CBA FX Strategy
1 April, 2014
New York Open
Thoughts from our Strategy Team
USD started the week on the back foot after FOMC chair Janet Yellen delivered a dovish speech on the US labour market and has remained unmoved through the Asian session. Yellen’s speech was notable because she, unusually for the FOMC chair, articulated her view rather than the FOMC view. Yellen cited four indicators that suggest there is greater slack in the labour market than the 6.7% unemployment rate suggests. Yellen considers “this extraordinary [monetary policy] commitment is still needed and will be for some time”. In our view, Yellen’s speech suggests there is little prospect for US monetary policy being tightened before the middle of 2015. Today’s manufacturing ISM should lift again in March to around 55 points and indicate strong expansion in US manufacturing (10:00am). We believe the ISM manufacturing survey is due to snap back from the severe weather affects, as the regional surveys (Empire State, Philly Fed, Chicago Fed, and Markit PMI) have picked up recently. Finally, the payrolls report (Friday) will be watched closely. A 200,000 outcome would meet expectations, no more. A significant print above 200,000 would fuel “risk on” sentiment and see the 10-year US Treasury yield break through the high-side of its recent range and move toward 2.9%. However, we do not expect a strong USD reaction to the US economic data, as market participants now await a “clean and clear” view on the US economic data that is not clouded by bad weather. Neither the FOMC’s higher end-2015 and end-2016 interest rate forecasts, or selected upside US economic data surprises have been able to generate a firmer USD. We believe it will take a lift in the real Fed funds rate to generate sustained USD strength.
In US rates, the Treasury market rallied back 1 to 3bps yesterday. Fed Chair Janet Yellen spoke of “considerable slack” in the labour market and the need to take “some time” to allow the accommodative policy settings to work. The speech was more dovish than expected. Over the first quarter of 2014, the US yield curve has “twisted”. The Jiu Jitsu throw has seen the 2 to 5-year part of the curve lift (in yield) back to the December highs, while the 7 to 30-year sector of the curve has fallen 10 to 40bps. The US 5s30s curve spread has fallen from 222bps on 31 December 2013 to 183bps on 31 March 2014. The major catalyst of the “twist”, was the FOMC statement two weeks ago that highlighted the likely (upward) path for the Fed Funds rate. The US Treasury curve underwent a sharp “bear-flattening” (yields higher and curve flatter) following the FOMC statement, with the 5-year selling off 20bps. The move was partially reversed overnight, however, with the Fed Chair’s latest comments. The US Treasury curve underwent a quick “bull-steepening” (yields lower and curve steeper) following Yellen’s more dovish comments, and the 5-year rallied back 3bps.
EUR/USD, following a mostly listless Asian session, rallied to its intraday high of 1.3882. The pair has been supported above its 50-day moving average (1.3725) and was lifted by the slightly better March German unemployment rate which kept flat from the downwardly adjusted 6.7% in February. Nevertheless, yesterday’s March Eurozone CPI disappointment heightens the risk of further action by the ECB when it meets on Thursday. While we do not expect the ECB to adjust its policy settings on Thursday, we think the ECB will stress that its policy easing options remain open in an effort to keep a lid on the EUR and its negative impact on Eurozone inflation. EUR/GBP, having endured an unexciting Asian session, rose quickly to its intraday high of 0.8285 above 50-day moving average of 0.8279, after March manufacturing purchasing managers index (PMI) softened unexpectedly to its lowest since July, although the gauge has remained in expansion territory for the past 12 months.
AUD had a rollercoaster day but treaded lower into European trading. The official China PMI printed slightly above expectations (pushing AUD up) while the HSBC China PMI final estimate printed slightly below expectations (pushing AUD down). The AUD spiked higher following the RBA’s policy statement as more participants reduced their net short AUD positions. The RBA retained its forward guidance that "the most prudent course is likely to be a period of stability in interest rates". Consistent with our view, the RBA appears to have finished talking the AUD lower because of underlying inflation concerns. AUD eventually eased, resting on the day’s low, as market participants chose to focus on a slightly negative comment on China’s economy by the RBA “it may have slowed a little in early 2014”. But we see further mild upside gains in AUD on as market participants reduce net AUD short positions and RBA appears to both have finished talking down the AUD and remain firmly committed to their neutral monetary policy bias. Australian swaps rates hardly moved following today's statement.
USD/JPY rose further into European session. The Q1 2014 Tankan survey of Japanese businesses painted a strong, albeit not as strong as expected, picture of the Japanese economy. We agree Q1 will be strong for Japan though warn that much of the strength in Q1 may reflect a “bring forward” of spending ahead of today’s increase in the consumption tax from 5% to 8% (as occurred in 1997). We expect a large fall in consumption spending after the tax is increased and see high risks the Bank of Japan increases monetary policy support that pressures Japanese swap rates lower, supporting an increase in USD/JPY and AUD/JPY.
USD/CNY midpoint stayed above 6.15 for the second straight session. The People’s Bank of China (PBoC) has been eying 6.15 levels in the past two weeks with six straight higher-than-expected fixings before yesterday. If the PBoC continues to push the spot top bound or 2% above its midpoint, USD/CNY should top around 6.25. However, intraday USD buying appears to have subsided somewhat with USD/CNY trading just 1% above midpoint. As a result, the pair closed just a tad above 6.20. In the offshore market, USD/CNH continues to trade at a modest discount to its onshore counterpart, reflecting primarily a sluggish USD. Given our expectation for the PBoC could lift the mid-point over coming sessions, we recommend establishing cautious USD/CNH longs targeting 6.25 (see attached note).
