CBA FX Strategy
10 March, 2014
Thoughts from our Strategy Team
USD was broadly stronger into European trading following its Friday’s post-payrolls gains. US non-farm payrolls for February were stronger than expected (175,000 versus 149,000 expected). The result is even better than the headline suggests because poor weather prevented more people than usual from working in February and there was upward revision to previous month’s payrolls. The payrolls result supports our view that the FOMC will again taper its asset purchases by USD10 billion (to USD 55 billion) at its next meeting on 18-19 March. In our view, the period of downside surprises in US economic data (because of weather effects) will soon come to an end and support a rise in the USD. US February retail sales are expected to be soft on Thursday though the strong non-farm payrolls suggest upside risks to US retail sales. In any case, weaker than expected retail sales is likely to be written off as weather-affected. Hawkish FOMC voter Plosser speaks today. FOMC nominees Fischer and Brainard (and Powell, who is seeking renomination) appear before the Senate Banking committee on Friday giving market participants the first opportunity to hear their views on the US economy and US monetary policy.
US Treasuries came under pressure Friday, selling off 3 to 6bps because of stronger than expected US non-farm payrolls. The sell-off in Treasuries was led by the 7 to 10-year sector of the curve. US yields have risen for four consecutive sessions as market participants have gained some confidence in the geopolitical outlook in Eastern Europe (although this remains very fragile), and the broader economic outlook in the US. The improved sentiment is likely to continue this week, in our opinion. We believe the market will look to the retail trade report this week for confirmation of the recovery, despite the weather affects. The US 10-year Treasury yield is sitting at 2.788%, having briefly traded through 2.8% on Friday, and has bounced 20bps over the past week. Yields have broken through the high-end of the recent trading range, and could push towards 2.9% on renewed confidence. There are several Fed officials speaking this week. The speakers are likely to highlight the strength of the US recovery, the need to look to qualitative rather than quantitative guidance, and the continued desire to taper asset purchases. Our bias remains towards higher yields in the US and abroad.
AUD endured some volatility following the “disappointing” February trade balance for China and was weaker against a firmer USD in European session. China recorded a trade deficit of USD 23 billion compared to expectations of a trade surplus of USD 14.5 billion. The drop in AUD was modest because the Chinese economic data is typically volatile around Lunar New Year and Chinese imports held up at 10.1%pa (see attached note). We expect AUD to be heavy this week. We expect the Australian housing finance (Wednesday) and labour force (Thursday) to be softer than market expectations. It is too soon for Australian employment to respond to the acceleration in Q4 2013 GDP growth. Our forecasts for Chinese retail sales and industrial production (Thursday) are also below market consensus.
In Australia, the rates market was on the back foot this morning following the move in US yields after US non-farm payrolls, but regained some ground, and steepened, over the day. Over the week ahead, Australian yields are likely to grind higher, if US yields continue to grind higher. The one major data-event that could divert the path for rates this week, however, is the employment report Thursday. CBA economists are below consensus, looking for a +6k gain in employment on the month (versus a mean-reverting consensus of 15k). Both CBA and consensus are looking for a stable 6% unemployment rate. A small positive (+6k) in employment growth on Thursday, is likely to dampen the spirits of the local rates market on the day, but is unlikely to change the trajectory of rates on the week. If the unemployment rate stays unchanged at 6%, the market is likely to look through a small employment gain on the month. We believe the market would need to see a negative print and/or an increase in the unemployment rate to rally in a material fashion. We believe the risk of a bad report (a negative print and/or a rise in unemployment rate) is 20-30%. The probability of a bad report is low, but not insignificant, in our view.
NZD/USD is trading where it closed NY trade on Friday in anticipation of the RBNZ meeting on Thursday. We, along with the market, expect the RBNZ to lift rates by 25bpts at the meeting. The RBNZ has signalled for quite some time that the Overnight Cash Rate will start to rise in 2014, and came close to lifting rates in January. Whilst a hike by the RBNZ seems a near certainty on Thursday, the pace of tightening is an open question. Rate hikes will support the NZD, which is at near-record highs on a trade-weighted basis. While the high TWI reflects NZ’s robust terms of trade, which are at 40-year highs, a high TWI does some of the RBNZ’s job for it. AUD/NZD was heavy in Asian trade, pushing below 1.0700 as Chinese trade data weighed more heavily on AUD. The current level of the Australia-New Zealand two-year swap spread (-103bpts) suggests that any gains in AUD/NZD should remain limited in the near term.
