CBA FX Strategy
2 May, 2014
New York Open
US March non-farm payrolls later today will generate some vol. but don’t expect the USD to hang onto any gains.
AUD/USD unmoved by Australian Q1 PPI data showing strong imported inflation.
USD was marginally higher, but remains lacklustre despite further evidence yesterday of an improving economy. News of a Ukrainian military helicopter being shot down in an operation against pro-autonomy activists in the eastern Ukrainian town of Slavyansk had no impact on the USD. Today’s US March non-farm payrolls (8.30am) is widely expected to show solid growth in employment (consensus 218k), with the unemployment rate to edge lower to 6.6%. Based on the firm partial indicators (such as ADP and the ISM employment sub-index) we think the risk lies with a slightly stronger than expected payrolls outcome. Whilst a strong payrolls outcome will generate some vol. we don’t expect the USD to hang onto any gains.
AUD/USD tracked sideways, and remains below the 30-day moving average (0.9295). Australian Q1 producer price data showed a firmer than expected lift in wholesale prices, driven by strong rises in imported inflation. Australian producer price data is now released after the Australian CPI, and as a result has limited market impact. AUD/USD continues to trade below the levels prior to the release of Q1 CPI as do Australian swap rates and especially the two-year rate. The Chinese non-manufacturing April PMI is released this weekend.
NZD/USD remained firm, consolidating the recent rally and appearing to receive support at the 30 day moving average of 0.8613. Any USD inspired dips in NZD stemming from today’s US March non-farm payrolls are likely to be well contained. Our New Zealand based economists have revised down dairy co-op Fonterra’s 2014/15 payout ratio to $7.00 per kg of milk solids (previously $7.80) as a result of a forecast firm NZD/USD. Nevertheless, the forecast payout is still very high (historically a top 4 season) and dairy prices are forecast to recover through to the end of 2014, following recent seasonal declines. There are no implications for NZD. Kiwi rates markets opened unchanged, but saw yields push higher towards the end of the day in a bear flattening.
EUR/USD eased back slightly. Eurozone April Markit Manufacturing PMI data is released today, along with Eurozone March unemployment rate data. The Eurozone PMI data is expected to show the European manufacturing sector continues to expand, with the consensus for no change from the March level (53.3). Eurozone unemployment is expected to remain stubbornly high at 11.9%. Reaction to the Eurozone data is expected to be very limited ahead of today’s US non-farm payrolls print. A stronger than expected US non-farm payrolls outcome is likely to generate a shallow dip in EUR/USD, however we think this is unlikely to persist much into next week as the focus turns to Thursday’s ECB policy meeting.
GBP/USD held around yesterday’s closing levels, after touching a fresh 4-year high following the better than expected UK April Markit manufacturing data. There is limited UK data today. UK construction PMI data for April is expected to ease back to 62.2, from 62.5 in March, but is unlikely to have any material impact ahead of the US non-farm payrolls data. EUR/GBP traded in a narrow range around the 0.8210 level. 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.
China is on May holiday today. Without onshore PBoC guidance, USD/CNH followed mostly broad USD moves with EUR/CNH mired firmly in a tight range. Elsewhere in Asia, markets are more subdued ahead of the non-farm data releases tonight with USD/Asia slightly higher. We changed our USD/CNY forecasts as the pair looks to peak at 6.28 levels with CNY appreciation path remaining intact. We keep other Asian currency forecasts unchanged, as delayed USD strength was already pencilled in the old projection. A sluggish USD, more assertive PBoC actions and Southeast Asian outperformance remain this year’s key themes.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – non-farm payrolls (today), Non-manufacturing ISM (Monday), trade balance (Tuesday). Fed speakers: Stein, Yellen (Wednesday 7 May), Tarullo, Evans, Bullard (Thursday 8 May).
AUD – RBA rates announcement, trade balance (Tuesday 6 May), labour force (Thursday 8 May).
CNH - Official China non-manufacturing PMI (Saturday), trade balance (Thursday 8 May).
NZD – Employment, Q1 (Wednesday 7 May).
GBP – Bank of England announces rates (Thursday 8 May), trade balance, industrial production (Friday 9 May).
EUR – Unemployment rate, Markit manufacturing PMI (today), European Commission Forecasts (Monday 5 May), ECB rates announcement (Thursday 8 May). ECB Speakers: Mersch (Monday 5 May), Draghi (Thursday 8 May).