CBA FX Strategy
10 April, 2014
New York Open
Thoughts from our Strategy Team
The USD steadied, after softening yesterday on the back of the minutes of the 18-19 March FOMC policy meeting. The USD index remains in the bottom of the relatively narrow 3.1% range it has occupied since late September. The minutes were viewed as being more dovish than the perceived hawkish turn of the FOMC in the wake of the meeting announcement. The FOMC minutes tried to temper the interpretation of the updated Fed funds rate projections. More specifically, “several participants” indicated that the “increase in the median projection overstated” the shift up in the Fed funds rate projection path, and “some” members were concerned that it could be misinterpreted as the FOMC having a “less accommodative reaction function”. In addition, the increased focus on the slack in the labour market echoed Fed chair Yellen’s recent speech and highlights the dovish leanings of the FOMC. These leanings were reinforced today by dovish FOMC voter Tarullo, who said that the Federal reserve shouldn’t raise interest rates ‘pre-emptively’ and that the FOMC should wait for evident that the recession and high unemployment had reduced the amount of slack in the US labour market The FOMC minutes support our view that the USD will remain heavy, and could remain so until the real Fed funds rate turns positive in late 2015/early 2016, or at the very least until the real US-G6 2 year swap rate differential turns positive in early 2015.
AUD/USD continued to push higher. Reaction to the dovish FOMC minutes and a stronger than expected March Australian employment report supported the AUD. Australian employment rose 18.1k in March (+2.5k consensus, CBA +11k), and the unemployment rate fell to 5.8% (6.1% consensus, CBA 6.0%) which is the lowest since November 2013. Jobs growth was all part time, and the sizeable fall in the unemployment rate was driven by a fall in the participation rate. While these factors do take some shine off the strong report, the fact remains that the exceptionally strong February jobs outcome (upwardly revised to 48.2k) was followed by further jobs gain. Today’s Australian employment outcome, along with signs of a turnaround in job ads and the employment sub index from the NAB survey, suggests that the unemployment rate may have already peaked. This would support our view that the RBA could lift rates later this year. Some of the AUD’s gains today were given back following the surprisingly strong Chinese trade surplus (USD7.7bn vs US1.8bn expectation). China’s trade data showed weaker than expected export growth, which was coupled with substantially weaker import growth. In terms of impacts for Australia, China’s iron ore imports lurched higher (up 20.8%MoM), and the value of total imports from Australia was 8.5% higher YoY. The overall fundamental backdrop remains favourable for the AUD, and we continue to think AUD/USD can push up towards 0.9500 over coming weeks.
In Australian rates, the stronger than expected Australian employment report saw bonds sell off at the front end, with 2yr to 5yr yields 2-3bpts higher. The curve flattened, with 10yr yields 1pt lower. Swap rates were more responsive, with yields 3-5bpt higher out to 10yrs, but little change beyond.
GBP/USD remained around its new post August 2009 high. The Bank of England meets today (7:00am). We and the market consensus expect no change from the BoE. Based on the improvement in the UK economy, the debate among market participants has clearly 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 the market pricing is slightly aggressive, there should be nothing to challenge the markets view this week. 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 pushed to the lower bound of its recent range following the Australian employment and Chinese trade data releases.
EUR/USD consolidated yesterday’s move towards the top of the 4.2% range it has traded since mid-September. Two ECB Board members speak today. ECB chief economist Praet is a noted dove and speaks about “The financial cycle and real convergence in the euro area” (9:00am). ECB Vice President Constancio speaks about “Growing out of the crisis: Is fixing finance enough?” (12:00pm). Either of these speakers, but particularly Constancio, could point out the high EUR is a headwind to economic recovery and a headwind to the ECB meeting its inflation target. However, comments along these lines by either speaker is likely to have only a temporary dampening effect on EUR/USD because of the significant headwinds to the USD (see above), though EUR could continue to soften against AUD and GBP. We continue to think EUR/AUD can grind down to 1.4225.
USD/CNY midpoint was higher than expected again today, for the fourth straight session, lifting back up to 6.1510. USD/CNY pushed higher through Asian trade lifting back above 6.20 in tandem with a strengthening of the USD against Asian currencies. In the final hour of Asian trading, the People’s Bank of China (PBoC) lifted USD/CNY spot to 1% above its midpoint and the pair closed at above 6.2100. The offshore USD/CNH continues to closely track its onshore counterpart, with a negligible discount. Given the slew of higher-than-expected fixings and the fixation of PBoC with keeping the midpoint around 6.15 levels, we continue to risk to USD/CNY on the upside in the short-term even as USD performance remains sluggish.
