CBA FX Strategy
6 May, 2014
New York Open
Thoughts from our Strategy Team
It was a relatively quiet Asian session with Japan (and HK) closed for holidays.
EUR/USD and GBP/USD lifted in earlier European session on the back of pockets of strength in European Service PMIs.
AUD/USD should remain well supported leading into tomorrow’s retail sales and Thursday’s labour force data.
NZD/USD may be in the spot-light in tomorrow’s speech by the Reserve Bank of New Zealand governor.
USD/CNY and USD/CNH fell to two-week lows as the PBoC appeared refrained from intervening against USD weakness.
EUR/USD rose quickly to just a tad below this year’s highs of 1.3967 ahead of ECB policy meeting on Thursday, after April Services PMI in Spain, Italy and France surprised on the upside. In particular, expansion in Spanish service industry registered its fastest expansion in seven years. While we expect the ECB to leave policy unchanged, a policy loosening would not surprise us especially as Eurozone inflation (headline and core) remains mired well below the ECB’s 2%pa target. On the other hand, further action is more likely in June when the ECB releases new medium-term economic forecasts. Nevertheless, we expect the ECB to reiterate its dovish bias, although, against a softer USD, we do not think ECB to knock EUR/USD off its perch.
GBP/USD moved higher in tandem with EUR/USD to its strongest since 2009, after April reading of the UK services PMI also overwhelmed market expectations comfortably. More specifically, UK services expanded at its fastest pace in four months in April, after having eased over the preceding few months. The firm UK services PMI will add to the positive momentum in the UK economy, keep pricing for the first BoE rate hike towards year-end and continue to support GBP. GBP/AUD remains bound between 1.8003 (30-day moving average) and 1.8338 (100-day moving average).
AUD/USD rose into European trading to its intraday high following the RBA announcement, helped by a softer USD. The RBA left monetary policy unchanged, as expected, and the statement was virtually identical to April. There was an incremental change around the labour market commentary, where the RBA has detected some improvements in leading indicators. However, an incremental improvement in the labour market outlook is not yet a threat to the “period of stability in interest rates”, with the RBA noting that, “it will probably be some time yet before unemployment declines consistently”. On the inflation front, the RBA noted that weak wages growth supported their outlook for inflation to remain within the target 2-3% band over the next two years. Rhetoric around the currency (high by historical standards) was unchanged, as were the comments around China. Given we expect the USD to remain heavy, AUD/USD should remain well supported leading into tonight’s retail sales (9:30pm) and Thursday’s labour market data. Retail sales are expected to have grown for the 11th straight month (CBA (f) 0.5%MoM vs market 0.4%) In Australian rates, bond futures were bid up following the RBA meeting, with 3yr and 10yr up 3bpts. Swap rates were also lower, pushing the 3yr rate to levels last seen in in August 2013.
NZD/USD lifted further through today, with early April highs (0.8746) taken out. The momentum in NZD could be tested today by the fortnightly GlobalDairyTrade auction. Dairy auction prices have been falling since mid-February on seasonally strong supply. Following the dairy auction, RBNZ Governor Wheeler will speak at the DairyNZ Farmers Forum on the significance of dairy to the New Zealand economy (5:30pm). In our view, there is a risk Wheeler expresses some warnings on the high NZD but we still expect him to stick to the view that New Zealand’s economy is recovering and higher rates will be needed. New Zealand Q1 Labour Force data is scheduled for release after Wheeler speaks (6:45pm). 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 offsets jobs gains. We expect any dips in NZD/USD to remain shallow.
