CBA FX Strategy
14 May, 2014
New York Open
Thoughts from our Strategy Team
After showing limited reaction to the Australian national budget yesterday AUD/USD lifted in today’s trade. The fiscal consolidation being undertaken by the Australian government is unlikely to be a significant drag on growth, and wont sway the RBA into further action. We continue to think the next move by the RBA will be a rate hike. AUD/USD touched its highest level since mid-April in Asia, and AUD outperformed on the crosses. The lift in the AUD has broadly tracked the strength in regional Asian currencies. In addition, based on some of the sharp moves in select Asian currencies late in today’s session, it is reasonable to assume some regional central banks may have intervened in an effort to weaken their respective currencies. Increased diversification of accumulated USD reserves by regional central banks into other currencies is another factor that may be supporting the AUD at the current juncture. There are no major AUD-centric releases over the remainder of the week. In our view, the improving domestic fundamentals and the higher risk-adjusted return on offer in Australia should keep the AUD firm.
Following yesterday’s moves in the US, Australian interest rates eased slightly lower today. The Australian national budget announced yesterday is not expected to have a major dampening impact on growth. Hence, the RBA is not expected to provide an offset. We continue to think the next move by the RBA will be a rate hike in Q4 2014. In the near-term, with little on the domestic horizon, offshore developments will be the dominate driver of Australian rates.
The USD index consolidated today but remains near its highest level since early April. There is little on the calendar that is likely to have a lasting impact on the USD and/or US interest rates until Fed Chair Yellen speaks later this week (Thursday 6:10pm EST). Yellen is speaking to the US Chamber of Commerce and we expect she will stick to the recent strict. Should it be discussed, we think Yellen will reiterate that policy will remain accommodative even as the US economy gathers momentum. We continue to think that in the lead up to Yellen’s speech movements in the USD index will be driven primarily by ongoing reaction in the EUR to building expectations of additional ECB policy easing. EUR underperformance should continue to support the USD, but a dovish Yellen may dampen the USD later in the week.
NZD/USD edged up modestly today, and at the time of writing was approaching yesterday’s intra-day highs. As has been the case for a while NZD/USD appears well supported on dips down towards 0.8600. The RBNZ’s Financial Stability Report (FSR) did not have any specific comments on NZD intervention within the text. In the accompanying press conference RBNZ Governor Wheeler noted that the RBNZ was looking at the “exchange rate implications” in regards to its tightening cycle. The RBNZ Governor did not try to talk down the NZD in his parliamentary testimony, but did state that the NZD carry trade is “quite strong” and “may strengthen” further. In terms of the data flow, Q1 New Zealand retail sales underwhelmed expectations printing at 0.7% (QoQ) (consensus 0.9% QoQ)). However a 0.2%pt upward revision to the previous quarter provided an offset. In our opinion, New Zealand’s fundamental backdrop, including rising interest rates, a high terms of trade and robust domestic economy should continue to support the NZD.
EUR/USD inched up off its lows in today’s trade, but remains within 0.2% of its lowest level since early April. March Eurozone industrial production came in today at -0.3% as fcst. Negative data surprises would add to expectations for further ECB action. We prefer to express a bearish EUR via EUR/GBP (see below). Given the dovishness of the ECB, EUR/AUD should also remain heavy.
GBP/USD is lower today after unemployment data and the Bank of England’s Quarterly Inflation Report. UK ILO unemployment rate falls 0.1% - in line with consensus of 6.8% - continues the positive trend in the UK labour market - lowest unemployment rate since early 2009. The 3M/3M employment growth of 283k was better than expected. Average weekly earnings (3m/yoy) of 1.7% is underwhelming and reinforces low inflation expectations. However, we still see a risk to the upside on the BoE’s growth view – continuing a trend of upward revisions. All up, this should keep front end UK rates pricing lift-off for Q1 2015.
