CBA FX Strategy
19 March, 2014
New York Open
Thoughts from our Strategy Team
The USD firmed ahead of today’s FOMC meeting, although USD index remains near the bottom of its recent range, and is now less than 0.6% away from its late October 2013 low. The policy announcement and new economic projections are released at 2pm, and Fed Chair Yellen’s press conference is from 2:30pm. We and the market consensus expect the Fed to look through the bad weather, focus on the medium-term outlook for the US economy and announce another US$10bn step down in the pace of its monthly asset purchases from US$65bn to US$55bn. More interest will be on whether the FOMC alters its forward guidance on the Fed funds rate. With the US unemployment rate now at 6.7%, we think the current guidance is now obsolete. At a minimum we expect the FOMC to remove the reference to the 6.5% unemployment rate threshold. While we think there are a number of options available to the Fed, in our view the most likely is for the Fed to raise the prominence of its funds rate forecasts. This would help the Fed influence market expectations for: (i) when the FOMC first raises the funds rate; and (ii) the pace of FOMC rate hikes. Current market pricing has the first Fed funds rate hike in early Q4 2015 (see chart below). From a relative perspective, we think indications by the Fed that the rate hike cycle could begin earlier than current market pricing would be viewed as being mildly hawkish and support the USD. Irrespective, we think the negative USD sentiment may be close to reaching its limits. The ongoing monetary policy normalisation by the Fed, combined with the expected rebound in the US data over coming months and the positive US-G6 weighted two-year swap spread should help lift the USD over the medium-term.
In US rates, yields eased off slightly yesterday with the 10-year note down 2bpts. At 2.67%, the US 10-year continues to hover near the middle of the range it has occupied over recent months. Given the major event risk today in the form of the FOMC meeting, rates are unlikely to deviate too much pre-announcement. As outlined above, we expect the Fed to announce another US$10bn step down in the pace of its monthly asset purchases and for the Fed to alter its forward guidance. QE tapering and Fed rates guidance exerts bear-steepening pressure on the curve. And once the US data starts to improve, and if the positive risk sentiment holds, we are likely to see a meaningful pick up in yields. We remain of the view that the US 10-year is likely to move toward 3% once confidence returns, and it is just a matter of time.
GBP is the lone G10 currency that strengthened against the firmer USD today. GBP/USD rose to its intraday high of just a tad below 1.6640 before the releases of UK labour market data and March Bank of England (BoE) meeting minutes. The labour data continue to reinforce the positive picture of the UK labour market. While the UK ILO unemployment rate, as expected, remains unchanged in January, growth of average weekly earnings picked up. Moreover, jobless claims dropped in February by 35k against market consensus of -25k from the upwardly revised fall in January. With generally positive labour market data, the pair managed to keep its pre-release gains at the time of the writing, even as the BoE minutes cautioned that further GBP strength is possible as the economy recovers, putting downward pressure on inflation. The next data event today will be the UK budget (8:30am). We expect that the UK Budget is likely to highlight the positive momentum in the UK economy and project further improvement in the UK’s fiscal position. GBP should be supported on selected crosses. In our mind, GBP/JPY stands out. Should risk sentiment remain positive, GBP/JPY looks to have found support around 168.11 (100‑day moving average) and could soon push higher. In addition, the recent rally in EUR/GBP looks to have run ahead of the fundamentals, particularly relative to the negative German-UK two-year swap spread.
AUD/USD eased off today, after touching a new monthly high yesterday. AUD/USD continues to gravitate towards the 200-day moving average (0.9147), and our previously published tactical target of 0.9223. Positive risk sentiment should continue to support the AUD today. However, the looming FOMC meeting suggests participants will remain cautious and large moves pre the Fed announcement are unlikely. Given we expect the FOMC to announce further asset purchase tapering and continue on the path of monetary policy normalisation, and for the US data to rebound as the cold weather rolls out of calculation, we think the rally in AUD/USD could be close to petering out. 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, with no data catalyst in today’s session, participants remained focused on the FOMC announcement. Following yesterday’s lead, Australian rates eased off slightly. Yesterday’s RBA meeting minutes again spelled out that the RBA is on hold for a prolonged period. The OIS market does not have a full rate hike priced until mid-2015. By contrast, CBA expects the first RBA rate hike to be in Q4 2014. There appears to be plenty of room for market RBA expectations to be pulled forward toward our outlook if the data improves in coming months. This would support a rise in the 1 to 5-yr Australian swap rates as evidence mounts that the economy has ‘survived’ the economic transition away from mining investment led growth.
