CBA FX Strategy
9 April, 2014
New York Open
USD index consolidated yesterday’s weakness today but was little changed. We have come to the view the USD will remain heavy until the real Fed funds rate turns positive in late 2015/early 2016. It has been conventional wisdom among market participants that the USD would strengthen as the FOMC tapered asset purchases and US 10 year Treasury yields increased. While US 10 year Treasury yields have increased around 100 basis points since Bernanke first hinted the FOMC would taper its asset purchases in May 2013, the USD has weakened rather than strengthened (see chart). While we acknowledge the USD up-cycle could happen sooner than late 2015/early 2016, when the real US-G6 2 year swap rate differential turns positive around late 2014/early 2015, the USD is likely to stay heavy in 2014. The FOMC minutes may provide some short term support to the USD (2:00pm). The risk is the FOMC minutes are deemed “hawkish” and the USD lifts temporarily.
AUD/USD continued to punch higher, after hitting our near term target of 0.9353 yesterday. Stronger than expected Australian housing finance data for February provided a boost to AUD. Tonight’s March Australian employment report is the major Australian data release for the week (9:30pm). While a softening in headline jobs growth is likely following last month’s stronger than expected 47.3k jobs rise, the average statistical payback factor might not be enough to bring about a negative jobs outcome. However, we think that the risk remains on the unemployment rate front. With the unemployment rate currently pushing the top of the rounding barrier to stay at 6.0%, there is a risk that a weak jobs outcome could see a pop up to 6.2% (consensus 6.1%, CBA forecast 6.0%). The FOMC minutes may also be a headwind to gains in AUD in the near term though will still see AUD reaching 0.9500 in coming weeks because we expect the USD to remain heavy and the OIS market to price in more and earlier rate hikes by the RBA. March Chinese trade data is another AUD risk-event tomorrow.
In Australian rates, the curve is again better bid and 1-2bpts higher (lower in yield) this afternoon. The 3-year bond futures contract has been trading at 96.96 to 96.97 and is searching for a break higher or lower. That catalyst may be found in tomorrow’s employment report, which is known as the employment lottery for a reason. The rally in rates markets over the last three seasons suggests the market is now more at risk to a stronger number than a weaker number. And this is the view of CBA economists. We see the report delivering a solid 11k, versus consensus of just +2.5k, and a number of prominent forecasters call for deep negatives. Risk/reward in terms of market reaction may be tilted towards a stronger number, in our opinion.
GBP consolidated today, with GBP/USD remaining around its recent multi-year highs. The UK’s front-end yield advantage should keep GBP relatively well supported against the USD. The diverging perceptions regarding ECB and BoE monetary policy and persistently negative German-UK two-year swap spread should continue to dampen EUR/GBP. GBP/AUD looks set to remain range bound in the lead up to tomorrow’s Australian employment and Chinese trade data releases.
EUR/USD was little changed from yesterday’s highs around 1.38 levels. Today the ECB’s Coeure speaks (10:00am and 2:00pm). Should policy be discussed, we expect the risk of further action to combat the deflationary risks will remain topical. This would continue to weigh on the EUR relative to GBP and the AUD.
USD/CNY midpoint was set higher than expected in the past three sessions, although it dipped slightly below the 6.15 level for the first time in a week. USD/CNY closed at 6.20 as the central bank bids pushed the pair up in the final two hours. On that note, intraday USD buying by the People’s Bank of China (PBoC) has subsided but remains prevalent, with USD/CNY spot remaining 0.8% above its midpoint. The offshore USD/CNH settled with a negligible discount reflecting heightened anxiety over the PBoC’s action in coming sessions. While the central bank has been successful in instilling a significant amount of uncertainty (without much success in creating volatility, yet), the US appears increasingly impatient over the recent CNY weakening path. The Treasury warned that it would be concerned if China retreats from easing control of the yuan. More interestingly, our whirlwind tour (seven meetings today) of some major Chinese bank names pointed to lingering confusion as the PBoC maintains tight controls over lending activity. We believe the trade-off from further lifting USD/CNY at the risk of fuelling faster credit expansion should keep the central bank cautious.
USD/KRW pushed to its lowest since August 2008 in early Asian session, as market participants became increasingly comfortable that the Bank of Korea (BoK) was prepared to tolerate a stronger KRW. There was a larger than expected fall in South Korea unemployment rate (from 3.9% in Feb to 3.5% in March [3.6% expected]). This, along with the softer USD, and Korea’s large current account surplus has weighted on USD/KRW, although the central bank was seen to have capped the downside at around 1,042 levels in late Asian trading. The BoK meets to discuss policy on Thursday. The consensus is for no change in rates, and the BoK is likely to delay the commencement of its tightening cycle until Q4 2014/Q1 2015. In the near term, we expect USD/KRW to remain heavy on a softer USD outlook.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – FOMC Minutes (Today), retail sales (14 April), CPI (15 April). Fed speakers: Evans, Tarullo (today), Stein (13 April), Lockhart, Yellen, Plosser, Rosengren (15 April).
AUD – Labour force (Today), 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: Lautenshlaeger, Coeure (today), Praet, Constancio (Thursday).
NZD – CPI (16 April).
JPY – Industrial production (16 April) BoJ speakers: Kuroda (16 April).
CAD – Bank of Canada rates announcement (16 April), CPI (17 April).
Asian central banks – Bank of Korea (Today), Bank of Thailand (23 April).