CBA FX Strategy
27 May, 2014
New York Open
Thoughts from our Strategy Team
Quiet trade so far this week. This is unsurprising given the holidays in the US and UK with no major economic data scheduled in Europe or the US today.
EUR has modest downside risks this week. Draghi’s ECB is “not resigned to allowing inflation to remain too low for too long”.
The focus today is likely to be on any comments coming from the ECB’s annual forum.
Fonterra payout announcement due tomorrow. Downward revisions risk weighing on NZD.
It has been a quiet start to the week. This is unsurprising given the holidays in the US and UK yesterday and with limited data released today. The focus in the European session is likely to be on any comments coming from the ECB’s annual forum. EUR/USD is trading just above its 200-day moving average (1.3640) but little changed on the day. Comments yesterday by ECB President Draghi at the ECB’s annual forum reinforce our own and the markets expectations for further policy action on 5 June. President Draghi warned about the potential for a “negative spiral” between low inflation, credit contraction and falling inflation expectations. Draghi stressed that the ECB is “not resigned to allowing inflation to remain too low for too long” and that an extended departure from the ECB’s projected baseline scenario would be met by a “broad-based asset purchase programme”. Earlier, ECB’s Nowotny told reporters in Vienna that “our problem is that of a too-low inflation, which is significantly below the ECB’s target of 2%”. On the other hand, Nowotny also said that “euro breakup narrative isn’t relevant in market anymore”. Today, ECB’s Chief Economist Praet chairs the morning panel discussion on the topic of “Monetary policy and balance sheet adjustment” without providing much comment himself. Later, the Armchair Discussion by President Draghi (9:30am), while a more likely reiteration of his comments yesterday, could generate some intraday volatility. We believe the ECB’s dovish bias should continue to keep a lid on EUR/USD and keep EUR/GBP and EUR/AUD down near their recent respective lows.
AUD has edged marginally higher in a quiet start to the week, and is grinding back up towards its 50-day moving average (0.9286). In Asian trading, news of China’s May economic data should show improvement lift market sentiment somewhat. On that note, we took another look at China’s shadow banking sector. While we see possible risk of a spill-over from likely defaults especially in the trust companies and wealth management products, we are of the view that it remains a tail risk at the current juncture given the relatively limited exposure to off-balance-sheet lending activity at the systematically important state-owned banks (see attached note). The only economic focal point in Australia this week is the CAPEX report (Thursday). Further news of a successful “transition” in the Australian economy towards non-mining business investment will be supportive for further gains in AUD/USD later this week. AUD crosses are also likely to strengthen. EUR/AUD risks setting a new 2014 low over the coming week, particularly if the ECB delivers further policy easing on 5 June and the Australian data is positive.
NZD risks softening further over the next 24 hours after Fonterra, New Zealand’s largest dairy exporter, releases its opening season farm-gate milk price forecast for 2015 and possibly an update for 2014. Typically these forecasts are released between 4:00pm-5:00pm Tuesday. Most analysts and our New Zealand economists expect Fonterra to open with a conservative forecast of NZ$7.00 per kilogram, though Fonterra may release a price as low as NZ$6.50 per kilogram. However, given our positive outlook for China, New Zealand’s largest dairy export market, we remain positive about New Zealand’s economy, particularly as the rebuild of Christchurch gathers momentum.
Australian and Kiwi rates markets have remained subdued over the first few trading sessions of the week. The broader market will focus on the durable goods orders and other second tier data (with the Case Shiller house price index) in the US today. But neither is likely to generate much of a reaction in US rates. Long-end US rates remain near the bottom of their recent ranges. Medium-term, we continue to expect long-end yields to lift in line with the improvement in the US economy.
Upcoming Economic Calendar Highlights Important for Exchange Rates and Interest Rates
USD – US April Durable Goods (Tuesday); US May Consumer Confidence (Wednesday); US Q1 GDP second estimate (Thursday).
JPY – CPI, industrial production (Friday). BoJ speakers: Kuroda (Wednesday).
AUD – Q1 Australian CAPEX (Thursday).
GBP – BoE’s Carney speaks (2:00pm, today).
CHF – GDP (Wednesday).
CAD – Current account (Thursday), GDP (Friday).
