CBA FX Strategy
28 May, 2014
New York Open
Thoughts from our Strategy Team
Yesterday’s US economic data a mixed bag, while still trending towards improvement.
More policy easing options being considered by the ECB, including promoting the ABS market.
AUD/USD set to remain range-bound, but EUR/AUD may well fall back to 1.4706 this week.
NZD/USD’s post-Fonterra lift was fleeting, as unwinding longs triggered stops with the pair consolidating just ahead of 0.8476.
USD/CNY lifted immediately on suspected more aggressive PBoC USD buying. Spot rose to 1.5% above its midpoint, the highest in three weeks.
In US rates, the market started off on the back foot, before rallying in the afternoon session. The mix of second tier economic data released yesterday was generally positive. US durable goods orders beat expectations and the Case-Shiller house price index rose a little more than analyst forecasts. US consumer confidence rose, the Richmond Fed Index stalled, and the Dallas Fed Index fell. All-in-all, the US economy is chugging along. Not too cold, and not hot enough. Goldilocks is still waiting for the Fed’s QE microwave. The yield on the 10-year Treasury note ended the day down 2bps to 2.515%, and the 30-year yield fell 3.5bps. The curve flattened on the day, with the 1-year to 5-year section of the curve holding strong (yields unchanged), and the 7 to 30-year section of the curve rallying.
EUR/USD was somewhat softer in late Asian trading but remains comfortably above 1.3600. More details of the discussion at the ECB Forum were made public and the market had the chance to react to the possible types of easing. The ECB is considering a package of measures. One measure is to promote the Asset Backed Securities market. This would involve packaging auto, mortgage, small business, and credit-card loans that would be sold to investors. The ECB would aim to reduce risk capital held against ABS if banks held these securities on their balance sheet. The ECB believes the nature of the packaged ABS market may encourage greater lending to smaller companies; who generally find it harder to access credit, but are quick to employ people if business activity picks up. The ABS proposal would take about a year to implement, so it probably won’t feature as an immediate policy option at next week’s meeting, where an easing of monetary policy of some description is now widely expected. Draghi concluded the ECB Forum by stating the ECB doesn’t see the risk of deflation and the ECB has the tools needed to get inflation to the 2.0% target. At this stage, we see good support for EUR/USD being maintained around the 1.3600 level and see some modest downside in EUR/AUD towards 0.1.4706.
NZD/USD lifted briefly early this morning after Fonterra (New Zealand’s largest dairy exporter) released its estimates for next season’s farm-gate milk price of NZ$ 7.00 per kilogram, as the market was probably positioned for a lower price. We consider Fonterra’s forecast conservative and likely to be revised higher as the year progresses. For example, this time last year, Fonterra estimated a milk price of NZ$ 7.00 per kilogram though it has been revised up over the year to NZ$ 8.40 per kilogram. However, NZD fell sharply lower in late Asian trading with unwinding longs apparently triggering stops. At the time of writing, NZD/USD appears struggling to hold onto 100-day moving average of 0.8476 or its low in almost three months. But 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.
Kiwi swap rates open higher but drifted down 1bp lower. Initially, swap rates lifted after Fonterra’s announcement. The marginal revision lower to the current year, was slightly lower than our expectations. And next year’s forecast was as expected. There were some concerns among market pundits that the payout announcement would be a “shock” to the low-side.
AUD/NZD dipped briefly after Fonterra’s announcement but the fall was shallow and temporary. AUD/NZD and AUD/USD faces the potential tailwind of a solid CAPEX report tonight. CBA Economics expect capex plans for 2014/15 to be $129 billion, slightly above consensus of $127.8 billion. Lending commitments to the non-mining industries have started to lift significantly, suggesting the transition away from mining investment to non-mining activity is occurring. News of a successful transition in the Australian economy will be supportive for our view the RBA will raises the cash rate before the OIS’s estimate of Q4 2015 and add to gains in AUD/USD and AUD crosses for the remainder of the week.
In Australian rates, the 3-year and 10-year bond futures contracts are 1 to 3bps higher in price (lower in yield). The 3s10s bond futures curve is 2bps flatter at 90bps. For the technicians out there, the 3-year bond futures contract has been flirting with 97.20 level for a while now. The contract has failed to break through 97.20, not through lack of trying, over the last 3 trading days. The last time it broke through (on 21st May), it rallied to just 97.28. Technically, it looks like a break through 97.20 would see a run much higher. This has not happened. The failure to do so suggests we a forming a base here (lows in yields).
