CBA FX Strategy
7 May, 2014
New York Open
Thoughts from our Strategy Team
USD index, consolidating just above its weakest levels (around 79) in two years, remains precarious ahead of Yellen’s testimony to Congress.
EUR/USD ignored the unexpected fall in German March factory orders, awaiting Yellen’s speech today and ECB meeting on Thursday.
NZD/USD fell quickly from yesterday’s high of 0.8780 on currency “jawboning” from RBNZ Governor Wheeler in Asian session.
USD/CNY rose above 6.2350 in closing minutes on suspected PBoC intervention with USD/CNH moving in lockstep.
USD was slightly firmer into European trading, after succumbing yesterday to a mix of good European economic data and “poor” US economic data. The main US event this week is FOMC chair Yellen’s testimony to Congress today (from 10:00am) and Thursday (9:30am). We expect Yellen to retain her dovish bias and emphasise the need to keep monetary policy unusually accommodative even as the US economic recovery gathers momentum. Her comments should keep the USD heavy.
EUR/USD consolidated today but continues to trade near its highest levels since mid-March. The cross is little interested in the disappointing German March factory orders which contracted unexpectedly by 2.8% (MoM), while market consensus had been looking for a small on-month expansion. The main focus for the EUR this week is Thursday’s ECB policy meeting and press conference. We expect the ECB to leave policy unchanged, but the tone should remain dovish. Nevertheless, given the Eurozone’s large current account surplus and high real yields we do not see much downside in EUR/USD.
AUD held on to most of yesterday’s gains, despite a softer than expected March Australian retail sales outcome. Australian retail sales for March and Q1 were much worse than expected, with the shift of Easter from March to April likely to be responsible for some of the softness. While the headlines were weak there were upward revisions to growth in February and QIV volumes. Despite the weaker than expected outcome, the data still supports the idea that Australian economy is successfully transitioning away from mining investment led growth. We stick with our out of consensus call that the RBA will lift rates in November so long as the Federal Government does not sharply tighten fiscal policy in next Tuesday's Budget. The HSBC China services and composite PMIs were mixed, and had limited impact on the AUD. The AUD is likely to be influenced by Yellen’s testimony today and the Australian April labour force release (9:30pm). Chinese trade data will also published either tonight or tomorrow.
Australian rates have drifted slightly lower today. While today’s Australian retail sales data saw some intra-day volatility, the highlight of the week locally is the Australian employment report tonight. CBA is close to consensus for the labour market report. In our view a consensus outcome would most likely be ignored by market participants who are grappling with offshore developments.
NZD/USD has eased off despite positive detail in the NZ Q1 labour force report. The catalyst for the softer NZD early in today’s Asian session was a speech by RBNZ Governor Graeme Wheeler. Wheeler’s most significant comment was “if the currency remains high in the face of worsening fundamentals, such as a continued weakening in export prices, it would become more opportune for the Reserve Bank to intervene in the currency market to sell NZ dollars”. In our view, the likelihood of the RBNZ intervening is low and does not make us bearish NZD. Past interventions by the Reserve Bank of New Zealand to push NZD lower were unsuccessful. Nevertheless, Wheeler’s comments may get more airplay in the European and US sessions. Wheeler also said he “considers that the exchange rate is overvalued and does not believe its current level is sustainable”. He also said a persistent high exchange rate would be a factor in the RBNZ’s “assessment of the extent and speed with which the OCR needs to be raised”. These comments are not new. Stronger than expected employment growth of 0.9%QoQ and a strong lift in the participation rate to a record high kept the unemployment rate unchanged at 6%. The surging employment growth suggests the NZ economy remains strong, and supports our call for the RBNZ to lift the OCR by a further 0.25% in June (to 3.25%).
GBP/USD has held on to yesterday’s gains and was mostly unchanged around its new high since August 2009. Short sterling futures continue to price the first BoE rate hike in Q4 2014. There is little on the immediate horizon to challenge this market pricing. The Bank of England (BoE) meeting on Thursday should be a non-event. The next major focus for GBP is next Wednesday’s release of the UK labour market data and the BoE’s quarterly Inflation Report. In our view, both are likely to be GBP positive. Elevated front end UK interest rates and positive economic momentum in the UK should continue to support GBP/USD and undermine EUR/GBP.
USD/CNY midpoint was higher against market expectations for the third straight session. As a result, despite the softer USD, the so-called fixing remained above 6.15 levels. As we wrote in yesterday’s daily, we believe the People’s Bank of China (PBoC) remains keen on lifting the spot higher both in absolute terms and relatively in its daily trading band. On that note, suspected PBoC intervention propped up USD/CNY in the closing minutes to 6.2354 with USD/CNH moving in lockstep.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – Fed speakers: Yellen (Today), Yellen, Plosser, Tarullo (Thursday), Fisher (Friday).
AUD – 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 – RBNZ Deputy Governor Grant Spencer speaks (Friday), RBNZ Financial Stability Report (14 May).
CNH – Trade balance (Thursday), CPI, PPI (Friday).
CAD – Building permits (Today), Housing starts (Thursday), labour force (Friday).
AUD & NZD Today
Kiwi the big mover overnight down nearly 1% from the NY close and 1.3% from yesterday’s highs near 0.8780 when session lows at 0.8657 were made earlier as the RBNZ Gov Wheeler made comments at the Dairy Farmers Forum with this being the most significant … “if the currency remains high in the face of worsening fundamentals, such as a continued weakening in export prices, it would become more opportune for the Reserve Bank to intervene in the currency market to sell NZ dollars” … his comments dropped the NZD initially around 50 pts to 0.87c with the next 40 odd point drop happening once London walked in … Strong Q1 Employment data for NZ played a second fiddle to Wheeler's comments rate. Today 0.8650/0.8700 contains all the immediate interest with stops either side which if hit will extend ranges to 0.8600/20 – 0.8720/40 with an increase in the unemployment rate occurring due to a healthy 0.4% increase in the participation
AUD by comparison has had a whippy session held in the tight confines of a 0.9330/55 range, Retail Sales for March printed weaker but were totally ignored with tonight’s April Employment data the key event. After 2 strong months in Feb and March for Australian Employment, tonight’s number will either confirm the trend has turned or not. On the day we look for Exporter interest to support dips into 0.9300/20 with Intraday trying their luck with shorts on moves above 0.9360/70 …. But with unemployment due and the potential for it to print anywhere we expect accounts to be fairly neutral going into the 9.30pm ET release. AUDNZD sellers have emerged on this last move from below 1.07c overnight selling from 1.0770 in the last hour or so.
Thoughts from our Trading Team
A very quiet market ahead of tomorrow. We traded in a very tight 1.3910 / 30 thus far.
Extremely quiet and followed EURUSD.
Very quiet, as is the rest of the G10 complex. All eyes are on key support at 101.20 and USD index support at 78.95; if these break we could see a flush out aggressively to 100.00.
Cable sidelined and range-bound whilst we continue to stall against the 1.7000 Barriers as the related Gamma plays dictate. 1.6966-86 has been our range so far in London.
Very quiet post yesterday’s large move (large in modern FX standards that is). We have traded in a 0.9330 / 45 range today, with us hovering above key support at yesterday’s break up point of 0.9320 / 25. A long here with a stop sub 0.9280 could be the preferred trade.
A slight reversal of USD fortunes this morning… NZD/USD has subsequently continued the Wheeler comment related move lower, after failing a few times to get above .8700 during early trade in London. Stops have been triggered down through the .8682 Asia low, which in turn has also tripped stops up through the pivotal 1.0765 level in the cross