NZD/USD also eased lower, but maintained most of its overnight gains. As expected, New Zealand’s current account deficit narrowed to NZ$1.43bn (3.4% of GDP) in Q4 2013. The NZ current account is expected to narrow further over much of 2014 as strong prices and dairy production boost export earnings. NZ Q4 2013 GDP is scheduled for release tonight (5:45pm EST). 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 a AUD/NZD headwind. The New Zealand economic data should also support the NZD vis-à-vis the EUR, GBP and CAD.
USD/CAD lifted again on a firmer USD, after spiking up yesterday following a dovish speech by Bank of Canada (BoC) Governor Poloz. Poloz highlighted the possibility of a rate cut by the BoC if downside risks to inflation increased. Canadian Q1 2014 GDP growth is likely to be “softer” than the BoC forecast in January, partly on account of the unusually harsh winter weather. The major economic message of the speech was that demographic forces will see a weaker post-recovery growth trend for the Canadian economy, which will be accompanied by lower equilibrium interest rates. The signal that the longer run norm for the policy rate in Canada will be lower echoes similar comments by the BoE. While declining to comment on the value of the CAD, Poloz said the lack of reference to the currency in the BoC’s March statement wasn’t meant as a signal the bank was comfortable with its level. The contrasting near-term direction for policy between the BoC and the RBA saw AUD/CAD outperform, pushing through our published target of 1.0125. Given the dovish tone from the BoC we would expect to see further near-term gains in AUD/CAD. NZD/CAD is nearing its post-float high. While easing back in today’s Asian session, we think NZD/CAD could soon test its post-float high given the hawkish RBNZ, high NZ terms of trade, and better than expected NZ economic data. (See attached strategy note.)
USD/JPY continued to lift into European trading. The Nikkei rallied earlier and Japan posted another sizeable adjusted trade deficit in February (JPY 1.133 trillion). While this is an improvement on January (deficit JPY 1.763 trillion), it is worth remembering the January adjusted trade deficit was a record. Japan has now posted adjusted trade deficits for 36 consecutive months. The large February adjusted trade deficit could see Japan post another monthly current account deficit in February (released 8 April). This would be the 2nd consecutive adjusted monthly current account deficit and 3rd in 4 months. As we have stated previously, the structural deterioration in Japan's current account surplus should continue to weigh on the JPY over the medium-term.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – FOMC meeting (today). FOMC speakers: Yellen (today), 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 – UK Budget (today). BoE speakers: Carney (today), Weale (Thursday), Dale (Friday).
NZD – Q4 2013 GDP (Thursday).
JPY – Trade data (today). BoJ speakers: Kuroda, Kiuchi, Sato (today), Kuroda (Thursday).
CAD – Retail sales, CPI (Friday).
AUD & NZD Today
30 point ranges for both AUD and NZD overnight ahead of the FOMC later this afternoon …. AUD this morning sits comfortably between Exporter interest 0.9100/0.9080 and then below 0.9040 while Corp sellers remain layered from 0.9140 thru to 0.9180 with 0.9150 technical resistance also expected to attract plenty of attention (200 day m.a at 0.9147 and 2013 down-trendline both meet here). NZD is starting to look comfortable up above 0.86c with demand against many of the crosses helping it remain buoyant … NZ’s Current Account Balance deficit narrowed to $-1.43B overnight continuing the good run of data ahead of tonight’s 5.45pm EST release of the Q4 GDP (exp +0.9%) with growth expected to show a broadening of activity across sectors. 0.8580/0.8640 as a range on the day with buying interest starting to stack up now in the 0.8450-0.8550 region ensuring any pull-backs will be well supported.Thoughts from our Trading Team
Currencies sidelined ahead of the FOMC meet later, with even the BOE Minutes and UK data proving a non-event this morning, as EUR/GBP continues to sit above the previous high turned support at .8350.
AUD very stuck inside the Option interest which lies inside 9100 + 9110, and the 9150 technical resistance on top where both the 200 DMA and 2013 down-trendline both meet. NZD short dates still high, but unlike yesterday, not affecting the Spot level as we await important GDP data tonight shortly after the FOMC rate decision.
USD/CAD has been the one mover of the morning, continuing its move higher from yesterday to take out previous highs resistance at 1.1160, now eyeing up the last 2 resistance lines at 1.1200 + 1.1225 which would complete a breach of all the multiple highs of 2014 so far. CAD/JPY, CAD/CHF and CAD/MXN are amongst the crosses which have subsequently broken down on supports.