USD/KRW rebounded from yesterday’s five-year low of 1031.55 to above 1040. The Bank of Korea (BoK) left rates unchanged, as expected, for the 11th straight month at today’s meeting. However, the BoK did note that KRW had appreciated considerably against the US dollar on capital inflows. 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, but the pair should hold 1030-40 levels, as market participants continue to reconcile the recent fall in USD/KRW and BoK’s rhetoric.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – Retail sales (14 April), CPI (15 April). Fed speakers: Stein (13 April), Lockhart, Yellen, Plosser, Rosengren (15 April).
AUD – RBA Minutes (15 April). RBA Speakers: Debelle (15 April).
EUR – ECB monthly report (today), industrial production (14 April), ZEW, trade balance (15 April). ECB speakers: Praet, Constancio (today), Draghi (12 April), Coeure (13 April).
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 Thailand (23 April).
Thoughts from our Trading Team
Post FOMC and essentially this morning is a carbon copy of yesterday albeit the pair is 70 pips higher. Brief sell off to our low 1.3837 and then a grind higher. The landscape has not changed with 2 year spread short term chart continuing to point Euro higher, corporates under hedged and market attempting shorts in the hope The ECB act on the strong currency. Reaction to continued Rhetoric is now shrugged off. 1.3880 & 1.3940 further points of pain. To the downside sub 1.3740 and perhaps the view has changed.
The USDJPY continues to track lower with the more dovish rate path presented by the FOMC minutes last night. The vast majority of short term players are long spot from what I have read and will be throwing in the towel below 101.20. Large bids appear on ebs from 50 down and we are sitting at the lows of 101.40 at the time of writing with 500 on the bid.
GBP/USD sidelined post last night’s moves.. Having opened around 1.6775, we traded an early 1.6800 high before giving back down to 1.6766… a failure to gain momentum on either side sees us greet the States in the middle of our range at 1.6780.
AUD continues to trade higher in the European session. We have seen some good buying interest in the 0.9450s with real bank names supplying the AUD. We have subsequently gone short at 0.9455 / 60, leaving room to add up at 0.9480 with a stop above 0.9500; looking for a move initially to 0.9400 followed by 0.9350.
Following the better than expected Australian employment data overnight, NZD interest so far today has been reflected all via the cross, … we opened Aud/Nzd around 1.0800, traded upto the 1.0820 REG offers which provided a temporary ceiling, until a 2nd wave of RHS flow took these out to quickly rally upto 1.0837 (just breaching the month 1.0835 highs). Interestingly, the cross flow exposed the weak side of the individual legs as NZD quickly fell off its .8740 perch, and was soon followed by the AUD giving back from the simultaneously made .9462 high. We greet the States with the cross still firm around 1.0835, and the legs around .9455 + .8722.
The big topside level of note for NZD/USD of course remains the all-time high of .8842 made on August 1st 2011.
AUD & NZD Today
A good print for March Employment data overnight (+18.1k with unemployment falling to 5.8% however Jobs growth was all part time, and the sizeable fall in the unemployment rate was driven by a fall in the participation rate) saw AUD spike nearly ¾ of a cent with the pairing pushing to near 0.9460 cleaning-out a large amount of Corp selling interest that was layered 0.9400/50 in the process … A combination of China’s Trade data showing weaker export growth and then Real Money selling from near 0.9450 has encouraged some profit taking by intraday longs seeing AUD back nearer 0.94c as NY walk in … today we have further Corp selling interest 0.9460/0.9500 while Exporters have again dragged their buying interest higher sitting it now 0.9350/80.
NZD also had a strong showing jumping above 0.8740 after the NZ PMI printed at 10 month highs before it ran into selling against the AUD cross which has seen the pairing drift back to the 0.87c mark … today we look for a 0.8670/0.8730 range, if AUDNZD can finally break through strong resistance into 1.0825/50 (which has held on 3 occasions so far this month) we would expect Kiwi to come under downside pressure drifting back to where Exporter buying sits below 0.8640.