CBA FX Strategy
18 March 2014
New York Open
Thoughts from our Strategy Team
USD strengthened into European trading mainly against EUR and GBP. Despite yesterday’s sense of ‘relief’ in markets that the Crimean secession vote did not result in an escalation, the situation in the Ukraine remains fluid, and the potential remains for escalation, such as a further move by Russia into other Ukrainian regions. While yesterday’s improved sentiment fed through to a stronger AUD and NZD there was limited appetite for further gains today.
US Rates finished yesterday’s session higher, as “risk on” sentiment prevailed and the “safe haven” bid into Treasuries was partially reversed. Investors took confidence in the fact the sanctions imposed on Russian and Crimean officials were well within expectations, (not extreme in nature), and are unlikely to cause a response from Russia (as Putin was not on the sanction list). US yields rose 2 to 4bpts. The yield on the 10-year note bounced back from last week’s rapid decline, and lifted 4bpts to 2.69% (as the curve bear-steepened)
EUR/USD dipped quickly towards yesterday’s lows, after March German ZEW survey underwhelmed market expectations. While current conditions improved from last month and remains elevated, the expectations index eased for the third straight month to its lowest level since last August. We maintain our earlier view that EUR/USD should struggle around 1.4000. Given the increase in the ECB’s rhetoric around the impact of EUR strength, this may be a “line in the sand”. In its latest forecasts, the ECB assumes EUR remains unchanged at 1.3600. Persistent EUR strength would dampen already low inflation. By implication, given the ECB’s easing bias, persistent EUR strength and the resultant downward pressure on Eurozone inflation increases the chances of further ECB policy action. In our view, the expected rebound in the USD, reduced USD reserve recycling and persistently negative German-US yield differential should continue to weigh on EUR/USD over the medium-term. Given the ECB’s perceived “line in the sand” in terms of the EUR, we think there may be a ceiling (floor) developing in EUR/AUD. In the short-term, the improvement in market risk sentiment, mixed with “neutral” RBA policy meeting minutes could help EUR/AUD ease down to the bottom of this month’s range (1.5154).
AUD sustained most of yesterday’s gains despite some intraday volatility. AUD/USD did spike to 0.9110 following the release of the RBA Board minutes. The minutes from the RBA’s March Board meeting reiterated the RBA’s neutral stance. There was little new information in the minutes, given RBA Governor Glenn Stevens’ recent parliamentary testimony. The minutes reiterated that the RBA view the exchange rate is high by historical standards, though the decline seen to date would assist in achieving balanced growth in the economy. The RBA noted that they saw signs that interest rates were working their way through the economy. In looking at the labour market, the RBA noted that forward looking indicators of labour demand had stabilised at low levels, and that conditions in the labour market usually lagged changes in economic activity. The RBA expects employment, and wages growth, to remain subdued for a while. Given the lack of pressure coming from the labour market, the RBA remains comfortably on hold. CBA’s view is that the next move will be a rate hike, in Q4 2014. Given the improved market sentiment and the reiteration of the neutral stance in the minutes we expect AUD to remain supported. However, we think the rally in AUD/USD could peter out towards this month’s high (0.9133). We expect the FOMC to announce another US$10bn step down in the pace of its monthly asset purchases later this week (Wednesday). This should support the USD. In addition, question marks over the momentum in the Chinese economy remain. The next read will be the flash estimate of the March HSBC China manufacturing PMI (released next Monday).
In Australian rates, improved investor sentiment was initially translated into higher yields early in the Asian session, however swaps faded back through the course of the day. With the RBA minutes again spelling out for the markets that the RBA is on hold for a prolonged period of time the OIS market was unmoved on the day. Rate cuts are highly unlikely. The OIS market does not have a full rate hike priced until mid-2015. There is plenty of room for these expectations to be pulled forward if the data improves in coming months.
NZD/USD moved largely in tandem with AUD/USD today and was little changed. NZ balance of payments data for Q4 21013 is scheduled for release tonight (5:45pm). Market expectations are for a significantly narrower deficit of NZD 1.53bn, as surging dairy, and meat, exports deliver a stronger export performance, thanks to elevated dairy production and prices. Our New Zealand economics team is forecasting a narrower NZD 1.4bn current account deficit. The BoP data is followed on Wednesday evening by the NZ Q4 2013 GDP data which is expected to show a moderation in the pace of growth. According to our New Zealand economists and the market consensus, GDP is expected to rise 0.9% (QoQ) or 3.1% (YoY) in Q4. Our New Zealand economists point out that while the pace of growth is likely to have moderated slightly from 3.5% (YoY) in Q3, the Q4 2013 GDP data is expected to show a broadening of activity across sectors. Solid New Zealand economic data should keep the Australia-New Zealand two-year swap spread deep in negative territory and remain an AUD/NZD headwind. The New Zealand economic data should also support the NZD vis-à-vis the EUR and GBP.
