CBA FX Strategy
New York Open
11 March 2014
Thoughts from our Strategy Team
USD was immediately stronger into European trading as in yesterday’s session. The confidence that the US economic recovery can be sustained is likely to be a source of support for the USD this week, particularly if US retail sales provide an upside surprise. The strong US non-farm payrolls released on Friday – despite poor weather preventing people from working – suggests that underlying momentum in the US economy is strengthening.
EUR/USD drifted lower on a firmer USD and after ECB Vice President Constancio reiterated, in his keynote speech at Annual European Financial Services Conference, ECB can still ease policy further. On the other hand, data releases tomorrow could see EUR firmer, albeit only slightly. Eurozone industrial production data for January is released tomorrow. Market expectations are centred on a 0.5%MoM increase. The bounce back in German industrial production and improvement in the Eurozone manufacturing PMI points to a firm outcome. Any intraday boost from the data is likely to be muted, and short lived. In our opinion, the expected bounce back in the USD and various fundamental indicators such as the German-US yield differential suggest EUR/USD should struggle to add to its recent gains. We think EUR/USD may struggle around 1.4000.
GBP/USD got some temporary respite after yesterday’s fall, as UK manufacturing production numbers conformed mostly to market expectations. In January, manufacturing output rose by 0.4%MoM from an upwardly revised 0.4%MoM in the preceding month. As a result, manufacturing production grew by 3.3% from a year ago, its fastest expansion in three years. The NIESR GDP estimate for February is also released today, and could add support to GBP if the February reading continues to show strong growth momentum (11:00am). Offsetting the still resilient data flow out of the UK, BoE Governor Carney repeated at a hearing of Parliament’s Treasury Committee today that any BoE rate increases will be gradual and limited.
AUD has ground modestly higher, despite the well-publicised falls in the price of copper and iron ore, China’s unexpected trade deficit and renewed concerns about China’s financial system. If this sounds familiar; it is. The correlation between AUD and individual commodity prices is loose. There are numerous occasions when AUD and iron ore (or copper) do not move in lock-step (see green circles in chart below). Also, concerns about China’s financial system flare up from time to time but are not a sustained driver of AUD. Australian business conditions softened appreciably in February; from 5pts (around the long run average) in January to 0pts in February. The details show most sub-components fell in February. The forward orders and employment sub-indices fell significantly. The Australian labour market and Chinese economic data (both Thursday local time) are the major drivers of the AUD this week. We expect a below consensus outcome (CBA: +6k v mkt: +15k). We expect AUD to be heavy this week, mainly because we see downside risks to the Australian and Chinese economic data and upside risks to US retail sales this week. See yesterday’s Global Currency and Interest Rate Weekly for more details.
USD/JPY was largely unmoved by the Bank of Japan (BoJ) meeting today. As was widely expected by market participants, the BoJ left policy unchanged. If the BoJ is going to change policy soon, it is likely to happen at the 30 April meeting (not the 8 April meeting). At 30 April meeting, the BoJ will update its economic forecasts and will also have a better indication of the effects of the increase in the value added tax on the Japanese economy. We expect USD/JPY to trend higher today and for the remainder of the week. Also supporting gains in USD/JPY and EUR/JPY is the fading away of concerns about Ukraine. The change in Japan’s current account surplus into a deficit means USD/JPY is unlikely to fall as much as it did in the past in response to negative global risks such as deterioration in Ukraine.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – Retail sales (Thursday). FOMC speakers: Fischer, Brainard and Powell (Friday).
EUR – Eurozone Industrial Production (tomorrow). ECB speakers: Praet, Mersch, Coeure (Wednesday), Draghi, Coeure and Weidman (Thursday).
GBP – NIESR GDP estimate (today); trade balance (Wednesday). BoE speakers: 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 – Trade data (Wednesday 19 March).
Thoughts from our Trading Team
Euro drifting lower after a very lacklustre few hours as comments from ECB Constancio take effect.
ECB CONSTANCIO: FINANCIAL MARKETS MISINTERPRETED US A LITTLE - MNSI
CONSTANCIO: ESPECIALLY DISAPPOINTED MARKETS THINK ECB ON HOLD - MNSI
CONSTANCIO: WE CAN STILL CUT RATES, IMPLEMENT QE OR BUY ASSETS – MNSI
Range 103.19-36 this am.
Mixed UK data leaves the £ little changed this am. Eurgbp traded to a high 0.8341 pre numbers, post drift back to our open 0.8325
Extremely tight trading ranges, with us encapsulated in a tight 0.9028 / 50 range.
Like the rest of the g10 complex very tight ranges, with all eye on the RBNZ later this week.
AUD & NZD Today
AUD and NZD overnight remained content to track within ranges NY saw yesterday with today not promising too much more to get excited about … weaker Australian business conditions and confidence for Feb showing the post-election jump from late 2013 to be temporary in nature saw AUD make session lows at 0.9010 where a combination of Option and Exporter accounts had bids filled …. We continue to expect 0.8980/0.9020 to offer strong support on the day from the same type of accounts with a mix of offers and stops sitting 0.9050/80 to cap the topside. NZD continues to find support on dips into the 0.8440/60 region ahead of the RBNZ later this week with intraday buyers taking profits ahead of 0.8520.