Elsewhere in Asia, the Reserve Bank of India (RBI) left its key policy rates unchanged today, as INR appreciation in recent months helped to stabilize inflation tentatively. However, with upside risk to inflation outlook lingering, the RBI will target 6% in headline CPI by 2016, which suggests that the policy rates will stay at current levels for a prolonged period of time. While relative valuation remains a compelling driver to continued INR outperformance, uncertainties arising from the upcoming election pose upside risk in the short term. As a result, while we anticipate further near-term strength in INR, with USD/INR likely to head toward 59.50, we closed our short KRW/INR 3 month non deliverable forward (NDF) trade position that was initiated on 6 February. In South Korea, USD/KRW fell to its lowest since mid-February 2014 as monthly trade data for April showed a strong rise in exports, resulting in the monthly trade balance surging to a larger than expected surplus of US$4.2bn (US$3.85bn expected). Exports rose by 5.2% on a year ago, solidly beating expectations for a 4.2%YoY increase, as the pace of growth in exports to China picked up. Korean CPI was weaker slightly softer than expected at 1.3%YoY (1.4% expected), and the Korean HSBC Manufacturing PMI lifted from 49.8 to 50.4 in March. We suspect part of USD buying is also being re allocated to regional currencies, leading to more pronounced divergence in currency performance in particular in KRW, MYR and SGD
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – ISM (today), ADP (Wednesday), ISM non-manufacturing (Thursday), payrolls (Friday). Fed speakers: Lockhart, Bullard (Wednesday), Fisher (Friday).
AUD – Retail sales, trade balance (Thursday). RBA Speakers: Glenn Stevens (Thursday).
EUR – PMI composite, ECB meeting (Thursday). ECB speakers: Draghi (Thursday).
GBP – BoE speakers: Bailey, Carney, Andresen (Monday), Bailey (Tuesday), Cunliffe (Wednesday), Haldane (Friday).
NZD – CPI (16 April).
JPY – Current account, Bank of Japan meeting (8 April).
CAD – employment, Ivey PMI (Friday).
AUD & NZD Today
AUD – a whippy session for the AUD with the official China PMI printing slightly above expectations while the HSBC China PMI final estimate printed slightly below expectations. Shortly thereafter the AUD spiked higher following the RBA, with more players reducing net short positions as current underlying inflation concerns are keeping the RBA mute on the high AUD. Macro accts were the main buyers overnight, however negative ‘slowdown’ comments from China has since pushed AUD lower during the London morning. Strong corporate interest today 0.9200-0.9230 should keep the AUD supported with offers 0.9300-0.9350 likely to cap the topside.
NZD- Real money buyers in London made another attempt to break through 87c, but failed for the 3rd time in the past week and Nzd has subsequently reversed course. 0.8700 should continue to remain toppy for the pair, with our traders looking to sell up there with a stop at 0.8750. Downside will continue to be very well supported with corporate bids 0.8640/50 and then 0.8600 with longs stopping on a break of 0.8590. Global Dairy Trade results due out this morning worth keeping an eye on.
Thoughts from our Trading Team
Stronger than expected European PMI’s across the board saw the EURUSD underpinned in early European trade, however we failed to break above the downward trend line dating back to the 18th of March and trouble the stops placed above yesterday’s 1.3810 high. Offers are camped from 1.3830 to 1.3860 and I feel this will be too far for the EURUSD to appreciate before the ECB on Thursday.
$/Chf tracked the EURUSD move, with EURCHF being offered in the morning with evidence of corporate interest to sell the pair from the 1.2200 level.
Very quiet trading in the USDJPY, with EURJPY being underpinned by the EURUSD appreciation post European PMI’s.
‘Weir Group in deal talks with Metso’ rumours assisted in EUR/GBP lifting during early trade from .8265 to .8280… the move higher continued following the release of the weaker UK PMI Manufacturing data which proved weaker than expected at 55.3 (56.7 survey), but a denial of the earlier M&A rumour helped cap the move just above .8290, and we greet the States around .8280.
Cable itself very uninterested trading around what appears to be a Strike at 1.6650.
Post RBA and Chinese data overnight has left the AUDUSD market in limbo at current levels. We have had a distinct lack of appetite to trade in either direction.
NZD trading on the firmer end of an .8671/02 range which has so far governed London… Global Dairy Trade results due out this afternoon one to keep an eye on. http://www.globaldairytrade.info/en/calendar/
$/Rub higher this am, taking its cue from $/Try and Zar.
Sharp reversal this am as $/Zar rallies from Far East low at 10.52 to currently 10.60 trading after a slightly softer PMI. Market depth clearly poor and susceptible to headlines, leaving trading to technical levels a crap shoot.
After the sizeable sell off post weekend and touching a low of 2.1360 yesterday and overnight in the Far East there has been some short covering as $/em in general rallies during the European morning, in thin trade, touching a high of 2.1537.