CBA FX Strategy
12 May 2014
New York Open
Thoughts from our Strategy Team
The USD index has bounced by over 1% off its lows over the past few sessions, driven by the softer EUR (see below). The EUR equates to 58% of the USD index. The US ten-year continues to trade near the bottom of its 2014 range. US retail sales (Tuesday) and a speech by Fed Chair Yellen (Friday) are the US macro highlights this week. While the US developments may cause some intra-day volatility, we think near-term movements in the USD will be driven by ongoing reaction in the EUR to building expectations of additional ECB policy easing and geopolitical tensions in the Ukraine. We think the USD can grind a little higher in the short term, but over the medium-term we continue to think the USD will be weighed down by relatively lower US real interest rates and the US’ US$380 billion current account deficit.
AUD/USD continues to hover in the top half of the range occupied since April. The Australian Federal Government Budget (Tuesday 5:30am EST) is the domestic focus this week. While the budget is expected to be tough, with both spending cuts and tax rises likely, measures are expected to be back-end loaded. Headlines about a contractionary budget may raise market expectations the RBA could be on hold for longer than currently anticipated. Nonetheless, we think the direct impact on the AUD from the budget should prove transitory. The budget should help underpin Australia’s AAA sovereign credit rating, at a time the transition in the domestic economy away from mining-investment led growth is coming through and the global economy is picking up. The Chinese data released prior to the Australian budget should dominate market interest in tomorrow’s Asian trade (Tuesday 1:30am EST). We see mild upside risks to the market consensus looking for 12.2% (YoY) growth in retail sales and 8.9% (YoY) growth in industrial production. While the AUD may be volatile early in the week, we expect the AUD to remain supported, particularly against the EUR.
Australian yields were slightly higher across the curve in Asia today. In Australian rates the highlight of the week is the Australian Federal Budget on Tuesday. A tight budget could lift expectations that the RBA is on hold for longer. But we do not expect much lasting impact in the rates market. Offshore developments such as tensions in the Ukraine remain a focus and should dominate moves in the long-end.
EUR continues to be dampened by last week’s dovish ECB press conference and increased probability of further policy stimulus in June. There are a number of Eurozone data points this week including the German ZEW survey (Tuesday), final estimate of April Eurozone CPI (Thursday) and Q1 GDP (Thursday). Expectations are for an acceleration in GDP growth from 0.2% (QoQ) to 0.4% (QoQ) and no change in annual inflation from the flash estimate of 0.7% (YoY). On balance, given the dovish leanings of the ECB, we think downward surprises in the Eurozone data will add to expectations for ECB action and EUR downward pressure. The Eurozone’s real interest rate advantage and large current account surplus should remain EUR supportive. We don’t expect EUR/USD will decline below the 200-day moving average of 1.3621. In our opinion a better way to express a bearish EUR view appears to be via EUR/GBP (see below).
GBP has softened against the USD but stayed firm against the weaker EUR over the past few sessions. The GBP focal point is on Wednesday with the release of the UK labour market data and the BoE’s quarterly Inflation Report. We expect a further decline in the UK unemployment rate and an upbeat BoE Inflation Report. Both are likely to keep market expectations of BoE policy tightening towards year-end in play and in our view be GBP positive. The divergence between the outlook for ECB and BoE policy and increasingly negative German-UK two-year swap spread (which is now at its most negative since October 2008) should continue to dampen EUR/GBP. GBP/AUD looks set to remain bound within its 200-day (1.7802) and 100-day (1.8324) moving averages.
USD/JPY continues to consolidate around 102.00. Data released today showed that on a seasonally adjusted basis, Japan recorded its third straight monthly current account deficit in March (or 4th deficit in 5 months). The monthly adjusted current account deficit was JPY 783bn in March, this is a new monthly record. On our estimates, Japan recorded a current account deficit of 1.2% of GDP in Q1 2014. This is a big swing from the large current account surpluses Japan used to record. The deterioration in Japan's balance of payments is the main factor why we think the JPY will continue to weaken (USD/JPY and cross/JPY higher) over the medium-term.
