CBA FX Strategy
New York Open
5 March 2014
The USD index was little changed today, as a higher USD/JPY on more subdued safe-haven demand was offset by firmer GBP/USD into European session. The improved situation in the Ukraine has supported global market risk sentiment. The safe-haven JPY and CHF underperformed broadly overnight. Also, US and European equity markets were up, as were base metal prices. Attention should now return to the US data. The February ADP employment report (8:15am), ISM services index (10:00am) and the Fed’s Beige Book (2:00pm) are released. The ADP report and the employment sub-component of the ISM will provide a further guide to Friday’s non-farm payrolls release, which we think will be weather-affected. The construction of the ADP report means it should not be impacted by the bad weather. Based on the underlying improvement across the broader US labour market, we see upside risks to the consensus estimate for the ADP report (155,000). In line with the recent correlation, a better than expected ADP report and relatively sanguine Beige Book should be USD supportive.
In US rates, Treasuries fell as investors piled back into equities. The yield on the 10-year note punched 9.5bps higher to 2.695%, as the Dow rose 1.5% (led by financials). The geopolitical gesturing over Ukraine eased overnight, when Russian president Vladimir Putin indicated that full-blown military conflict is highly unlikely. According to Bloomberg, Putin stated he reserved the right to use force to defend ethnic Russians while there’s “no such necessity” at present. We believe the probability of military conflict is low. There is always the risk that one’s hand is forced amidst the flamboyant military gesturing. The consequences of such actions would be strictly enforced trade sanctions against Russia, and a sharp sell-off in Russian assets. The other side of the coin, would see a sharp rally in USD, Treasuries, gold and energy commodities (particularly oil and gas).
AUD, particularly AUD/JPY, have been supported by improved risk sentiment overnight. Today, Australian Q4 GDP at 0.8% (QoQ) was 0.1% stronger than expected at 0.8% (2.8% YoY) with the June quarter also revised up 0.1% to 0.8% (no revision to the previous Sep quarter). The contributions to growth in Q4 were pretty skewed towards net exports (0.6%pts), with domestic demand only contributing a modest amount to GDP growth (see attached note). But as we have been saying for a while, GDP growth is not the issue for Australia’s economy, it is the upward pressure on the unemployment rate as the composition of GDP growth changes. Supportive of a firmer AUD was confirmation of a 0.6% (QoQ) rise in Australia's terms of trade. AUD/USD should lift toward 0.9000 over the next 24 hours. Australia's two-year yields have also lifted 3bpts, supporting a slight widening in the Australia-NZ two-year bond spread. ie. the AUD/USD. Also, the National People’s Congress meeting confirms today that China’s 2014 GDP growth target remains 7.5% (see chart below). With market participants focusing on the ongoing NPC meeting, USD/CNY is taking a breather with intraday buying by the People’s Bank of China (PBoC) continuing to moderate for the third straight session. Similarly, morning fixing was in line with our expectation. As such, USD/CNY treaded softer, although USD/CNH was still shell-shocked with CNH-CNY gap closing. We continue to expect a stabilization in both USD/CNY and USD/CNH which should help render AUD/USD supportive.
In Australian rates, yields are higher across the curve. The Australian curve shifted higher following the RBA’s neutral statement yesterday, and investors have pushed it a further 5-6bps this morning. The 3s10s Australian bond futures curve has steepened a point to 110bps. This morning’s Australian GDP report is the focus locally, and will be released at 11:30am AEDT. CBA economics has revised UP their forecast to 0.8% (QoQ) (previously 0.7% (QoQ)), following yesterday’s data. Market consensus is looking for a 0.7% gain on the quarter (~2.5% (YoY)), so a gain of 0.8% or more would reinforce sentiment on the day. Into the mix the announcement of the 2014 Chinese growth target may cause some intra-day volatility prior to the Australian GDP release. We would look to fade any significant reaction to the Chinese announcement.
NZD/USD remained well supported in overnight trade. Although dairy prices at the latest Global Dairy Trade auction overnight were lower, volumes were much stronger. New Zealand’s terms of trade is at a 40-year high, so the supply-induced slip in the fortnightly auction price is not particularly concerning. 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. Better than expected Q4 Australian GDP data and no surprises from the Chinese growth target announcement today (see above) may help AUD/NZD lift intra-day. However, given the deeply negative Australia-New Zealand two-year swap spread (now -98bpts) any gains in AUD/NZD should be limited in the near-term.
In Kiwi rates, a net positive in the diary auction overnight (a slight fall in prices following a significant gain in volumes) has helped support investor sentiment. The Kiwi rates market has pushed 5-7bps higher this morning following the offshore moves. The yield on the 2-year NZ swap has jumped to 3.87% (+6bps), lifting the 1y1y to 4.28% (+11bps). The 2s10s swap curve held at 113bps, but remains in a flattening trend. As we have said for the last month, it is all about the RBNZ next week. And they will almost certainly hike the cash rate by 25bps to 2.75%.
GBP/USD lifted after the recent run of solid economic data continued. Today, the February UK services PMI came in 58.2, above market consensus of 58 and mostly flat from 58.3 in the preceding month, as it continues to consolidate at its very elevated levels. AUD/GBP should be volatile today, but barring an unexpected large data surprise in either economy, we expect it to remain within its recent range.
USD/CAD traded back to its yesterday’s lows ahead of the Bank of Canada (BoC) meets today (10:00am). We believe the BoC 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. In our view, the mix of a firmer USD, dovish BoC, and expected soft Canadian employment report on Friday, should weigh on the CAD and help USD/CAD lift back up towards its recent highs later this week.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – ISM non-manufacturing, ADP, Beige Book (today), non-farm payrolls (Friday). FOMC speakers: Fisher (Wednesday), Dudley, Plosser (Thursday), Dudley (Friday).
EUR – final estimate of PMIs, second estimate Q4 GDP, retail sales (today), ECB policy meeting (Thursday). ECB speakers: Draghi (Thursday).
GBP – BoE policy meeting (Thursday). Speakers: Haldane (Wednesday).
NZD – RBNZ rates announcement (13 March).
AUD – 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 (today), Ivey PMI (Thursday), Employment (Friday). BoC speakers: Macklem (Thursday), Murray (Thursday).