CBA FX Strategy
30 April 2014
New York Open
Thoughts from our Strategy Team
The USD held mostly steady ahead of the FOMC meeting tonight (2:00pm). We don’t expect the meeting to move the market materially. Another $10bn in asset purchase tapering is almost a certainty. There will be no news conference or update of the famous dot chart. On the economic data front, much will be said about the weather-affected 1Q GDP report (8:30am) and ADP employment report (8:15am) heading into Friday’s non-farm payrolls report, but the market reaction is not likely to be material.
EUR/USD, following a lethargic Asian session, was somewhat firmer even after Eurozone April CPI underwhelms, albeit only modestly, market expectation. The lack of reaction reflects, in our view, sidelined investors ahead of tonight’s FOMC meeting and lowered expectation from yesterday’s softer than expected German April CPI outcome. The weaker Eurozone CPI is likely to see the ECB revised their inflation forecasts lower again, and raise the risk of additional Quantitative Easing. However, this stands in contrast to the recent watering down of rhetoric around inflation by ECB officials. The solid Eurozone current account surplus (2.3% GDP) continues to provide a foundation of EUR strength. Also adding to EUR support are accompanying Eurozone commercial bank repatriation inflows, offshore investment in Eurozone equity and bond markets, a contracting ECB balance sheet, and an improving Eurozone economy.
AUD/USD continued to grind higher in Asian trade, pushing back above the 30-day moving average (0.9281), but lost steam into the European session. Australian March private sector credit data was in line with expectations, rising 0.4%MoM and had little influence on the AUD. Trade price data for Q1 2014 is released tomorrow (2:30am Thursday BST), and is likely to show import prices increase by more than export prices in QI, pointing to a modest decline in Australia’s terms of trade. Additionally, the Australian Federal Government will release its Commission of Audit report tomorrow, which is expected to identify reductions in government spending, pointing to further fiscal consolidation. Over the last year, government expenditure subtracted 0.6%pts from Australian GDP growth, and the risk is we see additional drag through 2014/15 and 2015/16 as the economy is rebalancing away from non-mining investment growth. On average, annual government expenditure adds 0.7%pts to GDP growth. China’s April manufacturing PMI data is also released tomorrow, and could see some volatility in the AUD (02:00am Thursday BST). A small 0.2 improvement to 50.5 is expected. The AUD/USD is currently sitting some 1.5% above the 200 day moving average of 0.9153. We don’t expect a break below the 200 day moving average this week.
NZD/USD was mostly range-bound. NZD received a boost from stronger than expected building permits data for March was, which rose 8.3%MoM (2.0% expectation). However, the lift was tempered by a fall in national business confidence and weaker business conditions. In our view, NZD should remain supported by five major factors: (1) a 40 year high in the terms of trade; (2) an improving domestic economy; (3) a rising interest rate environment; (4) an increase in foreign bond purchases; (5) continued insurance-related inflows.
GBP/USD traded in a narrow range in Asia, after a volatile session yesterday, while remaining just shy of Monday’s 4‑year high. There is little data of interest in the UK today. Bank of England Chief Economist Spencer Dale and Andrew Haldane, executive director for financial stability, appear before UK Parliament for their appointment hearings today (11:30am). We do not expect any market relevant commentary. EUR/GBP lifted slightly even as the Eurozone CPI disappointed. However, we think the persistently negative German-UK two-year swap spread should continue to dampen EUR/GBP. Subsequently, we see some further modest downside to AUD/GBP.
USD/CAD ground modestly higher after falling to its lowest level in a fortnight yesterday, pushing through the 100 day moving average as CAD strengthened against a range of currencies. CAD/EUR remained supported after yesterday’s push up to its highest since early April on improved risk sentiment. There was no new information from Bank of Canada (BoC) Governor Stephon Poloz’s testimony to Canadian parliament last night. Poloz reiterated the BoC’s growth and inflation outlook and monetary policy stance. Poloz and Deputy Governor Macklem appear before another Canadian Senate committee tonight (4:15pm). We don’t expect the release of Canadian monthly GDP for February (8:30am) to have a significant influence on the CAD. Canada’s monthly GDP has been volatile, with weather impacts dampening growth in December, followed by a rebound in January. Partial data for a range of underlying indicators suggests a continuation of Canadian growth, albeit at a more moderate pace, in February. February temperatures were also colder than normal, which could dampen growth. The consensus is for 0.2%MoM, though we see slight upside risks.
