CBA FX Strategy
22 May, 2014
New York Open
Thoughts from our Strategy Team
- USD is expected to continue its listless trading seen in the past two weeks.
- AUD/USD is supported by buoyant equity markets and better than expected HSBC China manufacturing PMI.
- Similarly, positive market sentiment should continue to buttress USD/JPY and JPY crosses.
- Thai army announced coup after imposing martial law for the past two days, on which USD/THB spiked.
USD and US Treasuries had little reaction to the minutes of the FOMC’s 29-30 April meeting and was little changed today. On that note, the USD index has been trading in an extremely tight range for the past two weeks. The minutes showed “meeting participants generally indicated that their assessment of the economic outlook had not changed materially since the March meeting". There was some discussion on the Fed’s exit strategy. But the discussion did not really touch on new ground…”the Committee should consider a range of options and be prepared to adjust the mix of its policy tools as warranted”. The range of options include: raising the interest rate paid on excess reserves (IoER); overnight reverse repos; a term deposit facility; and lifting the Fed fund rate. There were no details on when the Fed may stop reinvesting the proceeds of its asset purchases and the possible timing of selling the assets on the Fed’s balance sheet. Low US and global inflation pressures, a large but closing US output gap, and policy easing in Europe are currently containing US and global yields.
EUR/USD was trading near its lowest levels since late February. Eurozone May PMIs are a mixed bag. Both manufacturing and services PMIs out of France fell unexpectedly into contraction territory. On the other hand, while German manufacturing PMI declined from 54.1 to 52.9, services rose to 56.4, its highest since June 2011. As a result, there is no change in the composite Germany PMI (56.1 in May) from April. The composite Eurozone May PMI is in line with expectation and EUR/USD was unimpressed. The ongoing divergence between the Eurozone's 2 largest economies, coupled with the low Eurozone inflation, should only solidify expectations for further ECB policy support in June. While the Eurozone economy is improving, the amount of spare capacity in the economy is dampening inflation. Low inflation remains the main focus for the ECB and why we expect further policy stimulus to be announced in June. These expectations should continue to act as a EUR headwind. The contrasting outlook between the ECB and BoE should continue to weigh on EUR/GBP which is now at its lowest level since early January 2013.
AUD outperformed in today’s trade, supported by the lift in regional equity markets and the better than expected flash estimate of the May HSBC China manufacturing PMI. The HSBC PMI exceeded the top end of market consensus, lifting to 49.7. This is a five-month high and significantly the improvement was driven by a rebound in output and orders. While developments in iron ore prices remain a market focus and still pose a near-term downside risk to the AUD, the improvement in the HSBC PMI may improve sentiment towards the AUD. A further lift in the AUD is likely today as offshore participants react to the HSBC China PMI data. As we wrote yesterday, we caution becoming too bearish on AUD. An improving domestic and global economy, relatively high Australian rates, low volatility, foreign demand for A$ bonds, a narrowing Australian current account deficit, and a soft USD, all suggest any renewed declines in the AUD should be modest.
In Australian rates, yields lifted today, with the 3s10s curve steepening slightly. Yesterday’s moves in US Treasuries and the better than expected HSBC China PMI supported the increase in yields. There is little of note on the domestic calendar until the Q1 Australian CAPEX report (29 May). Until then, moves in Australian rates will remain contingent on offshore developments.
USD/JPY and cross/JPY lifted in today’s Asian trade and continued to be supported in the European morning. Positive market sentiment, as illustrated by the lift in regional equities and sell-off in bond markets, has weighed on the JPY. We recommend taking advantage of the seasonal weakness in AUD/JPY. In our opinion, there are a number of factors that point to a more sustained rebound in AUD/JPY, such as the RBA’s neutral stance, more policy easing by the BoJ, the low volatility environment, the collapse in Japan’s current account surplus, and the relative smoothness in Australia’s economic transition. See the attachment for more details.
GBP/USD continued to consolidate following yesterday’s UK retail sales and BoE minutes-induced rise and was a touch softer into European trading ahead of the second estimate of Q1 UK GDP which matched the first estimate. The ongoing trend of positive UK economic data continues to support GBP and UK yields. The GDP in itself is a strong result, and confirms that the UK economy grew at an above trend pace over the year to Q1. April Public Finances were also released and came in worse than expected which put some mild pressure on GBP.
USD/CNY fixing was again in line with expectations and the pair traded in an extremely tight range of around 1% above its midpoint. There were talks onshore on PBoC providing liquidity to Bank of China and China’s Construction Bank in the tune of 300 to 400bn, which were swiftly denied by both banks. The PBoC injected on a net basis 120bn this week, which probably stokes market speculation of looser monetary stance. However, the seasonal injection coincides with tighter liquidity conditions arising from corporate tax payment. On that note, interbank rates are absolutely unchanged. USD/CNH saw selling interests on the back of positive regional equity markets and better than expected HSBC China manufacturing PMI, although it didn’t manage to dip much lower than its onshore counterpart as uncertainties over PBoC action lingers. Elsewhere in Asia, USD/THB shot up following the news that Thai army announced military coup after imposing martial law for the past two days. Situation remains fluid and should keep USD/THB upside wide open.