NZD – Fonterra announcement of Dairy payout (Tuesday); May Business Confidence (Thursday); April Building permits (Friday).
EUR - ECB speaker: Draghi (9:30am, today). M3/credit, Eurozone industrial & economic confidence (Wednesday). May CPI flash estimate (3 June).
AUD & NZD Today
AUD and NZD have not ventured too far to start off the new week remaining within ½ cent ranges so far … Fonterra, New Zealand’s largest dairy exporter, releases its opening season farm-gate milk price forecast for 2015 and possibly an update for 2014 in the next 24 hours and remains the key data release as far as the NZD goes … we like a 0.8520/80 range going into the milk forecast but remain wary that a break of 0.8480/0.8500 will target 0.8380/0.8400 should a much weaker forecast eventuate … NZIER (NZ Institute of Economic Research) commented overnight that the current slump in NZ house sales poses a significant risk to the economy that may force the RBNZ to pause in June.
The key domestic data event for AUD this week is the release of CAPEX on Thursday morning local time in Australia where we get an update on the “transition” in the economy towards non-mining business investment. (we will get a look at the actual QI capex outcome, the sixth estimate for 2013 14 spending and most importantly, the second estimate for 2014 15 capex) … today we look for a 0.9210/80 range to contain AUD noting stops remain to the downside through 0.9200/10. The budget fall-out to confidence continued overnight with the weekly index release falling back to lows last seen in May 2009, next week’s Retail Sales release will be closely watched to see if any of this sharp shift in confidence leaves any lasting effect to the economy going forward.
Thoughts from our Trading Team
Higher $ v EM in a Position driven move.
A very quiet morning, post long weekend, 17 tic range. As mentioned last week, market awaits EZ CPI 3rd June and then ECB 5th June.
CHF weaker this am in a quiet market.
Very quiet, trading in a 20 tick range thus far. Support is seen from 101.40 down, with resistance and sell orders stack from 102.10 up.
Weaker 2nd tier data, UK BBA Loans Approved, appears to have put a dampener on GBP this morning as we fall back from an early morning 1.6883 high print (coinciding with the .8086 low in the cross). Commentaries looking for ‘reasons to fit moves’ casually suggesting month end Buba RHS interest in EUR/GBP might have commenced early, and we continue to weigh heavy latter morning, before eventually running into support once again on Friday’s lows ahead of 1.6810 in Cable, and last week’s highs around .8115 in EUR/GBP.
Ranges: 1.6813-1.6883 & .8086-.81135.
Support: 0.9215, 0.9170, 0.9140
Resistance: 0.9280, 0.9320, 0.9360
The AUDUSD and the AUD complex was quiet in terms of trading yesterday; with it being a holiday in the UK, as well as the US. However what cannot go down, has to go up and this certainly is the way that the market has traded in Asia overnight. The short term resistance at 0.9250 finally gave way with us seeing a mixture of stops, as well as gamma and hedge fund type selling. We have since traded up to the initial resistance of 0.9280 (high of 0.9278 at the time of writing), with the USD looking relatively softer across the G10 complex, with exception of the JPY. I personally feel that the danger is that we see a further squeeze up to above 93 cents, where Asian offers, as well as speculative, selling is noted. Having said that, I cannot advocate going long here, as the risk reward is poor and consequently I feel it would be prudent to wait until we see the pair around 0.9295 / 0.9310 to build into a short. This level initially incorporates the short term trend line dating back to the 14th of May, with the 0.9320 /30 level being seen as key, as this was the break down point and the 61.8% of the recent move. The only caveat being the extreme bid tone in the USD/CNH overnight, which has seen us rally 120 pips at present, this as yet has not transpired into the G10, but it may just be a matter of time.
NZD/USD remains extremely anchored around .8550 where it spent the majority of last week. As mentioned in the morning Strat piece by Mr Dragicevich, [NZD risks softening over the next 24 hours after Fonterra, New Zealand’s largest dairy exporter, releases its opening season farm-gate milk price forecast for 2015 and possibly an update for 2014], and this has so far been reflected/priced in via the AUD/NZD cross which has remained pinned to the morning highs around 1.0830 today. Range: .8542-.8566 & 1.0815-1.0834.