On a separate note, China just announced that it will introduce NZD/CNY direct trading from 19 March. While the announcement shouldn’t surprise given China officially became New Zealand’s largest trading partner, the timing following the weekend widening to the USD/CNY trading band certainly points to a hastened pace of exchange rate liberalization currently. USD/CNY was lifted approaching 6.20. As we explained, if the People’s Bank of China (PBoC) intends to lift the spot above its midpoint by more than 1% with keeping the midpoint steady, USD/CNY will rise above 6.20 at some point of this week. As “heavy lifting” continues, USD is likely to remain on the back foot because of continued recycling inflows into other major currencies.
Kiwi swap rates opened 2bp higher following the “risk on” investor sentiment displayed in offshore markets, but faded through the day to be down 3-4bps on the 2yr. Further out, 10yr swap rates were also higher in early trade, and remain 1bp firmer on yesterday’s close. The Kiwi market is reporting a solid pickup in mortgage-related fixing over the weekend, with a few banks holding onto 1-3yr fixed-rate mortgage specials. This should see the NZ front end underperform as major bank balance sheets look to clear risk. As we have foretold for the last few months, we expect the ramp up in mortgage fixing to continue.
USD/CAD has drifted slightly lower, with CAD benefitting from the improvement in risk sentiment. Bank of Canada (BoC) Governor Poloz will deliver a speech today (11:55am) titled, ‘Redefining the Limits to Growth’. The speech is likely to reinforce the need to rebalance Canada’s economy away towards investment and net exports (which would be assisted by a lower CAD). Poloz may provide additional comments of note at a post speech press conference. We think there is a risk that CAD jawboning by BoC Governor Poloz may support USD/CAD. AUD/CAD has had a bias to grind higher since the start of the year. In our view, while the global uncertainty may increase the intra-day volatility in AUD/CAD, the contrasting biases of the RBA and BoC should keep AUD/CAD supported. Our AUD/CAD target continues to be 1.0125.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – CPI, Housing starts, Building permits (today); FOMC meeting (Wednesday). FOMC speakers: Yellen (Wednesday), Bullard, Fisher, Kocherlakota, Stein (Friday).
AUD – RBA Board meeting (1 April). RBA Speakers: Lowe (Tuesday 25 March), Stevens, Lowe (26 March), Stevens (3 April).
EUR – Current account (Friday).
GBP – Bank of England minutes, employment data, UK Budget (Wednesday). BoE speakers: Carney (today), Weale (Thursday), Dale (Friday).
NZD – Q4 2013 Balance of Payments (Wednesday), Q4 2013 GDP (Thursday).
JPY – Trade data (Wednesday). BoJ speakers: Kuroda, Kiuchi, Sato (Wednesday), Kuroda (Thursday).
CAD – Retail sales, CPI (Friday). BoC speakers: Governor Polox (today).
Quick Note on Base Metals
Base metals finished mostly higher on demand hopes after China announced that it plans to invest more than USD162b in town redevelopment plans to help support growth. Nickel prices continued to lift on expectations that trade sanctions on Russia, the world’s largest refined nickel producer, for its involvement in Crimea will exacerbate supply concerns already fuelled by Indonesia’s nickel ore export ban.
AUD & NZD Today
AUD saw an initial spike on the RBA minutes just thru 0.91c where it ran into plenty of Aust Corp selling combined with Option desk interest seeing the pairing retrace back and trek sideways around the 0.9080 level … the RBA minutes from the March meeting reiterated the RBA’s neutral stance with no new information gleamed, they also repeated the exchange rate is high by historical standards. Today a 0.9050/0.9130 range looks to cover it, Exporter interest has started to filter back in with their interest positioned patiently in the 0.8950/80 region. Strikes today rolling off at 0.9050 and 0.9075 which will keep AUD close by until expiry. NZD range of less than 40 pips sums it up, the pairing continues to trade with a firm tone and we expect any dip into the 0.8500/40 to find plenty of buying interest while profit taking selling continues by intraday accounts above 0.8600. NZ Q4 Current Account due out late this afternoon with a significantly narrower deficit of $NZD 1.53 bio expected which will continue to support Kiwi if prints as expected.
Thoughts from our Trading Team
Euro trading lower from the 1.3920 open solely on the weaker ZEW release (46.6 vs 53.0). We have since been supported by Gamma bids in the low 1.3890’s to greet New York lounged back up around the figure.
CHF sidelined tracking Eurusd
EUR/JPY lower on the morning very much tracking Euro…. 140.75 has been the low trade on the data ZEW release, basing just ahead of the 2014 uptrend support at 140.70.
Custodial name said to be behind the early morning fall from 1.6640 to 1.6590 which appeared to end at 8am… we have since remained very sidelined inside 1.6590/10
AUD quiet inside 9064-88 after Sydney failed to sustain their rally to .9110… Strikes around 9075 and 9050 appear to be the current governing force.
A squeeze in short dated NZ rates has seen NZD hold a firm tone to the morning, working hard through offers relating to the .8550 strike which has governed since yesterday, and we greet the States on the highs around .8570. Dairy Auction due out this afternoon, and last week’s .8607 high remains key should we pull away from the Strike levels.