In New Zealand, we FINALLY get to see the RBNZ in action on Thursday. It has been a long wait since the RBNZ’s decision in late January to leave the cash rate unchanged at 2.5%. The RBNZ have signalled they will commence their tightening cycle this Thursday. Failure to do so would be a huge surprise to a rates market that has the meeting almost fully priced. Market participants have 2.745% priced for March (ie 24.5bps of 25bps), and 2.956% priced by April. The question now is: how far will the RBNZ go? We believe the RBNZ will want to take 50bps off the table (raise to 3%) relatively quickly (by April), and potentially pause to assess the impact. Our New Zealand economists believe the RBNZ will deliver just 75bps this year. The market has priced in a full 120bps this year. Swap yields has the potential to run higher over the next month or so, especially as the amount of mortgage related fixing increases and is hedged via paying swap by large domestic balance sheets. Following the move higher, we would look to establish received positions in Kiwi rates versus Australia and the US as we believe the market has too much priced in the way of expected RBNZ tightening over the next two years.
USD/JPY was modestly higher today, lifting from around 102.70 in opening trade to a high of 103.37. Japanese economic data released today came close to expectations though was disappointing. The final estimate for Q4 GDP was shaved slightly from 1.0%saar to 0.7%saar. The appreciable slow-down in Japanese GDP growth in the second half of 2013 will make it difficult for the BoJ to sustainably reach its 2%pa inflation target. Nevertheless, we doubt the BoJ will ease policy further this week (Tuesday). We suspect they will wait for their 30 April meeting when policy-makers update their GDP and CPI forecasts and when there will be more clarity about how much "bring forward" spending the prospective increase in the value added tax is causing. In addition, Japan's current account deficit continues to slump to unprecedented levels (JPY-588 bn). The change in Japan's status from current account surplus (of around 3% of GDP) to ongoing current account deficits sets the scene for more JPY weakness, particularly if Ukraine developments fade into the background and US yields track higher as the Fed continues along its taper path.
USD/CAD lifted further, following the sharp rise in Friday’s NY session after the release of disappointing Canadian employment data and stronger than expected US non-farm payrolls. There are no major Canadian economic data to provide direction to USD/CAD this week. We expect USD/CAD to push higher through the week as the US-Canada 2yr bond spread is likely to become less negative on firming US yields. AUD/CAD initially opened lower because of the Chinese trade outcome, but recovered over the session back to Friday’s NY closing level. We still see further upside to AUD/CAD given the divergence of the policy bias between the RBA and the BoC. Our near term target for AUD/CAD is 1.0125.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – Retail sales (Thursday). FOMC speakers: Plosser (today), Fischer, Brainard and Powell (Friday).
EUR – Eurozone Industrial Production (Tuesday). ECB speakers: Noyer and Dombret (Monday); Praet, Mersch, Coeure (Wednesday), Draghi, Coeure and Weidman (Thursday).
GBP – UK Industrial production, NIESR GDP estimate (Tuesday); trade balance (Wednesday). BoE speakers: Bean(today); Carney, Fisher, Miles and Weale (Tuesday).
NZD – RBNZ rates announcement (Thursday).
AUD – Housing finance (Wednesday), labour force (Thursday), China investment, retail sales and industrial production (Thursday). RBA speakers: Deputy Governor Philip Lowe (Wednesday).
JPY – Bank of Japan policy meeting (Tuesday).
Thoughts from our Trading Team
Quiet morning as an attempt towards 1.3900 failed and we trade 10 tics below our open at 1.3870 as I write.
Quiet. Slight bias towards stronger $ this am.
Very brief dip in $yen first thing this morning to trade sub 103 before $ strength prevails and the pair takes out overnight highs.
Corporate buyer of Eurgbp lifts the cross some 20 tics (0.8310-.8330) and puts pressure on £ across the board.
Very little to add to the overnight move post weaker Chinese data. The AUDUSD has been in a very tight range of 0.9025 / 55 in the European session.
Much like the AUDUSD it is an extremely tight trading range. With us being encapsulated in a 0.8450 / 75 range.
AUD & NZD Today
AUD still feels heavy on the NY open continuing to feel the effects from the weaker Chinese Feb Trade data released over the weekend …. with enough Exporter/Intraday/Option Desk interest layered in the 0.8980/0.9020 region we expect AUD for now to hold its ground … Intraday and Option Desk will be the sellers on any move into 0.9050/80. Plenty of data to move AUD this week including Australia Housing Finance and Employment while in China Industrial Production and Retail Sales will be closely watched.
NZD also weaker on the Asian open on the back of the Chinese data but has recovered all these early losses ahead of the RBNZ meeting on Thursday morning NZ Time where they are expected to lift the OCR 25bp to 2.75%, the main question to be answered is how fast the tightening cycle will befrom here with the accompanying statements maybe answering this question … so 0.8440/0.8520 the range for NZD today …. there is no reason not to expect NZD to find support on any dips going into the RBNZ meeting so look for 0.8350/0.8400 to hold any deeper pull-back over the next few days. NZ House Price Index is out tonight.