CBA FX Strategy
24 April 2014
New York Open
NZD/USD lifts after the RBNZ raises interest rates 25bpt to 3.00% as expected.
AUD/NZD declines below 1.0800 & is a full cent lower than pre Australian Q1 CPI. AUD/NZD risks overshooting on the downside.
Other AUD cross rates have partially recover following the Australian Q1 CPI dip.
The decline in GBP stemming from the BoE minutes appears to be an over-reaction.
USD/CNY rose above 6.25 for the first time since 2012 on PBoC intervention. USD/CNH moved in lockstep.
NZD/USD lifted after the RBNZ increased interest rates by 25bpts to 3.00% as expected and traded up to 0.8637, however, it has retraced in the London session and is trading heavy. The accompanying statement contained no major surprises. The RBNZ repeated that "the Bank does not believe the current level of the exchange rate is sustainable". But the RBNZ also acknowledges the helpful job the exchange rate is doing to help contain inflation pressures...."The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures, including the extent to which the high exchange rate leads to lower inflationary pressure". With regards to the level of interest rates, the RBNZ believes "it is necessary to raise interest rates towards a level at which they are no longer adding to demand". Our New Zealand based economists expect the RBNZ to raise rates by a further 25bpts in June, before pausing to assess the impact of the first few rate rises. The added conditionality inserted by the RBNZ suggests the NZD will be a key risk factor around the pace and extent of the RBNZ’s tightening cycle. Our New Zealand economists are looking for a 4.5% peak in the cash rate at the end of 2015. This is less than the RBNZ’s March MPS forecasts imply. We expect the NZD will remain strong, and see very little downside in the immediate future. Our year-end forecast for NZD/USD is 0.8700.
AUD/NZD has dipped and looks set to decline to the 30-day moving average of 1.0749 (and possibly below). The very interest-rate sensitive AUD/NZD exchange rate has come under downward pressure again after the Australia-New Zealand two-year swap spread declined towards its cyclical low. The combination of yesterday’s lower than expected Q1 Australian inflation data and the RBNZ interest rate increase has provided some solid grounding to drive AUD/NZD lower. However, the economic information delivered in the last two days is not enough, in our view, to send AUD/NZD below January’s 1.0493 cyclical low. New Zealand two-year swap rates have the RBNZ tightening cycle fully priced, while the Australian two-year swap rate and one-year/one-year rate remain near the middle or upper-end of their four-month range, and some 15bpts above their levels in January when AUD/NZD touched its cyclical low. The current Australian interest rate swap rates are consistent with the improvement in the Australian domestic economy this year and the RBA’s shift from an easing bias to a neutral bias in February. We look for opportunities to establish a medium-term long AUD/NZD positions if the AUD/NZD exchange rate falls more than 2.0% below the 30-day moving average of 1.0749 (in our view, an overshoot to the downside).
GBP/USD eased back yesterday, but has partially recovered in today’s Asian session to be trading back just below where it opened the week. In our view, the decline in GBP stemming from the BoE minutes released yesterday was an over-reaction. The minutes of the April BoE policy meeting were relatively upbeat and the “internal debate” over the amount of spare capacity in the UK economy has been on-going for months. We note, the BoE staff revised up their estimate for Q1 2014 UK GDP to 1% (QoQ) following 0.7% (QoQ) in Q4 2013. The first estimate of Q1 2014 UK GDP is released on 29 April. If the BoE’s projections are realised, this would be the highest quarterly growth rate since June 2010. In the more immediate term, UK March retail sales are released on Friday. We see upside risks to the market consensus expecting a contraction. A better than expected UK retail sales report would support GBP into week’s end. More specifically, better than expected UK retail sales would help temper the recent lift in EUR/GBP. We think the persistently negative German-UK two-year swap spread should cap and ultimately dampen EUR/GBP.
