CBA FX Strategy
7 April, 2014
New York Open
USD had a limited reaction to the US March non-farm payrolls report, which was largely in line with expectations and resulted in no change to the 6.7% unemployment rate. While the bond market had a bigger reaction to the US jobs report (see below) the USD put in a mixed performance against the majors. We don’t expect much USD movement this week. The minutes of the FOMC’s March 18-19 meeting (Thursday) are likely to gain the most market attention, but not result in a significant USD movement.
In US rates, investors unwound short positions and US Treasuries rallied across the curve. Market participants focused on the near-miss of the headline non-farm reading (+192k versus 200k consensus), rather than the strength of the details. The revisions to the previous monthly prints, and the strength of the underlying details suggest the US labour market is improving from the winter chill. For now, it is not enough to satisfy the market, and the US data-surprise index fell further Friday night. Yields in the belly of the curve fell the most, with the 5 and 7-year sector of the curve down 10bps. The 10-year note pushed 7.5bps higher, sending the yield down to 2.72%. The 10-year yield has traded effectively sideways over the week, and remains well within the steadfast 2.6% to 2.8% trading range. The FOMC minutes will be the focus this week. The risk is the minutes are “hawkish” but we expect Treasury yields to remain within the recent trading range. We maintain our short duration bias, however. The US data shows continual improvement and the Fed are likely to stick to the process of tapering $10 billion per meeting.
AUD/USD unwound some of the gains in today’s Asian session made after the US March non-farm payrolls on Friday, but good near-term support for AUD should be found at 0.9250. AUD has been the best-performing currency for three consecutive weeks as confidence grows about the ability of the Australian economy to successfully shuffle the drivers of economic growth. In our view, AUD/USD is likely to continue to press on towards our near-term target of 0.9353 and then over time to 0.9500. This week’s local Australian economic data is rather light until Thursday, when the March Australian employment report is due. Consensus is a small 2.5k gain in monthly employment after last month’s strong 47.3k gain (CBA forecast is +11k). However, the risk is for a weaker employment report and a stronger than expected 0.1% lift in the unemployment rate to 6.1%. In such an environment, AUD would risk dipping to the 200 day moving average of 0.9139 before finding support. China’s March international trade data (Thursday) may add an additional amount of excitement on the day.
In Australian rates, the local market is well bid (yields lower) following the rally in the US market Friday. Australian 3-year and 10-year bond futures contracts have rallied 6-8bpts (lower in yield). The move has underperformed the US rally of Friday night, and the Australia-US interest rate differential has widened this morning. The focus this week will be on the Chinese economic data, and Australia’s employment report Thursday. The Australian employment report is particularly interesting this week, given the strength of the last two reports. In a typical “mean-reverting” fashion, consensus has been slashed to just 2.5k. A weak report would hold yields down this week.
USD/JPY stayed down in the Asian and European morning sessions after slumping following the release of weaker than expected US non-farm payrolls for March (even though the revisions were supportive). We estimate Japan’s current account returned to a very small surplus (of around ¥100 billion) in February after printing a record monthly deficit in January (Tuesday). A return to surplus for Japan’s current account should be a headwind for USD/JPY this week. The Bank of Japan meets on Tuesday though we expect no change to monetary policy. The consumption tax was increased (from 5% to 8%) only last week. It is too soon to judge the full effects of the tax increase on the Japanese economy. If the BoJ is going to loosen policy to support the economy following the tax increase, it is likely to move later in the year. At its 30 April or 15 July meetings, the BoJ releases updated economic forecasts which account for new information about the effect of the tax increase on the Japanese economy.
NZD/USD was firmer following the US non-farm payrolls outcome. NZD/USD pushed back up to around the 0.8600 level at the end of the week. With a lack of domestic New Zealand economic catalysts this week, the NZD will be directed by offshore developments. We think the risk is a further decline in NZD as extreme-long positions are wound back slightly, with NZD/USD fading back to find good support at its 30-day moving average (0.8518).
