CBA FX Strategy
2 April, 2014
New York Open
The USD index, while little changed post-FOMC in the past two weeks, continues to trade with a heavy tone. Today’s ADP employment report (8:15am) will help participants finalise expectations for the Friday’s non-farm payrolls report. Expectations are for both ADP employment and non-farm payrolls to lift in March. While we think the improving US economic data should mildly support the USD, we don’t anticipate a strong USD reaction. The mix of the US’ current account deficit (1.9% of US GDP) and negative real US interest rates look set to keep the USD relatively well contained (see attached note on “Why has EUR been so strong”).
AUD/USD recovered somewhat into European trading having drifted lower following yesterday’s RBA Board meeting. AUD remains above its lows for the week. AUD also dipped against the EUR and CAD, but outperformed the JPY. Mixed second tier Australian economic data was of little influence on the AUD. Australian building approvals data for February was slightly weaker than expected, with the volatile series falling 5%MoM (vs -2% expectations) after a 6.9%MoM lift in January. Official Australian job vacancies data for the three months to February showed some stabilisation, with a 2.6% lift after vacancies fell 0.8% over the three months to November 2013 suggesting tentative signs of a stabilisation in the labour market. Attention now turns to RBA Governor Glenn Stevens’ speech tomorrow (10:00pm). We do not expect the RBA Governor to explicitly talk down the AUD, most probably due to underlying inflation concerns. Overall, we expect the AUD to remain firm, supported by robust underlying fundamentals and a lack of USD strength. These underlying factors should help AUD rebound on the crosses, particularly AUD/EUR given the likelihood of a dovish ECB meeting on Thursday.
In Australian rates, yields pushed 2-4bpts higher in today’s Asian session. The rates curve bear steepened marginally, with 2yr swaps up 2bpts, and 10yrs up 3bpts. Relative to yesterday’s RBA post meeting statement, tomorrow’s speech by Governor Stevens is a better platform to elaborate on any incremental changes to the RBA’s thinking. We are much more likely to see a reaction in the rates market to the Governor’s speech tomorrow. We believe the Governor will continue his “glass-half-full” approach, and may discuss the Australian housing market in more detail. Stevens’ comments are likely to support the idea that the next move in RBA policy is a hike, and that the Australian rates market is currently under-pricing this risk.
NZD/USD continued to push lower today, and is more than 1.5% lower than yesterday’s intraday high. Dairy prices fell 8.9% at yesterday’s GlobalDairyTrade auction. Volumes offered have been very high, with prices easing at the past 4 auctions. With the NZ dairy season still in full swing, but drawing to a close, strong auction supply volumes are likely to weigh on prices over the next few months. However, prices remain historically high, supporting New Zealand’s terms of trade and the NZD, as the economy benefits from stronger volumes and elevated prices. There are no New Zealand economic releases of note this week. The next major piece of New Zealand economic data is the Q1 2014 CPI release (16 April). In our view, the decline in NZD is likely to peter out. Given the 40-year high New Zealand terms of trade, RBNZ rate hike expectations and the improving New Zealand economy, NZD should remain well supported. The macro economic backdrop outlined above should also support NZD on the crosses, particularly against the EUR, JPY and CHF. AUD/NZD should remain in its recent range. But over the medium-term, we continue to think AUD/NZD has bottomed and should grind higher over 2014.
USD/JPY jumped higher in Asian trade. The slightly disappointing Q1 2014 Tankan survey of Japanese businesses, improved global risk sentiment, easing Ukrainian tensions and slightly firmer USD is likely to see further gains in USD/JPY, as is the reduced Japanese current account surplus. While Japan’s economy is likely to be strong in Q1 2014, we would warn that much of the strength in Q1 may reflect a “bring forward” of spending ahead of yesterday’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.
GBP/USD entered European session with trading at its intraday high of 1.6664. We remain of the view that Thursday’s UK services PMI is also likely to moderate slightly. Nevertheless, the UK PMIs remain at historically high levels and are indicative of positive momentum in the UK economy. The positive momentum in the UK economy and ongoing market expectations that the BoE could begin to tighten policy later this year should support GBP against the USD and EUR.
USD/CNY midpoint was set lower-than-expectation for the second session, while remaining around 6.15. 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 the past two sessions. Spot CNY was relatively unchanged, finishing around 1% above the midpoint, although the PBoC appeared to have scaled back its intraday USD buying somewhat. The current midpoint provides the PBoC with the opportunity to push spot USD/CNY up above 6.25, if the central bank’s objective is to briefly utilize the entire 2% band width. In the offshore market, USD/CNH traded at a slightly wider discount to its onshore counterpart, reflecting primarily a sluggish USD. In our view, the PBoC could keep the mid-point steady over coming sessions, and as a result we recommend establishing cautious USD/CNH longs targeting 6.25.
Elsewhere in Asia, USD/Asia traded mostly listless in sympathy to a lethargic USD and ahead of the Friday’s payrolls data. We have seen sizable positioning move in SGD in the past two weeks, with SGD nominal effective exchange rate (NEER) rallying by 1%. Market expectation centres squarely on a no-change decision to the existing “modest and gradual appreciation” stance, although we believe the speedy recovery in SGD NEER has run ahead of weak price developments more recently and continued uncertainty over growth outlook in coming quarters. With Monetary Authority of Singapore (MAS) meeting looming, we re-entered a tactical short SGD/MYR 1m fwd trade (see attached note).
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – ADP, factory orders (today), ISM non-manufacturing (Thursday), payrolls (Friday). Fed speakers: Lockhart, Bullard (today), Fisher (Friday).
AUD – Retail sales, trade balance (Thursday). RBA Speakers: Glenn Stevens (Thursday).
EUR – PMI composite, ECB meeting (Thursday). ECB speakers: Draghi (Thursday).
GBP – services PMI (Thursday), industrial production (8 April). BoE speakers: Cunliffe (today), Haldane (Friday).
NZD – CPI (16 April).
JPY – Current account, Bank of Japan meeting (8 April).
CAD – trade balance (Thursday), employment, Ivey PMI (Friday).
Asian central banks – Bank Indonesia (8 April), Bank of Korea (10 April).