%YoY). The big surprise was the surge in building approvals (+6.8% and 34.6%pa) that prove that low interest rates continue to support the economy. Ongoing strength in home building is needed because last week's CAPEX survey painted a weak picture for business investment (particularly by the miners). However, the lift in the AUD was not sustained. The RBA left rates unchanged, following their March Board meeting. There was no change to the RBA’s interest rates guidance or its exchange rate views. More specifically, a "period of stability in interest rates"..."is likely", and the "exchange rate remains high by historical standards." Although this later comment on the exchange rate did not appear in last month's statement, it has appeared frequently before, and hence is not new news. The only two bits of "fresh" news are that "signs of improvement in investment intentions in other sectors (outside mining) are only tentative". But the RBA nevertheless expect an "improvement" not a fall, despite the signs being tentative. And secondly, the RBA has refrained from commenting on the recent high inflation outcomes. On net this suggests some comfort with current interest rate settings. Overall, today's RBA statement is quite neutral for the exchange rate despite the immediate volatility and the immediate interest rate swap outlook (which has barely moved, observing the two-year and the one-year/one-year). In the lead up to the Q4 Australian GDP data the AUD is likely to be influenced by market sentiment around the Ukraine situation and news emanating from China’s National People’s Congress. Chinese Premier Li Keqiang is scheduled to announce the 2014 GDP growth target at 6:30pm.
EUR and GBP edged higher on a softer USD (see above), after underperforming yesterday. However, there was a spike in EUR following the reports about the Russian troops (see above). The main focus for the EUR is Thursday’s ECB policy meeting. We expect the ECB to announce fresh policy action, but acknowledge recent macro developments make it a close call. We expect EUR/USD and GBP/USD to continue to drift lower this week, weighed down by a firmer USD.
NZD/USD was firmer also. There are few domestic catalysts for NZD this week. The next major domestic driver 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. In the meantime we expect the NZD to remain range bound, subject to developments in the Ukraine. AUD/NZD initially lifted following the release of Australian economic data (see above), however the gains were erased following the RBA statement, with AUD/NZD finishing the Asian session marginally lower.
USD/CAD retreated to its opening levels into European trading, after lifting yesterday on safe haven demand for USD. The Bank of Canada meets tomorrow (Wednesday 10:00am) and is likely to maintain its easing bias. Canadian economic data has surprised to the downside, with the Canadian economic surprise index the most negative since September 2013. With Canadian employment likely to be soft on Friday, and Wednesday’s Ivey PMI expected to show a weaker pace of expansion in Canada’s manufacturing sector, the pressure for USD/CAD to lift higher is likely to be sustained. Overall, we expect USD/CAD to push higher towards 1.1200 this week.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – ISM non-manufacturing, ADP, Beige Book (Wednesday), non-farm payrolls (Friday). FOMC speakers: Fisher (Wednesday), Dudley, Plosser (Thursday), Dudley (Friday).
EUR – final estimate of PMIs (Wednesday), preliminary Q4 GDP, retail sales (Wednesday), ECB policy meeting (Thursday). ECB speakers: Draghi (Thursday).
GBP – PMI construction (today), PMI services (Wednesday), BoE policy meeting (Thursday). Speakers: Cunliffe (Tuesday), Haldane (Wednesday).
NZD – RBNZ rates announcement (13 March).
AUD – GDP Q4 (Wednesday), retail sales (Thursday). RBA Governor Stevens appears before the House Economics Committee (Friday).
JPY – Bank of Japan policy meeting (11 March).
CAD – BoC rates announcement (Wednesday), Ivey PMI (Thursday), Employment (Friday). BoC speakers: Macklem (Wednesday), Murray (Thursday).