CBA FX Strategy
8 May, 2014
New York Open
Thoughts from our Strategy Team
USD continued to drift lower and should stay heavy as Yellen is expected to reiterate that monetary accommodation remains warranted.
AUD/USD boosted by stronger than expected Australian labour market data and Chinese trade figures.
Today’s ECB meeting did not contain policy action. But Draghi may attempt to talk EUR lower, with limited effect.
Despite comments, we see little near-term likelihood the RBNZ will intervene to lower the NZD.
PBoC may lift fixing higher in coming sessions, as frustration over a sluggish USD capping USD/CNY grows.
IDR and MYR outperform as unchanged policy stance placates local currency bond markets.
USD continued to drift lower, having shown little reaction to Fed Chair Janet Yellen’s testimony to the Joint Economic Committee yesterday. Yellen will testify to the Senate Budget Committee on the economy today (9:30am). Whilst the focus may incorporate some comments around the pace of US fiscal contraction and any implications for the Fed, this is only likely to reinforce yesterday’s message that the high level of monetary policy accommodation remains warranted. We expect little market reaction to today’s speech. FOMC voters Plosser (8:00am) and Tarullo (9:30am), along with non-voter Evans (9:25am), will also speak today. The speeches cover bank regulation and Fed communications, however the Q&A sessions could generate some headlines. We expect the USD to remain generally heavy, and US rates unresponsive to Yellen’s additional testimony today.
EUR/USD remained supported against a softer USD in the lead up to today’s ECB policy meeting (unchanged as expected) and press conference (8:30am). 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, excess capacity in the economy and EUR/USD trading near multi-year highs we expect the ECB to reiterate its dovish bias and may explicitly try to talk EUR lower. The lethargic USD, the Eurozone’s large current account surplus and Eurozone’s real interest rate advantage should limit EUR/USD downside.
GBP/USD held steady at its multi-year highs. Today’s Bank of England (BoE) policy announcement was a non-event as expected. Looking further ahead, 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 upbeat and support GBP. Elevated front end UK interest rates and positive economic momentum in the UK should keep GBP/USD firm and dampen EUR/GBP.
AUD/USD pushed to its highest in two weeks today, following the release of Australian labour force data and Chinese trade numbers. Australian employment data for April was better than expected. Jobs growth was 14.2k, better than the expectation for an 8.8k rise. Jobs growth was all full-time. The unemployment rate was unchanged at 5.8%, as was the participation rate (64.7%). In all, a positive report, which supports our view the Australian economy’s transition from mining-investment led growth to non-mining activity is on track for now. Today’s outcome is the third straight month that total employment growth has exceeded expectations. The data supports our call for the RBA to raise rates in November 2014, unless next week’s Australian Government budget contains a significant fiscal contraction. China’s April trade data was better than expected. The stronger than expected import growth (+0.8%yoy vs -2.1%yoy expectation) and second highest iron ore imports on record supported the AUD. The AUD is likely to remain well supported especially against a heavy USD.
Australian rates lifted today on the improved domestic economic data and better news out of China. The yield curve flattened slightly. The yield on the 3 year bond future pushed 3bpts higher to 2.87%, whilst the yields on the 10 year bond future were unchanged at 3.82%. Swap rates were also higher on the day, lifting 2-3bpts through to 7 years, with the 10 year up only 1bpt.
NZD/USD was little changed today after falling by about one US cent in the past 36 hours. The main catalyst for the weakness was hints by the Reserve Bank of New Zealand Governor that intervention to weaken the NZD is possible. We do not think the Governor is likely to intervene in the near term. The Reserve Bank of New Zealand uses four criteria to assess whether it could intervene. Our assessment of these criteria is that it is unlikely the Reserve Bank of New Zealand will implement either type of intervention in the near term (see table below). In particular, the Governor has described the NZD as “overvalued” and “unsustainable” but not “exceptional” or “unjustified”. The choice of words is crucial because of the criteria for intervention the Reserve Bank of New Zealand has set itself. All four criteria must be met before intervention can proceed. Also, with New Zealand CPI inflation in its target band and domestic demand heating up, there is little risk the Reserve Bank of New Zealand will not meet its Policy Target Agreement. Even if the Reserve Bank of New Zealand does intervene, the 2007 intervention episode shows it was unsuccessful in stemming NZD strength.
USD/CNY midpoint was in line with expectation and continues to hover around 6.1550. The pair closed little changed from yesterday despite a softer USD, whereas USD/CNH followed USD lower trading at a small discount to its onshore counterpart. Moreover, better April trade numbers and wider trade surplus continue to exert downward pressure on both USD/CNY and USD/CNH. We believe PBoC’s frustration over a sluggish USD capping USD/CNY upside continues to grow. The central bank is likely to resort to lifting fixing significantly higher in coming sessions to instil uncertainty to both on and offshore renminbi markets. Higher fixing against a softer USD, if materializes, bodes ill with our earlier recommendations of short USD/CNY NDF positions, especially as forward implied yield continues to shrink.
Elsewhere in Asia, BI, BSP and BNM, as expected, kept their respective policy rates unchanged. USD/IDR spiked ahead of meeting as market participants positioned for a likely rate hike on Indonesia’s precarious inflation outlook, one of the worst in the region. The cross plunged as BI stood pat. Similarly, USD/MYR fell sharply after BI and BSP kept rates unchanged and as BNM followed suit. The unchanged stance, in our view, should help entrench improving inflation outlook and placate consequently local currency bond markets, which have seen renewed inflows more recently. In particular, the average daily volume of government debts traded in Southeast Asia’s largest bond market has more than tripled in the first two weeks of April compared to the same period in March. Against these backdrops, we maintain our short SGD/MYR 1m fwd trade on sustained demand for Malaysian Government Securities. By contrast, USD/PHP was little changed, as the BSP raised the require reserve ratio by 1% but refrained from rate hikes.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – Fed speakers: Yellen, Plosser, Tarullo (Today), Fisher (Friday).
AUD – RBA Statement on Monetary Policy, China CPI (Friday). RBA speakers: Debelle (Friday).
GBP – Industrial production (Friday).
EUR – ECB policy meeting and President Draghi press conference (Today).
NZD – RBNZ Deputy Governor Grant Spencer speaks (Friday), RBNZ Financial Stability Report (14 May).
CNH – CPI, PPI (Friday), Fixed Assets Investment, Retail sales, Industrial production (Tuesday 13 May).
CAD – Housing starts (today), labour force (Friday).
AUD & NZD Today
A decent 0.75% jump for the AUD overnight as the combination of a better Employment data print (+14.2k v 8.8k exp with Unemployment steady at 5.8%) and better Chinese Trade data (surplus widened with stronger than expected import growth which included the second highest iron-ore imports on record from Australia) has pushed AUD into the mid 0.9390’s so far … the 0.9380/0.9420 region will like the previous numerous attempts over the last month or so will continue to offer stiff resistance … on the day we expect Intraday and Aust Corp sellers to be active on any rally into this zone, a break of 0.9430 will trip stops …. Exporters have re-loaded their interest sitting patiently 0.9320/50 on the day. Kiwi also pushed up a little on the Chinese Trade data but continues for now to run into sellers 0.8670/0.8700 which will encourage intraday to sell any rallies on the day, stops are building thru 0.8710 …. Buyers on the day towards 0.8610/30. Tonight’s key event will be the release of the RBA’s quarterly Statement on Monetary Policy.