CBA FX Strategy
20 March 2014
New York Open
Thoughts from our Strategy Team
The USD and US bond yields spiked higher across the curve after the FOMC took a more hawkish tone than had been anticipated. The USD has sustained those gains today. As widely expected the Federal Open Market Committee (FOMC) looked through the recent negative weather affects and announced a further reduction in the pact of its asset purchases. The monthly pace of asset purchases was trimmed by US$10bn from US$65bn to US$55bn per month. While tapering will remain data dependent and is deemed not to be on a pre-set course, the hurdle to alter the current path appears to be a high one. According to the FOMC, it will “likely reduce the pace of asset purchases in further measured steps at future meetings”. When asked about the outlook for asset purchase tapering in the post meeting press conference, Fed Chair Yellen reiterated that “next fall” (i.e. Q3 2014) was the “likely time for ending QE”. (See attached strategy notes “A more hawkish FOMC?”; “Could markets have another tantrum?”; and “When hawkish FOMC meets bolder PBoC”.)
In addition to the asset purchase tapering, the FOMC altered its forward guidance on the Fed funds rate. The Fed moved to a more qualitative approach. The Fed dropped its quantitative 6.5% unemployment threshold and noted that the Fed funds rate will remain near zero “for a considerable time after the asset program ends”. The more hawkish message was inferred from the FOMC’s latest projections. A greater number of FOMC participants now expect the first Fed funds rate hike to occur in 2015 (13 compared to 12 in December). The FOMC’s median expectation for the Fed funds rate at the end of 2015 and 2016 was raised by 25bpts respectively in each year. The Fed funds rate is projected to be 1% at the end of 2015 (previously 0.75%) and 2.25% at the end of 2016 (previously 1.75%) (see chart below). Added to this, when asked what constituted a “considerable period” between the end of asset purchases and the first Fed funds rate hike, Yellen stated “around 6 months”.
The more hawkish turn from the FOMC reinforces our view that the negative USD sentiment is reaching an end, and the USD should grind higher over the medium-term. 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 guide the USD higher. From our perspective, higher rates in the US, combined with the structural deterioration in Japan’s current account surplus should support a higher USD/JPY. EUR/USD may also retrace lower. The updated Fed rate forecasts are in stark contrast to estimates inferred for the ECB. A Taylor rule estimate using the ECB's latest inflation and unemployment forecasts has them on hold through to Q3/Q4 2016. Nominal and real German-US yield differentials should continue to move against EUR/USD.
In US rates yields spiked higher across the curve with the 3-year, 5-year and 10-year rising by 13bpts, 16bpts and 10bpts respectively. As the US data starts to improve as the weather affects roll out of calculations, and if the positive risk sentiment holds, we are likely to see an even more meaningful pick up in yields. We remain of the view that the US 10-year is likely to move toward 3% over coming months.
AUD/USD remained heavy, after spiking lower post the FOMC announcement. This comes after the AUD struggled to push through the 200-day moving average (0.9144) yesterday. With a lack of domestic catalysts, AUD/USD could continue to weaken towards 0.8942 (50-day moving average) as European participants react to the hawkish FOMC outcome. 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, the lead from the US saw Australian yields push 4-5bps higher today. There was no data catalyst in the Asian session to challenge the offshore momentum. The expected pick up in global rates, driven by the US developments, when overlayed with the neutral RBA should support a rise in Australian yields, particularly as evidence mounts that the Australian economy has ‘survived’ the economic transition away from mining investment led growth.
NZD/USD dropped further following solid NZ economic data. NZ GDP for Q4 2013 printed at 0.9% Q0Q, as expected and a touch higher than the RBNZ’s March MPS forecast. This brought annual GDP growth to 3.1%. Q3 2013 was revised down to 1.2%, from 1.4%. Growth was seen across a broad range of sectors in Q4 2013, reflecting improvement in business and household demand. Our New Zealand economists view is that the Q4 GDP outcome will reinforce the RBNZ’s confidence that growth is becoming self-sustaining, and support a follow up 25bp rate hike at the RBNZ’s April meeting. Positive USD sentiment through the European session could see NZD/USD remain heavy, but the firm GDP data should keep NZD supported on the cross rates, particularly NZD/CAD. NZD/CAD pushed up to a new 17-year high yesterday. The widening New Zealand-Canada three-year swap spread continues to support NZD/CAD. We think NZD/CAD could soon test its post-float high given the hawkish RBNZ, high NZ terms of trade, and strong NZ economic data.
USD/CAD lifted to its highest since July 2009 yesterday, on a stronger USD, and sustained those gains through today’s Asian session. CAD is likely to remain soft, with Tuesday’s dovish speech by Bank of Canada (BoC) Governor Poloz contrasting with the more hawkish tone from the Fed. The lift in USD/CAD is well supported by the less negative US-Canada two year bond spread, courtesy of the stronger lift in US yields. Canadian economic data released on Friday is likely to confirm relatively soft activity in the Canadian economy, with the rebound in retail sales only partially recovering the December decline, and CPI easing lower. AUD/CAD has ground lower, but remains above our earlier published target of 1.0125. In our view, the fundamental drivers for further near‑term gains in AUD/CAD remain in place.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – Existing home sales (Friday), ISM Manufacturing (Monday). FOMC speakers: Bullard, Fisher, Kocherlakota, Stein (Friday), Lockhart, Plosser (Tuesday).
AUD – RBA Board meeting (1 April). RBA Speakers: Lowe (Tuesday 25 March), Stevens, Lowe (26 March), Stevens (3 April).
EUR – Current account (Friday), PMI Indices (Monday).
GBP – CPI (Tuesday). BoE speakers: Weale (Thursday), Dale (Friday).
NZD – Trade balance (Thursday 27 March).
JPY – CPI (Friday 28 March). BoJ speakers: Kuroda (today).
CAD – Retail sales, CPI (Friday). BoC Speakers: Deputy Governor Lane (Monday).
AUD & NZD Today
AUD and NZD extended their declines in Asia overnight post the FOMC with Kiwi suffering even though Q4 GDP met expectations at +0.9% with the slight revision down for Q3 possibly doing the damage … weaker commodity and equity markets across Asia weighed on the AUD in particular. Going forward; with AUD key resistance around 0.9150 holding over the last 2 weeks (200 day ma and key trend-line from April 2013 highs) our attention turns for a potential test of key support into 0.8890 in coming sessions, a little far away on the day but something to remember … today we have Exporter interest 0.8950/80 with plenty of Aust Corp sellers lined up 0.9040+. NZD buyers this morning sit 0.8450/80 while we expect sellers to emerge on any move towards 0.8550+. NZ March Consumer Confidence out tonight.
Thoughts from our Trading Team
USD strength dominates.
The EURUSD continues the moves lower started yesterday evening post FOMC. We have taken out the 21 DMA and NYC low of 1.3810, and then the support at 1.3775/ 80.
SNB added very little to their previous stance today, which saw CHF trade slightly lower.
A very tight trading range today in the JPY, with large offers noted on ebs taken out at 102.50, with dips being very shallow with USD higher across the board.
Trading softer with the general USD strength, but the main interest appears in the cross as it has fallen back below the .8350 ‘resistance turned support’ this morning which could open up the lower end of the year’s range and target a move left onto the .82’ handle.
AUDUSD traded inside a 15 tick range this morning. With key support coming in at 0.8990 initially, followed by 0.8900. Offers will now be stacked from 0.9050 up to 0.9100.
Overnight GDP data solely reflected in the cross as it sits on the day’s lows below 1.0570… care a break of 1.0530 which could test the resolve of medium term longs.