CBA FX Strategy
23, April 2014
New York Open
Thoughts from our Strategy Team
EUR/USD lifted on better-than-expected April Eurozone PMI data to hover firmly above its 50-day moving average.
AUD/USD declined a full cent following lower than expected Q1 Australian CPI data.
GBP/USD softened modestly following today’s BoE minutes but should remain supported at its multi-year highs.
NZD/USD continues to trade around 0.8600 ahead of the RBNZ meeting, where a +25pbt rate hike is widely expected.
USD/CNY inched higher towards 6.25 in early Asian trading, although the push lost steam later on a softer USD.
AUD/USD fell a full cent in today’s Asian session on lower than expected Q1 2014 Australian CPI. AUD also underperformed on the crosses. The headline Q1 CPI rose by 0.6% (QoQ) or 2.9% (YoY), a bit below market expectations (market and CBA: +0.8%/3.2%). The underlying measures of inflation were also below expectations. The RBA’s preferred underlying inflation measures averaged out at 2.7%pa in Q1, a touch below the RBA’s forecasts published in the RBA’s February Statement on Monetary Policy. On a six-month-ended basis that smooths out some of the quarterly volatility, underlying inflation was running at an annualised rate of 2.8% in QI. Following the higher than expected Q4 2013 inflation print, the Q1 CPI data should calm immediate fears about high inflation in Australia. Australian two-year swap rates moved some 6bpts lower to 2.95% after the CPI data. In addition to the Australian CPI data, the flash estimate of the HSBC China manufacturing PMI printed on expectations, rising from 48.0 in March to 48.3 in April. While the HSBC China PMI remains below 50, this was the first monthly increase in 6 months. While AUD may continue to underperform in early US trade as offshore participants react to the Australian CPI data, we think AUD/USD should find support around 0.9246 (30-day moving average). In our view, the fundamental backdrop remains unchanged. Australia’s economic transition away from mining-investment led growth continues to come through, and the RBA has switched to a clear "neutral" bias. We continue to expect the next move by the RBA to be a rate hike in November 2014. Australian interest rate markets continue to have the first RBA rate hike priced for June next year. Added to this the USD continues to underwhelm.
EUR/USD lifted on better-than-expected April Eurozone PMI data to hover firmly above its 50-day (1.3794) moving averages. Eurozone business surveys have consolidated in positive territory recently and the improving trend continued in April. Eurozone composite PMI rose to 54, its strongest since mid-2011, led mainly by the outperforming German survey. The outperformance placates somewhat market concerns over stalling momentum in Eurozone economy, which, coupled with already slow inflation, could increase expectations of further ECB policy support. On the other hand, in line with the recent trend, Eurozone policymakers continued to make comments yesterday, with the ECB’s Coeure and Linde reiterating that the ECB has measures available to loosen monetary policy further, particularly if the EUR remains strong. Linde also noted that if Eurozone inflation does not bounce back in April/May, this could trigger a policy response. A couple of ECB officials, including President Draghi are scheduled to speak tomorrow. This would apply modest amount of downward pressure on the EUR. However, given the Eurozone’s real interest rate advantage and large current account surplus, any moves in EUR/USD should remain fairly muted.
GBP/USD endured intraday volatility into European session and softened slightly following the minutes of the April BoE meeting. The April BoE minutes appears more upbeat with BoE opining that “the domestic economy was building momentum with some signs of modest rebalancing towards investment”. The decision to keep the key rate unchanged at 0.5% and maintain the stock of asset purchases at GBP 375bn was unanimous before the fall in February unemployment rate to below 7% last week. On the other hand, inflationary pressure appears to have “eased further” and should remain muted, partly due to recent GBP strength, according to the minutes. Overall we expect GBP/USD to remain supported around its multi-year highs. Ongoing reaction to the lower than expected Q1 2014 Australian CPI data and the GBP supportive factors outlined above, combined with the upside risks we see to March UK retail sales (released Friday) suggest GBP/AUD can continue to grind up towards 1.8229 (50-day moving average) in the near-term.
Although it has edged modestly higher today, EUR/GBP remains near its lowest levels since late February. In our view, the diverging outlook for ECB and BoE monetary policy and persistently negative German-UK two-year swap spread should limit gains and ultimately dampen EUR/GBP. In the wake of the Australian CPI data, EUR/AUD has bounced back to its highest levels since early April. Given the low Eurozone CPI, patchy recovery and potential for further ECB policy easing, we think the rally in EUR/AUD may peter out around 1.4943 (30-day moving average).
NZD/USD softened slightly to below its 30-day moving average (0.8607), ahead of today’s RBNZ policy meeting (5:00pm). We and the overwhelming market consensus expect the RBNZ to raise rates by another 25bpts to 3.00%. Attention will be on any interest rate guidance and/or any commentary around the NZD, given the NZD TWI is tracking above the RBNZ’s March forecasts. Nevertheless, we do not expect the RBNZ to view the NZD as “overvalued”. In our view, New Zealand’s high terms of trade, strong exports, solid economic momentum and interest rate advantage suggest the high NZD is fundamentally justified. For these reasons, combined with a soft USD, we don’t see too much downside in the medium-term NZD outlook, and believe solid support for NZD/USD is likely to be found at 0.8515 (50-day moving average).