USD/JPY was initially lower in Asian trade, after the Bank of Japan refrained from adding additional stimulus to Japan’s economy. Our base case was that the BoJ to keep its ultra-accommodative monetary policy unchanged at today’s meeting. However, we remain of the view that there is a non-negligible risk the BoJ adds further stimulus in coming months. Should the projected impact from the recent consumption tax increase on the Japanese economy be more pronounced than previously thought, the BoJ could lower its GDP growth or inflation forecasts. Japanese industrial production was also weaker than expected, rising only 0.3%MoM in March, after February’s 2.3% slump.
USD/CNY midpoint was lower than our expectations again today, marking the sixth session in a row the PBoC has set the reference rate lower than our estimates. Onshore USD/CNY spot pushed above 6.2650 to a new 18 month high in the morning and traded just around 1.8% above its midpoint, as the PBoC continues to utilise the recently doubled 2% trading band. Onshore CNY has now traded more than 1.5% above its midpoint for 4 days in a row. If the PBoC were to fully utilise the 2% trading band, USD/CNY could possibly lift to 6.28. Offshoer USD/CNH traded above 6.27 after rising steadily through the Asian session. USD/CNY dipped in the closing minutes as markets pared back longs ahead of FOMC meeting and the long May holiday weekend. The PBoC was absent in the downward move. We believe its priority centres squarely around utilizing the entire daily trading band in coming sessions. We anticipate some reaction in USD/CNH to China’s April manufacturing PMI on Thursday, where a small 0.2 improvement to 50.5 is expected.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – FOMC rate decision, GDP, Q1, ADP employment report (today), ISM manufacturing (Thursday), non-farm payrolls (Friday). Fed speakers: Yellen (Thursday).
AUD – Official China PMI (Thursday), RBA rates announcement (Tuesday 6 May).
CNH - Official China PMI (Thursday),
NZD – Employment, Q1 (Wednesday 7 April).
GBP – Markit Manufacturing PMI (Thursday). BoE speakers: Dale, Haldane (today), Cunliffe (Thursday)
EUR – Unemployment rate, March; Markit manufacturing PMI, April (Friday), European Commission Forecasts (Monday 5 May).
AUD & NZD Today
Q1 GDP, FOMC and month-end events today ensured AUD and NZD did not move beyond a 30-40 range overnight staying safely within in ranges that have held all week so far …. Order-wise going into today in AUD; the main Exporter interest continues to sit 0.9200/30 with stops then thru 0.9180 with Intraday again looking to fade moves into 0.9290/0.9330 with a few stops now building thru 0.9340 …. In NZD any buying interest of note remains patiently in the 0.8480/0.8510 region with Intraday also looking to sell rallies towards 0.86c. Tonight’s Chinese April PMI the key event domestically for AUD and NZD post todays US events.
Thoughts from our Trading Team
Euro heavy post EC CPI. Market looking for Estimate YOY print of 0.7 or less to add to Shorts. They got their wish as 0.7 printed and market hit Euro from 1.3790s to 1.3771 . It didn’t go according to plan as bids came in and lifted the pair immediately back above 80 , then 90 then above the fig and onto a high of the morning 1.3834. Market is very unlikely to continue to fight this, leaving the topside increasingly vulnerable. 1.3880, 1.3910 & then 1.3940 immediate points to watch topside.
Gravitates once again around 102.50, very little going on.
Outside of the EUR/AUD show this morning, we’ve been quiet across… Cable range of 1.6805-26 pretty much reflects the lack of interest in the Pound so far, with all eyes on ADP later today.
The AUDUSD has been trading in a tight trading range today, albeit with it being busy both sides in the crosses. There was evidence of large EURAUD liquidation with us trading to 0.9297 in AUDUSD and EURAUD to 1.4830 / 35 pre German data. The number came out slightly weaker than expected, however this saw a short squeeze in the EURUSD, killing EURAUD shorts as we traded back to 1.4910 / 15, before AUDUSD trades down to 0.9270.
Outside of the EUR/AUD show this morning, we’ve been quiet across… the NZD range of .8549-69 pretty much reflects the lack of interest so far in Kiwi, with all eyes on ADP later today. The Gamma from last week around .8555/75 continues to have a good hold on the range.