CBA FX & Rates Strategy
23 March, 2014
Asia Opening Commentary
AUD/USD is likely to remain well-supported and continue to grind up toward our published target of the 200 day moving average (0.9139). Australia’s terms of trade remain at historically high levels, Australia’s two-year swap rates remain toward the top of their six-month trading range, and despite a lift in US swap rates, we have not seen a large decline in the Australia-US two-year swap spread. The PBoC is likely to be further diversifying recent USD accumulated reserves into AUD (and other currencies). Late last week, the PBoC announced it will continue to further liberalise interest rates, with bank deposit rates a particular focus. The shadow banking industry offers numerous wealth management products aimed at enhancing returns on bank deposits. Greater liberalisation of interest rates may encourage some of the major banks to offer such wealth management products “on balance sheet”, where regulation is more clearly defined. This should assist in calming some of the market concerns about China’s less visibly-regulated growing shadow banking system. The release of China’s March HSBC Manufacturing PMI (12.45pm AEDT) is likely to drive today’s intra-day direction in AUD. Consensus is for an improvement in the declining PMI trend. Intra-day direction in AUD/USD may also be somewhat influenced by intra-day direction in USD/CNY. Both AUD/USD and USD/CNY currently remain well supported.
In Australian rates, the movement in Australian and New Zealand yields are likely to be dictated primarily by offshore markets. Two speeches by RBA’s Lowe and Stevens will hit the headlines during the week and should support investor confidence about Australia’s economy. The Australian cash rate is firmly on hold and yields are more likely to rise than fall. The trade balance released in New Zealand this week is unlikely to cause a significant rally in New Zealand rates.
USD is likely to grind marginally higher over the course of this week. The Fed’s commitment to continue tapering asset purchases and updated guidance about a lift in the Fed funds rate in 2015 will encourage a lift in US two-year swap rates and marginal strength in the USD. However, we don’t anticipate strong upside momentum in the USD until the real Fed funds rate gets into positive territory in mid 2016.
In US rates, investors have pushed yields higher on the back of a more “hawkish” FOMC and an improved growth outlook. The improvement in US data from the weather impacts is set to continue and the underlying trend is positive. The path of the Fed is relatively clear, and the various speakers this week are likely to provide continuity. Improvement in the US economic data and continuity from the FOMC will support investor confidence. Provided the powers in Europe don't escalate tensions with Russia, we see the likely improvement is investor confidence as the main driver of yields this week. Despite the small relief rally on Friday, the yield on the US 10-year Treasury note is likely to push toward 2.79% over the week (the recent high).
EUR/USD eased off its highs last week, and is now sitting just above its 30-day moving average (1.3779). Comments over the weekend by the ECB Vice President Constancio reinforce our view that the ECB will be in no hurry to raise rates. According to Constancio, Eurozone economic slack “won’t narrow until late 2016/early 2017”. This fits in with our Taylor Rule estimate for the ECB refi-rate, based on the ECB’s latest forecasts. Based off the 3-Month EURIBOR contracts, the market is now pricing the first full ECB rate hike by December 2015. Hence, there appears ample scope for market ECB pricing to adjust lower. The flash estimates of the March Eurozone PMIs are released today (France 7pm AEDT, Germany 7:30pm AEDT and the Eurozone 8pm AEDT). Expectations are for the Eurozone PMIs to ease slightly. We think the risks are for a larger decline. Over recent months the Eurozone PMIs have bucked the downward drift observed in the Chinese and US PMIs. Historically this divergence has not been sustainable. A larger than expected pullback in the Eurozone PMIs and dovish ECB rhetoric should dampen the EUR. AUD/EUR looks to have found solid support above 0.6526 (50-day moving average). A further grind higher in AUD/EUR looks likely over coming weeks, barring a sharp deterioration in global sentiment and/or the Chinese economic data.
USD/JPY is expected to grind higher this week in line with a firmer USD. In a speech in London on Friday, BoJ Governor Kuroda indicated a change of strategy may be coming, by suggesting the “BoJ can adjust policy quickly if necessary”. Previously, Kuroda has been reluctant to indicate a change of policy settings. The next big event for the Japanese economy is the increase in the consumption tax from 5% to 8% on 1 April. In our view, there is a high chance the consumption tax increase depresses the Japanese economy and forces the BoJ to provide more policy support, depressing Japanese swap rates and encouraging an increase in USD/JPY. Bank of Japan deputy Governor Iwata delivers a speech today, though the speech is unlikely to change perceptions about future BoJ policy (time unknown).
USD/CAD finished lower on Friday, following stronger than expected Canadian retail sales data and a slightly firmer Canadian CPI outcome. Canadian retail sales rose 1.3%MoM in January, nearly double the 0.7%MoM rise expected by markets. The better than expected retail data was driven by auto sales, though sales ex-autos (+1.0%MoM) also exceeded expectations. Canadian CPI inflation moderated in February, falling to 1.1%YoY (1.0%YoY expected) from 1.5%YoY in January, as exceptionally strong February 2013 numbers dropped out of the annual equation. Core inflation also moderated (from 1.4%YoY in January to 1.2%YoY in February). While firmer than expected, inflation remains at the bottom of the Bank of Canada’s (BoC’s) target range. The BoC has highlighted its concern about rising deflationary risks. There is no Canadian data this week. BoC Deputy Governor Tim Lane will deliver a lecture titled “Financial Benchmarks: A Question of Trust” which is expected to cover financial system governance. Monetary policy may be raised in the Q&A session. With bottom of the range inflation, there is little information to suggest any shift in the BoC’s dovish stance anytime soon. Given the relative disparity between the BoC and the more hawkish tone from the Fed we think that USD/CAD should remain buoyant. AUD/CAD has remained well supported 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 – Chicago Fed National Activity Index (today), durable goods orders (Wednesday), GDP Q4 (Thursday). FOMC speakers: Lockhart, Plosser (Tuesday), Pianalto (Thursday).
AUD – China HSBC manufacturing PMI (Monday), RBA Board meeting (1 April). RBA Speakers: Lowe (Tuesday), Stevens and Lowe (Wednesday), Stevens (3 April).
EUR – PMI Indices (today), CPI (Monday 31 March). ECB speakers: Liikanen (today), Draghi (Tuesday).
GBP – CPI (Tuesday), retail sales (Thursday), GDP, Current Account (Friday). BoE speakers: Dale (Friday).
NZD – Trade balance (Thursday 27 March).
JPY – BoJ Speech from Iwata (today); CPI (Friday).
CAD – Retail sales, CPI (today), GDP, Jan (Monday 31 March). BoC Speakers: Deputy Governor Lane (Monday).