CBA FX Strategy
5 MAY, 2014
New York Open
Thoughts from our Strategy Team
US March non-farm payrolls much better than expected but the USD remains heavy because details of the report were less favourable.
AUD/USD is likely to have a volatile week given the large amount of Australian and Chinese economic data released this week.
EUR/USD remains near its highs. Focus this week will be on the ECB policy meeting (Thursday). No change is expected and the ECB’s dovish rhetoric is unlikely to have much of a lasting impact on EUR/USD.
The USD remains lethargic despite the improving US economy. Last week’s US payrolls report exceeded expectations but a further decline in the labour force was a key catalyst behind the fall in the unemployment rate from 6.7% to 6.3%. Overall, the report does not change our view the Fed will continue to taper its asset purchases by $US 10bn per meeting. In line with our published view, we expect the USD to stay heavy until the real Fed funds rate turns positive in early 2016. The main US events this week are the ISM services (today 10:00am) and FOMC chair Yellen’s testimony to Congress on Wednesday and Thursday. We expect Yellen to emphasise the need to keep monetary policy unusually accommodative even as the US economic recovery gathers momentum. Overall, we expect the USD to stay heavy this week.
In US rates, the initial spike in yields post the payrolls report quickly reversed. The intensification of the Ukrainian conflict remains front of mind and the real threat of serious military action trumped good economic data which showed less impressive details. In our view, the US curve is likely to remain well bid, until geopolitical tensions ease.
AUD temporarily spiked in early Monday trade because China’s official services PMI lifted to strong levels in April (released on Saturday). AUD then eased after the release of weaker than expected Australian building approvals and a lower than expected final estimate of the April HSBC China manufacturing PMI. AUD is likely to be volatile this week given the large amount of data from Australia and China. Overall, we expect the Australian data to confirm that the “economic transition” remains on track despite some softness in Australian building approvals. We expect the Chinese data to confirm the economy is stabilising. The RBA is widely expected to keep the cash rate steady tonight. The RBA is likely to be increasingly confident the Australian economy is successfully transitioning to non-mining investment led growth though may sound a word of caution about the recent lift in the AUD in Tuesday’s policy statement or in Friday’s Statement on Monetary Policy.
In Australian rates, bond yields eased lower today, mirroring the moves in the US on Friday. The highlight of the week locally is the Australian employment report on Thursday. CBA is in line with consensus for employment and the unemployment rate. A consensus outcome would bode well for the Australian outlook, following the stellar report cards delivered over the last few months. A consensus outcome would most likely be ignored by market participants, however, who are dealing with the increasing tension in Russia and Ukraine. The RBA meeting tonight is unlikely to move the rates market in our view.
NZD/USD finished last week on a stronger note, having risen 1.0% over the week, and has remained firm in today’s trade. The major New Zealand economic event this week is the release of the Q1 New Zealand labour market data on Tuesday. CBA’s New Zealand economists see upside risks to the consensus for employment, with a 0.7% (QoQ) forecast (0.6% consensus), but are forecasting a slightly smaller decline in the unemployment rate to 5.9% (5.8% consensus) with a view that the strong supply of labour should partially offset jobs gains. Prior to the labour force release the fortnightly GlobalDairyTrade auction could influence the NZD. Dairy auction prices have been falling since mid-February on seasonal increased supplies. In addition, in today’s Asian session it was announced that RBNZ Governor Wheeler will speak at the DairyNZ Farmers Forum on the significance of dairy to the New Zealand economy (Tuesday 5:30pm). Given the likely skew of the audience (i.e. dairy exporters), there is a risk the RBNZ Governor expresses some thoughts on the strength of the NZD. Irrespective, we expect dips in NZD/USD to remain relatively shallow. NZD strength is being underpinned by: (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; and (6) a soft USD.
In Kiwi rates, yields were slightly lower today. The 2-year swap rate remains well anchored near 3.98% and the long-end of the curve is continuing to be dragged lower by developments offshore. The highlight this week will be the employment report on Wednesday, following the GDT dairy auction and RBNZ Governor Wheeler’s speech. CBA are above consensus for New Zealand employment growth. A stronger than expected outcome will support the 2-year swap rate around 4%, but will have little to no influence on investor’s expectations thereafter. The long end is dominated by developments in the US and Australia (which in turn is influenced by the US). Until confidence lifts, which requires peace in Russia and Ukraine, the long end is likely to remain well bid (low in yield).