BoE inflation report: Carney sees slack being used up and expects growth of 3.4% this year and 2.9% next year. BoE is "moving closer to rate increase point". Those forecasts, like the 5Y low in unemployment clearly aren't hawkish enough for the market. And Carney is also continuing to emphasise low rates for longer and low inflation expectations. Carney also saying he "doesn't want to validate any market rate curves". Short sterling strip well bid. UST yields at YTD lows and risk of breaking lower - low vol, short FI positioning and ongoing dovish rhetoric continues to overwhelm the improving macro pulse.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD –CPI (Thursday), industrial production (Thursday). Fed speakers: Yellen (Friday), Bullard (Friday).
AUD – RBA meeting minutes (20 May). HSBC flash China PMI (22 May). RBA speakers: Ellis (Thursday), Debelle (20 May).
EUR – ECB Monthly report, CPI, and Q1 GDP (Thursday). ECB Speakers: Constancio and Mersch (Thursday), Coeure (Friday).
NZD –2014 Budget (Thursday).
JPY – Q1 GDP (Thursday). BoJ Speakers: Kuroda (Thursday).
AUD & NZD Today
NZD shrugged off a slightly weaker Q1 Retail Sales report overnight and with no real NZD jawboning by RBNZ’s Wheeler when he released the RBNZ stability report combined with weaker US Yields has seen Kiwi push back towards resistance near 0.8680 …. We look for a 0.8620/80 range on the day, a few weak stops have built to the topside but further sellers wait patiently ahead of 0.8720. AUD also extended itself to the topside bettering last week’s high near 0.9390 by another 20 points overnight on demand from increased reserves diversification and weaker US Yields, the move above 0.94c did draw out plenty of Aust Corp sellers who will continue to be good sellers on any further moves towards 0.9430/40 on the day with Intraday still sellers on rallies as well … 0.9340/50 contains the buying interest on the day. AUD will continue to see demand on dips from increased diversification of USD reserves by certain Asian Central Banks who may be currently intervening in their respective currencies.
Thoughts from our Trading Team
Treading water close to 1.3720. Brief 10 pip rally on the following comments ECB'S PRAET SAYS WILL ONLY CONSIDER QUANTITATIVE EASING MEASURES IF EURO ZONE ECONOMY, INFLATION DEVELOP SIGNIFICANTLY WORSE THAN WE EXPECT –PAPER. Then a run down to 1.3705 on Eurjpy selling (Stop/losses triggered). Looking at my 2 year rate spread Euro fair value is above 1.3800.
$/chf lags the $ yield move as Eurchf remains bid around 1.2200.
The JPY complex has tracked the yield lower this morning. This was initially led by USDJPY trading below 102.00, however followed by EURJPY triggering a raft of model stops below the cloud base at 139.90 / 140.00.
Over expectancy and market positioning catches GBP longs very wrong footed this morning, despite the Employment data and the subsequent BOE Inflation Report being only ever so slightly more dovish than expected.
Cable traded as high as 1.6875 pre the Employment data, and fell down into the 1.6810’s on the slightly weaker print… the longs who averaged here in hope of being rescued by the BOE Inflation report were disappointed when the headlines included: *BOE SAYS MARGIN OF U.K. SPARE CAPACITY HAS NARROWED SLIGHTLY* *BOE SEES SCOPE TO REDUCE SLACK FURTHER BEFORE RATE INCREASE*. This saw a quick drop through previous 1.6770 lows and a spike in EURGBP .8174 previous highs taking out intraday positioning. Neither move sustained momentum, and we greet the States back around the 1.6795 and .8165 levels.
Very quiet yet again and we have traded in a tight 0.9390 / 0.9410 today.
So far this morning we have seen a failed break of the previous 1.0875 high in the cross which yielded only a 1.0881 high… market gives up on the trade lounging back to 1.0855, lifting Kiwi off the low .8640’s up into the high .8650’s as ATM Gamma continues to rule NZD/USD.