USD/CNY midpoint was in line this morning as it has been the case for the past three weeks. A slightly firmer USD in Asian trading lifts the so-called fixing to just a tad below 6.17, although the spike in USD/CNY spot immediately after the start of trading was likely due to more aggressive USD buying by the People’s Bank of China (PBoC). On that note, the intraday high in USD/CNY was more than 1.5% above its midpoint, the most since 5 May. The higher spot within the daily trading band of +/-2% normally indicates central bank intervention. We maintain that short-term risk to USD/CNY remains on the topside at around 6.28 – 30 levels, as the PBoC could still utilize the entire daily trading band in coming sessions. USD/CNH moved up to 6.27 in lockstep with its onshore counterpart in morning trading but has stabilized so far at around 6.26 levels. Elsewhere in Asia, USD/Asia were somewhat supported with market participants taking up a more cautious tone. High-yielding currencies underperformed in general. We expect USD/Asia to tread modestly higher this week despite a range-bound USD (see attached note).
Upcoming Economic Calendar Highlights Important for Exchange Rates and Interest Rates
USD – US Q1 GDP second estimate (Thursday).
JPY – CPI, industrial production (Friday).
AUD – Q1 Australian CAPEX (tonight).
CAD – Current account (Thursday), GDP (Friday).
NZD – May Business Confidence (Thursday); April Building permits (Friday).
AUD & NZD Today
NZD down nearly 1% overnight after initially lifting briefly to session highs just thru 0.8570 after Fonterra (New Zealand’s largest dairy exporter) released its estimates for next season’s farm-gate milk price of NZ$ 7.00 per kilogram which was towards the higher end of expectations … a 7 month low print for Business Confidence was the initial catalyst for a pullback in the pairing with a subsequent follow up sell-down in late Asia/ early London triggering stops thru 0.8525/30 with heavy selling against a number of crosses including the AUD noted … key support this morning comes in around the 100 day ma into 0.8475/80 with a break triggering more stops that will possibly then target 0.8380/0.8400 … expect 0.8530/50 to offer good resistance on the day with intraday sellers emerging on any move into this region. We also watch AUDNZD key resistance into 1.0915/20 with a break adding to current Kiwi weakness.
AUD by comparison had a narrow 40 point range content to tread water ahead of Q1 CAPEX data (second reading of the 2014/15 estimated spending the important update) released later tonight, the weaker gold price and news that the Leading Index has fallen to 3 year lows was largely ignored for most of the overnight session with AUD weakness coming thru only in the last hour or so to session lows just below 0.9230 … Exporter buyers this morning again sit into 0.9210/15 area with stops just below here with a triggering of these setting up the first test of the 200 day ma at 0.9175/80 …. Intraday sellers sit patiently for any spike above 0.9260 this morning with support for the AUD also seen via the NZD cross.
Thoughts from our Trading Team
NZD gets a tap at our open and $/zar hits 10.52
Another subdued European Morning for the pair. The offered tone remains with a break of 1.3610-15 required to continue the momentum.
CHF continues to weaken this am. A UK Clearer was a notable buyer of Eurchf just shy of 1.2230. Market talk resurfaces of SNB action should the ECB deliver with measures next week.
Very quiet, trading in a 20 tick range thus far. Support is seen from 101.40 down, with resistance and sell orders stack from 102.20 up.
Continued month end bullish trend in EUR/GBP, which helped trigger a KDR pattern in Cable yesterday, has continued on our open today, and in turn has triggered GBP/JPY entry sales down through 171.20 & 170.90 this morning, adding to Sterling woes… we have seen light corp buy interest in Cable which has helped support around 1.6770, but we still fail to rally much higher and greet the States on new lows around 1.6745.
EUR/GBP next resistance lies at .8145/50, before we look up at the 21dma at .8158 should month end continue to dominate.
Support: 0.9235, 0.9215, 0.9170
Resistance: 0.9280, 0.9300, 0.9320
The range is well and truly defined with 0.9230 / 0.9280 in the near term, with the wider (maybe we never see these levels again) of 0.9170 / 0.9330 being key to watch. The only caveat to this is the daily trend line dating back to the 14th of May now comes in at 0.9290 which should provide resistance into the stops noted above yesterday’s high of 0.9278; with further Asian noted sales from 0.9300 to 0.9320. To the downside gamma players line up in front of 92 cents once again, after recycling at the highs overnight. I still favour in the medium term to see AUDUSD to test the 0.9170 level, however I am waiting to start to build a short on the low 93 cents handle, with a stop above 0.9360.
Despite mixed and contradicting overnight data releases (Fonterra & ANZ Business Confidence) , the London open triggered large LHS flow in NZD/USD which saw a quick fall down through the .8520 level to print a .8496 low… rallies since have capped just above .8510 respecting the earlier break level, and we have since gone again on ANZL sales printing .8482 lows during mid-morning. We greet the States lounged back up around the figure, but key for me will be 1.0915/20 in the cross, which if broken should see a little reval lower for NZD/USD to target the next level at .8476 where the 100dma resides.
I’m trading NZD from the short side, using both the AUD/NZD price action and the .8530 level in NZD/USD, as short term gauges to my view.