CBA FX Strategy
20 May, 2014
New York Open
With few economic data releases, markets should remain relatively quiet today.
RBA’s Debelle notes that the expected decline in capital inflows should weigh on the AUD in the medium-term.
The fall in the iron ore price is a risk to AUD in the near term.
UK CPI is the main event offshore and will feed into markets views for the start of the BoE’s tightening cycle.
GBP/USD has rebounded over recent sessions towards last week’s pre-BoE Inflation Report levels. Yesterday’s comments by BoE Governor Carney that rising UK house prices pose the biggest risk to the UK economy, macro-prudential measures could be considered, and that GBP strength is generating “real challenges” for UK exporters and the UK expansion have had no lasting impact on GBP. Similarly, the initial modest lift from today’s faster than expected UK April CPI, an important input for helping assessing the timing of a BoE interest rate increase, was also fleeting. Consumer prices rose by 0.4% from March, beating market consensus of 0.3% marginally, although the modest acceleration was mainly due to airfare surge of 22% (MoM) ahead of Easter weekend. BoE said last week that the recent GBP strength is likely to have generated some “temporary downward pressure on inflation” and it sees headline CPI below its 2% target “over the next few years”. Interest rate markets are pricing the first BoE rate hike in Q1 next year. In addition, the BoE’s Bean is also set to speak today (1:30pm). Should policy be discussed, comments by Bean reiterating that the BoE’s future tightening cycle will be gradual would not be too dissimilar to the BoE’s recent rhetoric. Looking ahead, UK retail sales and the May BoE meeting minutes are due on Wednesday, while the second estimate of Q1 UK GDP is released on Thursday. On balance we think the data and the BoE minutes risk being positive and support a further rebound in GBP. When combined with the dovish ECB and deeply negative German-UK two-year swap spread, EUR/GBP should remain heavy. GBP/AUD has moved back above its 50-day moving average (1.8056). Positive UK data later this week should support a further modest increase in GBP/AUD.
AUD/USD has continued to drift lower today, and is sitting above its 50-day moving average (0.9268). As expected, given the release of the RBA’s Statement on Monetary Policy in the days after the May RBA meeting, the meeting minutes revealed nothing new. The minutes confirmed the RBA’s neutral policy stance. In a speech on “capital flows and the Australian dollar” later in the session, RBA Assistant Governor Debelle noted that the strong capital inflows into Australia over recent years are expected to ease “in the period ahead, with the possibility of a consequent further decline in the Australian dollar”. In the Q&A Debelle repeated that a lower AUD would help “deliver more balanced growth” and that the AUD is more likely to be “lower then higher in the medium-term”. While Debelle’s comments aren’t new they may get more traction in today’s early European trade. The other main focus for the AUD continues to be the decline in iron ore prices, which are now back below US$100/tonne for the first time since September 2012, as port-side inventory in China continues to hover above its record high of 100mn tons. Although iron ore prices often fall at this time, the negative sentiment and implications for Australia’s terms of trade may act as an AUD headwind in the near-term. To date, iron ore prices have declined by 6.5% in May 2014. The average decline in May between 2010 and 2013 was 11.9%.
USD/CNY fixing is in line with expectation for the 9th consecutive session (defined as deviation from CBA fixing model of below 10pts). Intraday, USD/CNY spot traded 1.26% above its midpoint and struggled to stay above 6.24 levels. The People’s Bank of China (PBoC) appears unwilling to step up USD buying to lift USD/CNY further, as, we have explained previously, the central bank is increasingly feeling USD/CNY gravity. On that note, the PBoC injected liquidity, on a net basis, last week through reverse repos following a total withdrawal of more than 1 trillion CNY since February. The injections coincided with more subdued FX intervention by the PBoC and possibly USD consolidation in the past sessions. Interestingly, the PBoC and CBRC jointly issued a statement with introducing quantitative restrictions on interbank funding activity. We believe the PBoC, grappling with flush liquidity conditions in the banking system, is trying to curb interbank funding and consequently fast credit expansion at some more leveraged FIs. If the PBoC, as we expected, maintains curbing credit expansion as its key medium-term policy objective, further heavy lifting in USD/CNY should become more sporadic. We continue to recommend selling USD/CNY NDFs against fixing for more attractive carry and against a softer USD. We would refrain from initiating sizable USD/CNH longs, as the PBoC could still lift both fixing and onshore spot in coming sessions. USD/CNH has been trading in lockstep with its onshore counterpart on that expectation despite sluggish USD performance.
Elsewhere in Asia, Singapore released its second estimate of Q1 GDP numbers which was revised up as expected. However, we believe despite the sizable upward revision in manufacturing output, without noticeable pick-up in export performance, growth outlook remains extremely uncertain in the largely externally driven economy. In fact, SGD nominal effective exchange rate (NEER) fell from 0.5% above to its midpoint in the past weeks, pointing to continued weak price developments and heightened uncertainty in growth outlook. We initiated a short SGD/MYR 1m fwd position on 2 Apr and we continue to like the trade having lowered stop/loss to 2.5800 (see attached note). USD/KRW spiked higher after once again approaching the 1020 level. While unconfirmed, we assume the move was triggered by FX intervention by the Bank of Korea. If it was FX intervention, diversification of accumulated USD reserves into other currencies such as AUD and CAD may come through over coming sessions.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – FOMC minutes (Wednesday), Markit May PMI (Thursday). Fed speakers: Plosser, Dudley (today), Yellen, Kocherlakota (Wednesday).
AUD –wages (Wednesday). HSBC flash China PMI (Thursday).
EUR – Current account (Wednesday), Flash PMIs (Thursday), German IFO (Friday). ECB speakers: Linde and Nowotny (today), Linde (Thursday), Linde and Lautenschlager (Friday).
JPY – BoJ policy meeting, trade balance (Wednesday).
GBP – CPI, Bean speech (today), BoE minutes and retail sales (Wednesday), 2nd estimate of Q1 GDP (Thursday). BoE Speakers: Haldane (Wednesday).
CAD – Retail sales (Thursday), CPI (Friday).
NZD – Reserve Bank of New Zealand two-year inflation expectation (Thursday).