GBP/USD remains well supported near its multi-year highs. Positive momentum in the UK economy and elevated front-end UK market interest rates remain key drivers behind GBP/USD strength. This week’s key focus will be the April UK Services PMI data (Tuesday) and Bank of England (BoE) policy meeting (Thursday). No change is expected by the BoE and we think the risk is the UK services PMI bounces back after having eased slightly in March. Irrespective, neither should challenge the current short-sterling futures pricing for the first full BoE rate hike in December 2014. GBP/AUD should remain bound between 1.7998 (30-day moving average) and 1.8339 (100-day moving average) in the near-term. But softer Australian data may see GBP/AUD test the top of this range.
EUR/USD continues to trade towards the upper end of the 5% range it has occupied since mid-September 2013. Eurozone March producer prices continued to soften as expected and EUR/USD was unmoved. This week the main focus is on the ECB policy meeting and press conference (Thursday). In what is likely to be a finely balanced decision, we expect the ECB to leave policy unchanged. While a policy loosening would not surprise us, any further action is more likely in June when the ECB releases new medium-term economic forecasts. Nevertheless, with Eurozone inflation (headline and core) well below the ECB’s 2%pa target, credit contraction ongoing and excess capacity, we expect the ECB to reiterate its dovish bias. However, given the Eurozone’s real interest rate advantage and large current account surplus, and soft USD, we do not think dovish ECB rhetoric will be enough to knock EUR/USD off its perch.
USD/CNY fixing was slightly higher than we expected. The People’s Bank of China (PBoC) lifted the spot, as in the past sessions, to more than 1.5% above the midpoint, although USD/CNY gravity is more keenly felt, in our view. USD/CNY closed at below 6.25 for the first time in more than two weeks. USD/CNH dipped in sympathy, especially against a listless USD. While market chatter continues to focus on risk of further unwind of structured products which could see a final spike higher in USD/CNH, we believe the pair is topping or has topped barring more aggressive PBoC actions. We closed our long USD/CNH position with a profit and still prefer short USD/CNY NDF against fixing on toppish fixing, a further delay in USD strength and attractive carry. Over a twelve-month time frame, we see USD/CNH declining below 6.0000, primarily driven by China’s current account surplus. This week’s Chinese economic data will generate some impact on USD/CNH and the spread to USD/CNY. Looking ahead, the China trade data will be a focal point (Thursday). The April Chinese CPI (Friday) will be more of a long-run determinate of USD/CNH, meaning it should generate less intra-day vol. than the trade balance.
USD/CAD finished the week lower overall, and is currently trading just below the 100-day moving average. In the absence of major US economic data this week, USD/CAD could push lower as the CAD strengthens in response to improving domestic data. Canadian trade data for March (Tuesday) is expected to show a larger surplus. The Ivey PMI, building permits and housing starts trickle through the week. The major Canadian release is the April employment data, released on Friday. Expectations are for a small 15,000 lift in employment, with the unemployment rate expected to remain stable at 6.9%. We see slight upside risks to the employment number, which could see USD/CAD remain heavy.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – ISM services (today), trade balance (Tuesday). Fed speakers: Stein (Tuesday), Yellen (Wednesday), Yellen, Plosser, Tarullo (Thursday), Fisher (Friday).
AUD –RBA rate decision (Tuesday), retail sales, HSBC’s China composite PMI (Wednesday), labour force, China trade balance (Thursday), RBA Statement on Monetary Policy, China CPI (Friday). RBA speakers: Debelle (Friday).
GBP – services PMI (Tuesday), BoE policy meeting (Thursday), industrial production (Friday).
EUR – PMI final estimates (Tuesday), ECB policy meeting and President Draghi press conference (Thursday).
NZD – GlobalDairyTrade auction (Tuesday), RBNZ Governor Wheeler speaks (Wednesday), employment, Q1 (Wednesday), RBNZ Financial Stability Report (Wednesday 14 May).
CNH –trade balance (Thursday), CPI, PPI (Friday).
CAD – Trade balance, Ivey PMI (Tuesday), Building permits (Wednesday), Housing starts (Thursday), labour force (Friday).
AUD & NZD Today
AUD temporarily spiked in early Monday trade following China’s official services PMI which lifted to strong levels in April however the pair was once again unable to break 0.9320 resistance and quickly reversed direction after the release of weaker than expected Australian building approvals and a lower than expected final estimate of the April HSBC China manufacturing PMI. With London out today and the RBA looming ahead tonight look for a quiet session. Exporter bids 0.9230 and 0.9200-0.9190 should hold the downside, with offers 0.9300-0.9320 on top likely to cap rallies. Tonight look for an optimistic tone from the RBA as all signs point to the economy successfully transitioning to non-mining investment, however most attention will be paid to whether or not they mention the high currency.
NZD – after rising over 1.0% late last week NZD holds on to gains as the week opens. Today exporters are waiting for dips to 0.8640 and then 0.8625 to buy with macro accounts looking to sell just ahead of 0.8700.