EUR/USD continued to grind lower and is now nearly 2% below its mid-March high. EUR/USD is currently sitting just above its 100-day moving average (1.3691). AUD/EUR has also pushed up above 0.6756 (200-day moving average). We think the bias is for EUR to grind marginally lower, but not fall below 1.3600 this week. There is little market moving Eurozone data released this week. February German industrial production released today was a little stronger than expected but is unlikely to challenge the dovish stance of the ECB, who are openly discussing the prospect of a different form of quantitative easing. There are a number of ECB officials speaking this week, including Vice President Constancio. Should policy be discussed, we would expect the risk of further action to combat the deflationary risks, will remain topical. In line with last week’s published strategy, we think AUD/EUR can continue to grind up towards 0.7030 (EUR/AUD down to 1.4225).
GBP underperformed both the USD and AUD in the wake of Friday’s US non-farm payrolls report. This week February UK industrial production is released (Tuesday) and the BoE policy meeting is held (Thursday). We expect no change from the BoE. Given the improvement in the UK economy, the debate has shifted to when the BoE could tighten policy. Based off the short-sterling futures curve, the market is pricing the first BoE rate hike for Q4 2014. While we think this is slightly aggressive, there should be nothing to challenge the markets view this week. This should keep GBP supported against the USD and EUR this week. However, given the firmer AUD, we think AUD/GBP can continue to grind up modestly this week, but may dip slightly following the Australian labour force report (Thursday).
USD/CAD fell to its lowest in a month on Friday, pushing below 1.1000 for the first time since early March. The catalyst was the stronger Canadian March employment data, which was released at the same time as US non-farm payrolls. Canadian employment rose by a stronger than expected 42.9k in March (vs 25.0k consensus). The stronger than expected rise in jobs saw the unemployment rate move back below 7.0% but remain above the US 6.7% unemployment rate. Later in Friday’s session, the weaker than expected (but volatile) Ivey PMI index saw some intraday volatility in USD/CAD. Signs that the Canadian economic data is moving beyond recent the weather-related impacts is likely to support CAD, with USD/CAD likely to remain towards the lower end of its recent range. The negative US-Canada two year bond spread is likely to keep USD/CAD heavy.
USD/CNY started the week slightly higher and remains above 6.2100. There was no “fixing” of the CNY today because of a market holiday (Tomb Sweeping day). We believe the PBoC is likely to keep the fixing steady close to current levels, and above 6.15 in coming sessions. USD/CNY has remained around 1% higher than its midpoint for the past week. With fixings above 6.15, USD/CNY could test 6.25 if the PBoC decides to utilize the entire 2.0% trading band. USD/CNH continues to trade at a discount to USD/CNY reflecting a degree of expectation by market participants of further CNY strength.
Elsewhere in Asia, USD/Asia lifted following the US non-farm payrolls data. Two Asian central banks meet this week. Bank Indonesia is expected to keep its reference rate unchanged at 7.5% following its meeting on Tuesday, as it seeks to continue to guide inflation back towards its target rate of 4.5% for 2014. On Thursday, a no change decision by the Bank of Korea (BoK) is also expected. The BoK is expected to lift rates later in the year, as the new central bank Governor Lee Ju Yeol seeks to balance some modest risks to the Chinese economic growth outlook with financial stability concerns from South Korea’s heavily indebted households.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – FOMC Minutes (Thursday). Fed speakers: Bullard (Monday), Kocherlakota, Plosser (Tuesday).
AUD – Labour force (Thursday); RBA Minutes (15 April). RBA Speakers: Guy Debelle (15 April).
EUR –ECB monthly report (Thursday); Industrial production (14 April), ZEW, Trade balance (15 April). ECB speakers: Mersch, Nowotny, Weidmann, Constancio (today); Weidmann (Tuesday 8 April).
GBP – Industrial production (Tuesday)
NZD – CPI (16 April).
JPY – Current account, Bank of Japan meeting (Tuesday)
AUD & NZD Today
Sideways sessions overnight for AUD and NZD to start the new week, it is difficult to see either of them breaking out of these established narrow ranges with good interest noted 20-30 points either-side from current spot levels this morning … Kiwi had two attempts to extend over 0.86c overnight each time running into strong Real Money account selling which encouraged some intraday accounts to establish fresh shorts, with the downside of 0.8530/60 holding plenty of Exporter interest we would look for a 0.8550/0.8620 range to contain NZD on the day. AUD similarly remains wedged between corporate selling from 0.93+ and Exporter bids 0.9200/30 which will ensure we don’t go too far …. the March Employment data is the key release later this week where most interest centers around any significant correction to Feb’s very strong number of +47.3k, the next few days also sees the release of Consumer and Business confidence data in Australia.