CBA FX Strategy
25 March, 2014
USD continues to lack direction and currently appears unresponsive to the US economic data. The USD is largely consolidating the relatively small 1.0% gain following the 20 March FOMC meeting, which contained some updated forward guidance. We maintain that strong upward momentum in the USD may be delayed until the real Fed funds rate gets into positive territory (mid-late 2016). We don’t anticipate much reaction to today’s US February durable goods data, nor to FOMC voter (and noted hawk) Charles Plosser speech on the US economy and monetary policy (10am AEDT). Given his hawkish bias, Plosser may express his preference for even more aggressive monetary policy normalisation than that expressed by the FOMC.
In US rates, the Treasury curve reversed some of yesterday’s mixed moves. The front end of the curve was well bid, and yields fell marginally. There was a strong 2-year note auction that attracted investors with higher yield. The 2-year Treasury note auctioned for a yield of 0.469 and received a bid/cover ratio of 3.2. Further out the curve, demand softened, and yields rose. The 10-year and 30-year yields lifted 2 to 3bps in what was a relatively quiet session. The twist in the curve reversed the Jiu Jitsu move seen in yesterday. Philadelphia Fed President Charles Plosser’s comments on CNBC supported the recent sell-off in the 2 to 5 year sector of the US curve. Plosser stated he was expecting policy to have a 2-handle in 2015 and he is forecasting 3% in 2015. Plosser is at the hawkish end of the spectrum. According to the FOMC’s published “dot chart” Plosser is the most hawkish of the voters. The high green points (dots) in the chart below show the outlier of 3% for 2015 and 4.25% for 2016 – we know this is Plosser, and the market watered down his comments accordingly.
AUD/USD continued its upward march overnight, reaching a new 2014 high in NY trade. The environment for AUD/USD is improving: (i) the Australian economy is successfully transitioning away from mining investment-led growth to consumer spending, housing construction and exports; (ii) the RBA is likely to start a rate tightening cycle in Q4 2014 (the OIS market is pricing a Q2 2015 start to a tightening cycle); and (iii) Australia’s terms of trade is stabilising after falling by 17% from 2011 to 2013. In today’s speech, “What’s the outlook for Australia and the global economy in 2014?”, RBA Governor Stevens is likely to emphasise a “glass half full” outlook for the Australian economy and the RBA’s “neutral” bias (2.30pm). While Governor Stevens is likely to make the observation that the AUD is “high” by historical standards, we do not anticipate any explicit or aggressive jawboning. Stevens will also participate on a panel discussion, “Central banks – will policy making ever be conventional again?” (5pm). Deputy Governor Lowe delivers introductory comments to the International Finance and Regulation conference today but is unlikely to cause any ripples in AUD (9:35am).
In Australian rates, the focus will be on RBA Governor Stevens’ speech from 2:30pm. Any hint that the RBA Governor is growing in confidence on the outlook for Australian growth is likely to be met with a bounce in Australian yields. We are confident that failing a systemic event offshore, the next move in policy is a rate rise, and maybe as early as Q4 2014. Consensus is slowly moving towards our view. Once investors become increasingly confident on timing, sooner rather than later, we are likely to see a significant lift in the Australian yield curve (bear-flattening).
EUR/USD endured another volatile trading session, falling initially before spiking higher for the second straight day in the middle of the NY session. While EUR/USD is likely to remain firm in the short-term, supported by the Eurozone’s current account surplus and relatively higher real Eurozone interest rates, we continue to think EUR/USD will struggle up towards 1.3950 and should ease lower over a longer time horizon. A number of ECB members spoke last night, and it is becoming increasingly evident that the persistent EUR strength is a focus for policymakers given its negative impact on Eurozone inflation. Notably, in an interview the usually hawkish Bundesbank President stated that to curb further EUR appreciation negative interest rates “appear to be more appropriate measures than others”. Weidmann also signalled that an ECB QE program was not “generally out of question”. The ECB’s Liikanen and Makuch expressed similar views. ECB President Draghi also reiterated that the ECB “stands ready to act” to ensure the ECB’s inflation mandate is fulfilled, the ECB’s updated forward guidance implies that short-term real interest rates “will become more negative” over time. Draghi added the ECB is “looking with attention” at EUR developments. Jawboning the EUR lower by the ECB should continue given the proximity of the EUR to 1.3950, the last time Draghi talked the EUR lower. The ECB’s Linde speaks today (midnight AEDT). Earlier this month Linde was quite explicit stating that further EUR appreciation “could lead to additional measures”.
In New Zealand rates, the excitement of the RBNZ’s policy normalisation is dying down, for now. NZ rates closed down 1bp yesterday in very light trading conditions. And the curve is struggling to find direction this morning. We suspect the NZ rates market has entered another quiet period. Gradual pay-side pressure is coming through from mortgage-related fixing (as we have anticipated). However, the pay-side pressure is being largely offset by offshore receiving and short covering. The market is evenly balanced for now. Rallies in rates (drop in yields) are likely to be shallow and used as paying opportunities as we approach the CPI data and the 24 April OCR review. NZ balance sheets still have a large proportion of mortgages floating or fixed for <1yr (~75% according to RBNZ data). The risk remains that a shift towards longer term fixed rates (2 to 3-years) continues. The New Zealand CPI report is due for release on 16 April. Until then, Kiwi rates will be driven predominantly by offshore events.
USD/CNY dipped below 6.18 over the last 24 hours, but has since lifted again to the 6.200 level. We believe the central bank has scaled back its aggressive USD buying seen in recent weeks. As a result, USD/CNY should be capped at 6.25 levels. In the offshore CNH market, USD/CNH continues to trade at a discount to its onshore counterpart, albeit with a smaller differential, as speculation of CNY appreciation appears to have reduced, given some concerns about China’s economic outlook.
Elsewhere in Asia, the final release of Korea GDP data due today for Q4 2013 is expected to show no change on the prior estimate, with GDP rising a solid 0.9%QoQ, courtesy of a pickup in business investment and inventory building boosting growth. Annual growth is expected to remain unchanged at 3.9%YoY. Little change is expected in rates at tomorrow’s Asian central bank meetings. In Taiwan, the Central Bank of the Republic of China (Taiwan) is expected to leave rates unchanged at the low of 1.875%, despite the Q4 2013 lift in domestic demand. In the Philippines, no change to the record low 3.5% is expected by Bangko Sentral ng Pilipinas (BSP), although recent comments by BSP Governor Amando Tetengco that “early, measured adjustments” to monetary policy may be “less disruptive” have raised the risk that BSP may lift rates earlier than the market consensus which is for rates to rise to 4.0% by Q4 2014.
GBP/USD remained in a relatively tight range, but managed to edge slightly higher. UK February inflation eased lower to 1.7%, remaining below the BoE’s 2.0% inflation target for the second consecutive month since late 2009. UK rates largely ignored the inflation data, with yields lifting slightly in line the intra-day global trend. Thursday’s UK retail sales may have more of an influence on the exchange rate. But we don’t anticipate a large move, and for GBP/USD to remain in a 1.6450 to 1.6620 range for the rest of this week.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – Durable goods orders (today); GDP Q4 (Thursday); FOMC speakers: Pianalto (Thursday).
AUD – RBA Speakers: Stevens and Lowe (today); RBA Board meeting (1 April); Stevens speech (3 April).
EUR – ECB member Linde speaks today (midnight AEDT); Eurozone CPI (31March).
GBP – Retail sales (Thursday); GDP, Current Account (Friday); BoE speakers: Dale (Friday).
NZD – Trade balance (Thursday).
JPY – CPI (Friday).
CAD – GDP (31 March).