CBA FX Strategy
15 May, 2014
New York Open
Thoughts from our Strategy Team
The USD index has moved higher this morning primarily due to the USD’s strength vs the EUR. This increase comes despite the sharp decline in US yields. US 10 year yields are now at their lowest since October 2013. In our view, 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 (today 6:10pm EST). We expect Yellen to stick to the recent stript, i.e., there is a lot of slack in the labour market that will require monetary policy to remain accommodative even as the US economic recovery gathers momentum. Confirmation that US core CPI remains low will support expectations that the FOMC is a long way from lifting the funds rate – we do not expect a large reaction on US rates or the USD (8:30am EST). 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.
AUD/USD has given back some of yesterday’s gains, but is still slightly up on the week. With no Australian data released over the remainder of the week, AUD is likely to be well supported near current levels ahead of Yellen’s speech. In our view, the improving domestic fundamentals and the higher risk-adjusted return on offer in Australia should keep the AUD supported.
USD/JPY remains down near its weekly lows. This comes despite the stronger than expected Q1 Japanese GDP data. The Japanese economy expanded by 1.5% (QoQ) in Q1. The market was looking for growth of 1.0% (QoQ). The activity data such as industrial production had been pointing to a strong result. But Q1 is likely to be the high point. There was a lot of bring forward of activity/spending in Japan to beat the 1 April increase in the consumption tax. Looking ahead, Q2 Japanese GDP is likely to fall as the “bring forward” of demand fades. If the bring forward of spending is large, the Bank of Japan may implement further policy easing in Q2/Q3 to prevent a deeper slump in Japan’s economy. Over the medium-term we continue to think that the collapse in Japan’s current account surplus will continue to weigh on the JPY. But in the short-term, the movements in US bond yields is likely to be the key driver of USD/JPY direction.
GBP underperformed yesterday on the back of the UK labour market data and Bank of England (BoE) Inflation Report. Despite acknowledging that the UK economy is “moving closer” to a rate increase, Governor Carney tried to temper market expectations by stressing that the amount of excess capacity means that rates will remain low for “some time”. Market pricing on the short-sterling futures curve for the first BoE rate hike was subsequently pushed out from Q4 2014 to Q1 2015. We think the moves in GBP yesterday are only a temporary setback. In our view, GBP should bounce back, particularly against the EUR. The UK economy continues to perform well, and the focus around the BoE remains on “when, and not if” it will start to tighten policy.
EUR/USD has set new lows this morning on the back of several factors. EZ GDP came in at +0.2% well below the consensus of +0.4%. ECB’s Constancio said the CB was determined to act swiftly on inflation and does not rule out more monetary easing. Finally EZ, CPI was confirmed at just +0.7% y/y. ECB officials continue to indicate that further easing is likely with even the hawkish Bundesbank President Weidmann stating that “when there is a need to act” policymakers should act. Given the dovishness of the ECB, EUR/AUD should remain heavy.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – CPI (Today), industrial production (Today). Fed speakers: Yellen (Friday), Bullard (Friday).
AUD – RBA meeting minutes (20 May). HSBC flash China PMI (22 May). RBA speakers: Ellis (Today), Debelle (20 May).
EUR -- ECB Speakers: Coeure (Friday).
JPY – BoJ policy meeting (21 May).
GBP – BoE minutes and retail sales (21 May). BoE Speakers: Carney (20 May).
AUD & NZD Today
AUD and NZD sidelined with all the action in the Euro overnight, again 30-40 point ranges were the best we saw with mainly intraday accounts getting involved with some sporadic interest from domestic Corps/Exporters at either side of the ranges…. Today in AUD we continue to expect 0.9400/30 to offer stiff resistance with layered corporate interest waiting patiently while Exporters play the same waiting game keeping their interest intact below 0.9330/40. NZ’s Federal budget passed without incident overnight projecting a slightly larger surplus than expected, ratings agencies have given it the tick of approval …. NZ PMI printed its 19th month in a row expansion coming in at 55.2 … we look for a 0.8640/0.8690 range on the day with Kiwi gaining additional support against the AUD cross at the moment with that pairing again capped by strong resistance in the 1.0860/80 in the last 12-18hrs, the 6th time this region has held since late April … 1.0750/70 will be the first line of support should this pairing continue to drift lower on the day.
Thoughts from our Trading Team
Euro hit from 1.3710.
After a 9 point range in the Fareast and London opening at 1.3715 it looked as if Europe was in for a quiet one. This was not the case as Euro drops some 50 tics. Unknown supply came to market with the pair trading at 1.3710 which pushed the single currency aggressively lower. Good amount of Euros changing hands 1.3660-75. As I write we break 1.3660. Plenty of rhetoric post ECB, suggesting they are going to act at next meeting. A price above 1.3760 would suggest the offered tone is waning. Support should be seen at 1.3640 and 200 DMA comes in at 1.3625 ish.
Surprisingly CHF weaker this morning with Eur/chf better bid against a lower Euro v majors. $/CHF is ignoring recent lower $ yield and is some 70 pips above RV according to my simplistic rates correlation chart.
The JPY complex initially tracked higher across the board this morning, with USDJPY trading to a high of 102.13 and EURJPY to 139.80. However a large sell order in EURUSD, as well as dovish ECB rhetoric saw EURJPY aggressively move lower, taking out key support at 139.40 / 50 in the way to a low of 139.11 at the time of writing this piece.
Cable took the opportunity of the Euro drop to trigger the last of the long stops which still lingered after yesterday’s slightly dovish BOE Inflation Report.
Breaking down through the 1.6750 level yielded a 1.6732 low print, and we have since lounged back to 1.6755/60 where we await the States.
Relatively quiet compared to the rest of the G10, however EURAUD has seen a good rejection of the 1.4650 level overnight and with EURUSD trading heavy, this has continued to be the way of the market. We have seen informed GBP/AUD sellers in Asia, with a stop above 1.7910, so this will lead me to believe AUDUSD will continued to be underpinned with key support still not tested this week of 0.9315 / 20. Key resistance is eyed between 0.9410 / 25, followed by the previous high of 0.9460.
NZD/USD opened strong as late Sydney tripped what looked like stops below 1.0800 in the cross (recall yesterday’s failed/false break higher of the 1.0874 resistance)… NZD subsequently opened on the highs above .8690 in London, and has slid lower on the back of the dominant Euro move of the morning. Range thus far: .8665-95, and currently sits around .8670.