EUR/USD volatility continued today. The pair lifted towards yesterday’s highs into European session after the German IFO outperformed market expectation. While the improvement in IFO was expected given its close historical correlation to German PMIs, rising business confidence despite heightened tensions in Ukraine and lingering growth concerns was somewhat surprising. Nevertheless, EUR/USD continues to trade near the midpoint of the 2.1% range it has occupied over March and April, as deflation fears persist. The preliminary estimate of April Eurozone CPI (released on 30 April) remains a key risk event. We believe any EUR support garnered from a better than expected German IFO could be offset by comments from the ECB officials. On that note, President Draghi, in his keynote speech at the conference "De Nederlandsche Bank 200 years: central banking in the next two decades" organised by De Nederlandsche Bank in Amsterdam, Netherlands, reiterated worsening inflation outlook may trigger further monetary easing. He said ECB “could cut rates, extend fixed-rate full-allotment”. On the above comments, EUR/USD fell towards its pre-IFO levels. Next ECB speaker is Vice President Constancio (12:15pm).
USD/CNY spiked in the closing minutes of onshore trading to above 6.25 today for the first time since 2012. As we highlighted the People’s Bank of China (PBoC) had been eying 6.25 levels for past weeks, helped by a modestly firmer USD. USD/CNH has followed in lockstep its onshore counterpart in recent sessions. As such, our long USD/CNH position initiated on 1 Apr reached target. The near-term outlook remains precarious in our view, as the PBoC lifted today USD/CNY spot 1.5% above its midpoint, its most on record. If the PBoC is aimed at filling up the recently doubled 2% of upper trading band, USD/CNY could test 6.28 in coming sessions.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – US Durable Goods Orders (today)
AUD – Private sector Credit (30 April); Official China PMI (1 May).
NZD – NZ trade balance (29 April).
GBP – UK retail sales (Friday), UK Q1 GDP (29 April).
EUR – European Commission Forecasts (28 April), April CPI (30 April). ECB Speakers: Constancio (today), Knot (Friday).
AUD & NZD Today
An as expected rise in the OCR to 3% by the RBNZ and accompanying hawkish comments lifted the pair initially in Asia but once again fell shy of 0.8650 resistance. London has come in to find the pair on a downward spiral with stops triggered through .8610 + .8605 left most scratching their heads. The week's low of 0.8555 has supported the downside so far but the offered tone of the pair looks like we may test exporter bids at 0.8520. Further support will be found at April lows of 0.8501, a break below could see a unwind of longs from longer term accounts. Our traders will look to sell on rallies towards 0.8600 today.
Aud overnight stalled at 0.9300 as the market continues to look to sell on rallies post the lower CPI print. This morning the pair has been dragged lower alongside gold making new lows. In relatively quiet markets look for corporate bids stacked 0.9225-0.9250 and selling interest 0.9300-0.9320 to dictate the range today. 0.9280 strikes rolling off today as well.
Thoughts from our Trading Team
10 pip grind higher pre German IFO, which came in better than expectations, no real surprise that accounts for another 10 tics higher. Draghi pops up on the wires ‘SAYS EURO FX RATE INCREASINGLY IMPORTANT FOR POLICY’ Euro drops the 20 tics from 1.3835 to our open 1.3815. Actions speak louder than words, as real demand buys into the rhetoric with specs selling. And so passes another fast & furious morning in Europe. Expect s/ls to be mounting above 1.3865.
Holy Smokes Bat people. $yen close to 102.40… need I say more.
Cable sidelined today after the plan at the start of the week of being long for M&A flows turned sour yesterday afternoon when long stops were triggered below 1.6780 + 1.6770… a subdued 1.6782-1.6806 range has governed proceedings so far today.
.9250-.9320 remain the support/resistance levels. 94.80 recent pivot in AUD/JPY could generate LHS momentum if broken, but reported 95.00 Expiries today could make this a delayed break should that prove the direction later today. As with NZD, ATM Strikes loitering around .9280 continue to dominate, and we greet the States again where we did so yesterday lunchtime.
Despite the RBNZ hike and slightly more hawkish comments leading to a .8638 high in Asia today, we opened in the low .8610’s and started a slow and pain led descent… stops triggered through .8610 + .8605 left most scratching their heads, and the stealth move continued with market offers incessantly countering any dip buying attempts…. We traded down to .8555 as the cross in turn made a 1.0824 high.