USD/CNY fixing was higher than our CBA model implied for the second straight session, although the deviation remains relatively modest. The People’s Bank of China (PBoC) appears keen on keeping the midpoint at between 6.15 – 6.16 despite a softer USD. However, its intraday USD buying subsided somewhat today as the central bank was reluctant to catch the falling USD knife with USD index diving to its weakest level this year. We believe USD/CNY gravity is increasingly felt and closed our long USD/CNH position as a result with a profit of 0.80%. While the PBoC is down in its “heavy lifting” effort in the past two session, we don’t believe USD/CNY or USD/CNH are out of the woods. We continue to expect the central bank to lift USD/CNY spot towards 2% above its midpoint at same point in coming sessions, most likely after the China’s April trade data release and ECB meeting on Thursday. Moreover, if the market participants intend to reinstate long USD positions, having PBoC on its side is definitely a safer choice. As such, we are looking to re-enter long USD/CNH position in the later part of the week. In the meantime, we continue to prefer short USD/CNY non-deliverable forward (NDF) position (against fixing) on a sluggish USD, toppish USD/CNY fixing and attractive carry (forward-implied yield).
USD/CAD was softer today mainly from USD weakness. In the absence of major US economic data this week, USD/CAD could remain heavy as the CAD strengthens in response to improving domestic data. Canadian trade data for March is released today (8:30am) and is expected to show a slightly larger surplus. The Ivey PMI (10:00am) is expected to soften modestly, though the risk lies with a larger decline in this volatile indicator. The major Canadian release this week is the April employment data (Friday). We see upside risks, which should see USD/CAD remain heavy.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – Trade balance (Today). Fed speakers: Stein (Today), Yellen (Wednesday), Yellen, Plosser, Tarullo (Thursday), Fisher (Friday).
AUD – 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 – BoE policy meeting (Thursday), industrial production (Friday).
EUR – ECB policy meeting and President Draghi press conference (Thursday).
NZD – GlobalDairyTrade auction (Today), 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 (Today), Building permits (Wednesday), Housing starts (Thursday), labour force (Friday).
AUD & NZD Today
After 30-40 point ranges in AUD and NZD overnight where the RBA left the OCR unchanged as widely expected and made a virtual identical statement to April (apart from mentioning some improvements in labor force leading indicators) both have popped 30-50 pts higher as the US dollar has been hit across the board with the USD Index making new 2014 lows in the process.
Kiwi dollar has had the bigger jump of the two with a breach of 0.8740/50 tripping a large rounds of stops (April high 0.8746) driving the pairing as high as 0.8778 so far … a few significant events in the next 12-16 hours including the monthly dairy auction (sometime this mrng), RBNZ Governor Wheeler speaking at the Dairy NZ Farmers Forum at 5.30pm ET and Q1 NZ Employment data at 18.45 ET …. 0.8730/0.8800 the range on the day expected as all-time highs at 0.8845 made in late July 2011 becoming a target now that we are so close. AUD took out stops thru 0.9320/30 and has run as high as 0.9353 so far, a combination of Aust Corp selling and intraday/model interest should offer some resistance into 0.9365/70 on the day but there will be more stops through 0.9380 should this level break.
Thoughts from our Trading Team
The path of least resistance, as warned for several months market is under hedged. Stronger Spanish PMI was the catalyst for this morning’s spike higher as further stop losses triggered. German PMI was below consensus but the market needs Euros. Next level on topside is 1.3950 then 1.4000. 1.3780 is the guardian to the downside.
$ Weakness and in particular CHF strength this AM, as tensions increase in Ukraine.
General USD weakness has led us lower, with us seeing CB’s sellers in the Asian time zone around 102.10. The IR differential suggests USDJPY should be higher, but with the USD on the back foot against the G10 complex, this may be misleading today.
GBP benefitting from general USD weakness as the DXY trades towards its 2013 lows… Cable has so far traded up through the 1.6940 and 1.6970 resistance levels ahead of the 1.7000 psychological level and barriers. 2009 highs at 1.7040/45 lie behind.
AUD appreciating with the USD sell off across the board. Large resistance taken out at 0.9320 / 25, with a raft of stops above 0.9330. Pay your money, buy your ticket and take a ride.
AUD/NZD cross down through both the 1.0680 Fibbo and 1.0660 previous lows today, lifting NZD above the previous highs at .8750… we now target the all-time high at .8850. Dairy Auction results due out this afternoon will be closely watched, before RBNZ Governor Wheeler is due to speak at the Dairy NZ Farmers Forum on the significance of dairy to the New Zealand economy. (5.30pm New York time).