NZD/USD showed little reaction to the RBNZ’s Q2 survey of two-year inflation expectations which came in roughly in line with Q1 (2.36% vs 2.33% prior). Although the inflation environment remains contained for now the expected lift in inflation pressures has prompted the RBNZ to start its tightening cycle by lifting the cash rate in March and April, and we expect another increase in June. We remain of the view that New Zealand’s economic fundamentals and rising interest rate environment should continue to support the NZD, particularly while financial market volatility remains so low.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD –Markit May PMI (today).
AUD –Q1 Australian CAPEX (29 May).
EUR – German IFO (Friday). ECB speakers: Linde and Lautenschlager (Friday).
CAD – Retail sales (today), CPI (Friday).
NZD –Trade balance (26 May).
AUD & NZD Today
AUD buoyed overnight thanks to better than expected flash estimate of the May HSBC China manufacturing PMI which exceeded the top end of market consensus, printing five month highs of 49.7. Exporters were the main buyers on the release taking the pair a quick 40 points higher before running into macro sellers above 0.9270. Bit of a wave of USD buying during London has pushed the pair lower but we believe this may present opportunities to get long. Our traders like buying on dips and will wait to buy into the 0.9210 area Key support remains 0.9210-0.9200 with further buying interest 0.9190-0.9170 ahead of the 200 dma at 0.9172. Sellers lined up 0.9290-0.9310 with stops 0.9315.
NZD continues to follow the path of the AUD initially benefiting from the strong China data. The pair showed little reaction to the RBNZ’s Q2 survey of two-year inflation expectations which came in roughly in line with Q1 (2.36% vs 2.33% prior). Key support remains intact at 0.8520 and we continue to look to buy on dips down there. Exporter bids 0.8540-0.8520 today, offers 0.8590-0.8610 with stops layered above 0.8620.
Thoughts from our Trading Team
Mixed PMIs shrugged off as dips bought this am. Possibly related to a squeeze in end of month funding as EONIA O/N average 0.271 yesterday from 0.196 Tuesday. 1 Week also some 4bps higher. 1.3630-40 the guardian to further losses with short term shorts likely to stop above 1.3750.
Corporates return an sell $chf this am in the .8930’s
Very quiet, trading in a 10 tick range thus far.
On the 3rd consecutive day of UK data releases, maybe the expectations of a full house of better than expected releases was always going to be a big ask… The London kick-off once again began pricing in a positive number, trading up from 1.6880 to 1.6917… GDP didn’t disappoint, ‘but’ came out bang on expectations at 0.8%, and this I suppose wasn’t quite enough for the longs. We almost immediately began turning left back below the figure, and the weak stops below the 1.6880 open were very soon after tripped to make an eventual low of 1.6862… we’ve continued to base on multiple attempts below 1.6870 since, which in turn has helped EUR/GBP cap above .8110…
One would presume that with the flurry of data we had coming to us this week, there are many spec accounts in the market long of Gamma this week, and I think that perfectly explains the recent resistance we have found on the approach of both sides of 1.6850 this week… Look for 1.6860/1.6910 to govern short term moves, with an outside risk of squaring of GBP longs into the long weekend for both the UK & USA being a potential outside risk of 1.6850 + .8130 pivots being tested in both Cable and the cross.
Support: 0.9240, 0.9205, 0.9170 (still key)
Resistance: 0.9290, 0.9330, 0.9360
Yesterday saw the continuation of large selling in the market, with a US investment banking name being the stand out seller in my session. Overnight we saw good interest to buy AUDUSD from the hedge fund community in NYC, however this had little impact on the market which still traded in a tight 0.9210 / 45 range. The release of the much better than expected China PMI, coming in at 49.7 against an expectation of 48.1, saw AUD revalue to 0.9265, printing a high of 0.9274 at the time of writing this piece, against a price of 0.9220 / 25 pre data.
So what for today? The levels to the downside is clearly defined now with fibbo from the whole move coming in at 0.9212, as well as mirroring (almost) the NFP low at 0.9203, followed by the moving average in the 0.9170 area. The topside there should be initial resistance between 0.9280 / 90, however the key resistance now for bears will be seen between 0.9315 / 25. I will look to trade the range today, while keeping a key eye on the EURAUD cross with 1.4650 / 1.4875 being the range to watch.
Extremely quiet .8572-.8589 range this morning.
Simply put: AUD remains tied up in knots around the .9250 & .9260 Strikes & AUD/NZD remains sidelined whilst above both the 55 & 100 DMA, leaving the NZD with nowhere to go. The 0.8620 level remains key for shorts.