USD/CNY fixing came in flat and largely conforming to market expectation at 6.1599 today. However, the People’s Bank of China (PBoC) appears to have intensified its intraday intervention, lifting USD/CNY spot 1.4% above its midpoint, its most since the March trading bank widening. Into the closing minutes, the upward push lost some steam on a softer USD and the pair closed at 6.2380, just above yesterday’s 6.2370. We continue to see upside risk to USD/CNY towards 6.25 levels in coming sessions. USD/CNH is trading at a small premium to its onshore counterpart, signalling concerns in the offshore renminbi market over PBoC’s action. We maintain our long USD/CNH position initiated at 6.2025.
Elsewhere in Asia, while refraining from another rate cut as expected, the Bank of Thailand (BoT) maintained its easing bias. We believe continued easing bias and deteriorating fundamentals on festering political turmoils should weigh on the domestic currency. We expect USD/THB to edge higher to 32.80 in coming weeks (see attached note). With spot finishing above 11,500 on Tuesday and today’s fixing set at 11,590, USD/IDR rose early in Asian trading. Mid-year earnings repatriation overseas were partly responsible for the spike, although the election outcome and persistent inflationary pressure have also dampened fund inflows. However, as we expect USD to remain somewhat sluggish in the short-term, we expect USD/IDR pair to tread between 11,250 and 11,750 with risks chiefly on the upside.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – US Durable Goods Orders (Thursday)
AUD – Official China PMI (1 May).
NZD – RBNZ Monetary Policy Meeting (today).
GBP – UK retail sales (Friday), UK Q1 GDP (29 April).
EUR – German IFO (Thursday), European Commission Forecasts (28 April), April CPI (30 April). ECB Speakers: Knot, Draghi and Constancio (Thursday), Knot (Friday).
AUD & NZD Today
AUD a full cent lower following softer CPI which came in at 0.6% q/q vs consensus of 0.8%. The HSBC Flash China PMI which came in at 48.3 also did not help the Aussie's cause. Aud plunged following the CPI release with macro accounts the main sellers, taking out stops through 0.9290. The move ran out of steam in London and has since stabilized. Plenty of exporter interest now sitting right around 0.9250 support. Topside resistance 0.9310/20 and then 0.9350. Worth keeping an eye on EUR/AUD which broke the 200dma and now looks to re-visit 1.4960 triple top. A break there may lead to further Aud weakness.
Nzd – dragged slightly lower in sympathy with the Aud overnight but overall remains sidelined ahead of RBNZ today at 5pm. We and the overwhelming market consensus expect the RBNZ to raise rates by another 25bpts to 3.00%. Attention will be on any interest rate guidance and commentary during Gov Wheeler's Statement of Monetary Policy following the announcement with particular attention to any comments around the high currency given the NZD TWI is tracking above the RBNZ’s March forecasts. Macro selling interest 0.8625 and 0.8650
Thoughts from our Trading Team
Early Stop loss run from 1.3815 to 1.3837 paid. 2 year rate difference suggests we should be closer to 1.3750. We drift back to 1.3820 prior to French PMI, which is weaker the pair drops to 1.3800 & remains there until German PMI stronger (no shock there) back to pivotal 1.3820 as we await Euro Zone number, which comes in above expectations as one would have expected with the stronger German release earlier and so Euro trades back above 1.3830 and onto 1.3855. The Market continues to fight and remain short including myself, at the moment it’s a losing battle. Stops will be placed up to 1.3910 dependant on parameters. Price below 1.3780 required to give solace to the shorts. 1.3820 remains the short term pivot.
The JPY has been very quiet today, gravitating towards 102.50 again. Japanese banks good sellers off the 102.50 level taking us to 102.17.
Cable sidelined and range-bound (1.6800-33) over the BOE Minutes this morning. EUR/GBP squeezing a few shorts up to .8240, but this was via pure Eur strength rather than anything GBP related. 1.6770/80 remains key downside support, against the 1.6844 recent high continuing to stifle attempts to the topside.
As with EUR/AUD and EUR/crosses in general, should they continue to cause topside pain, we may see resolve tested of those who instigated Cable longs yesterday on the M&A hype…
AUD was the big mover in Asia, but London has reversed that trend and sat inside a dull .9270-86 range. With Eur having all the attention, we eye EUR/AUD currently, which having broken cleanly up through the 200dma at 1.4845 overnight, now closes in on the H&S neckline re-visit at 1.4960. This is also the home of a few previous highs, so care a break of this level may lead to further AUD weakness to counter any exporter demand at current levels. .9250-.9320 the initial range, support and resistance levels for AUD/USD.
NZD sidelined ahead of today’s RBNZ meet, continuing to trade around the vast amount of Gamma located at .8600. 1.0769 (100dma) + 1.0750 (55dma) provide support levels for the cross following its fallout over the past 24 hours.