NZD/USD has eased off its highs over the past week following the RBNZ Governor’s speech that highlighted the risk of FX intervention. Further jawboning could come this week during the press conference and/or parliamentary hearing following the RBNZ’s Financial Stability Report (Tuesday EST). However strong Q1 New Zealand retail sales (Tuesday EST) released in the period between the FSR press conference and parliamentary testimony would provide an offset. In our opinion, New Zealand’s fundamental backdrop, including rising interest rates, a high terms of trade and robust domestic economy should support the NZD on dips.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – Retail sales (Tuesday), CPI (Thursday), industrial production (Thursday). Fed speakers: Plosser (Monday), Lockhart (Tuesday), Lacker (Tuesday), Yellen (Friday), Bullard (Friday).
AUD – Chinese retail sales and industrial production (Tuesday), Australian Government Budget (Tuesday). RBA speakers: Ellis (Tuesday), Ellis (Thursday).
GBP – Employment data, Bank of England Inflation Report (Wednesday).
EUR – ZEW Survey (Tuesday), Industrial production (Wednesday), ECB Monthly report, CPI, Q1 GDP (Thursday). ECB Speakers: Lautenschlaeger and Weidmann (Tuesday), Mersch and Weidmann (Wednesday), Constancio and Mersch (Thursday), Coeure (Friday).
NZD – Retail sales (Tuesday EST / Wednesday AEST). RBNZ Financial Stability Report (Tuesday EST / Wednesday AEST). 2014 Budget (Thursday). RBNZ Speaker: Wheeler (Tuesday BST / Wednesday AEST).
JPY – Q1 GDP (Thursday). BoJ Speakers: Kuroda (Thursday).
AUD & NZD Today
Narrow 30 point ranges overnight with both AUD and NZD well contained within ranges that have held for a week now …. With the normal Exporter / Short-term account sellers around ranges of 0.9330/0.9400 and 0.8590/0.8660 look like they will easily contain on the day. Overnight comments out of China from President Xi that China needs to get used a new normal for growth and PBOC head Zhou that China will not use any large stimulus to boost the economy have been largely ignored by AUD and NZD, however it looks like the Iron-ore market is listening as it slips to near fresh 2 year lows and eyeing a potential test of the psychological $100/tonne mark sometime soon. Federal Budgets to be released in Australia and NZ this week with much leaked already especially around the tough Australia budget (spending cuts and tax rises), tonight sees the release of monthly Chinese Retail Sales, Industrial Production and Fixed Asset Investment data. Look for more potential jawboning for the NZD from the RBNZ during the earlier part of this week also during the press conference and/or parliamentary hearing following the RBNZ’s Financial Stability Report.
Thoughts from our Trading Team
A very quiet market, with a large expiries at 1.3760 and 1.3770. Bids are in front of the 100 day moving average at 1.3740 and offers camped between 1.3790 to 1.3830.
Extremely quiet and followed EURUSD.
Very quiet, a with us stuck in a tight trading range around 101.90. Bids appear from 101.50 down and offers are camped above 102.20.
GBP the flavour of the morning with continued talk of pre-election UK rate hikes… this has been reflected via EUR/GBP as we have broken the 61.8% Fibbo support of the .7756-.8815 move at .8160… the next target is now the .8085 previous lows, and a breakdown of Eur/Usd through the 100 DMA at 1.3740 will certainly help add weight to this cross break.
Large expiries at 0.9350 and 0.9410 rolling off in the next few days keep us buoyant, as well as the ever corporate interest to buy AUDUSD. We bought circa 200m AUDUSD overnight and have the same bids as last week between 0.9330 and 40. Gamma offers are present in front of 94 cents, but with the AUD budget tomorrow I would expect the market to be square by the end of the day.
Sidelined this morning inside .8614-.8631… .8604 the low on Friday’s late WMR sell off remains the short term support.