CBA FX Strategy
29 May, 2014
New York Open
US Treasuries extended rally today with 10-year yield falling to its 10-month low of below 2.43%.
EUR/USD recouped some earlier loss as market participants position for a larger than expected revision to US Q1 GDP.
AUD/USD rose above 50-day moving average of 0.9295 following positive Q1 CAPEX survey data.
USD/CNY fell on month-end exporter demand with the central bank largely sidelined.
US Treasuries extended rally today with 10-year yield falling to its 10-month low of below 2.43% after breaking through 2.47% yesterday. The surge in US Treasuries (lower yields) appears to be predominantly driven by the bull-market run in Europe. Market participants are increasing bets on the ECB delivering significant policy stimulus next week. A rate cut of around 10-15bpts to both the refi-rate and deposit rate by the ECB appears to be priced. At 1.34%, the yield on 10-year German bunds is now just 21bpts above the lows reached at the peak of the Eurozone crisis.
Focus today in the US will be on the second estimate of Q1 US GDP (8:30am). The already low weather affected Q1 GDP is expected to be revised lower into negative territory. A larger than expected revision to US GDP will do nothing to improve confidence among market participants and is likely to see US yields remain on the back foot. Looking further ahead, all eyes will remain squarely focussed on next Thursday’s ECB meeting and the US non-farm payrolls report next Friday. The ECB is unlikely to fall short of rising market expectations. The US payrolls report next Friday could complicate the market’s reaction to the ECB announcement. A more aggressive than expected ECB next week could lead to a further rally in rates markets. This may then be only partially reversed by a positive US payrolls report or could be exacerbated by an unexpected negative surprise in payrolls.
The USD index retreated to yesterday’s lows in European trading to hover above its 200-day moving average of 80.382. EUR/USD recouped its earlier loss but remains near its mid-February lows. Yesterday’s unexpected lift in German unemployment and the still weak credit dynamics across the Eurozone banking system have only reinforced expectations that the ECB will announce further policy stimulus next Thursday. The expectations for the ECB should continue to keep the EUR under mild downward pressure and in turn support the USD index.
AUD/USD and the AUD crosses rose further following positive Q1 CAPEX survey released in Asian session. As is typically the case, AUD initially dipped on the weaker than expected quarterly change (-4.2% (QoQ) vs -1.5% (QoQ) expected), but quickly reversed course on the back of the better than expected 2nd estimate for 2014-15 capital spending plans. At A$137.1bn, Australian CAPEX plans for 2014-15 were well above consensus expectations of A$127.8bn. Significantly, the non-mining side provided most of the upward surprise. This suggests the transition of the Australian economy from mining investment to non-mining investment is occurring smoothly. Further evidence that the transition in the Australian economy is occurring is supportive for our view the RBA will raise the cash rate before the markets’ implied estimate of Q4 2015.
In Australian rates, market participants were focussed on CAPEX report. As we had expected, the firm CAPEX report was unable to reverse the rally in Australian rates markets, being driven by offshore developments. This is likely to remain the case leading into the big offshore event risks next week, namely the ECB meeting (Thursday) and the US non-farm payrolls report (Friday).
USD/CNY fixing was again in line with expectation, although a firmer USD overnight took the midpoint above 6.17, its weakest level since last September. USD/CNY spot lifted immediately to 1.5% above its midpoint, on par with yesterday. However, a somewhat softer USD and month-end exporter demand pushed the pair decisively lower even with sporadic intervention by the People’s Bank of China (PBoC). It appears that yesterday’s “heavy lifting” might have been pre-emptive in anticipation of month-end demand. USD/CNH mirrored weaker onshore counterpart but traded at a slight premium despite a softer USD which usually takes USD/CNH below USD/CNY, given that the latter trades within a rigid daily trading band. The premium, albeit small, is another indication that the PBoC did not “lean against the wind” today. However, it doesn’t mean that the central bank will soon remove the USD/CNY floor. Given that the midpoint is now finally above 6.17, we maintain that short-term risk to USD/CNY remains firmly on the topside. Elsewhere in Asian, THB was the obvious underperformer. While the Bank of Thailand (BoT) played down outflow concerns today, the market doesn’t appear convinced. We continue to expect USD/THB to edge higher to this year’s high of 33 levels in coming weeks, as dwindling tourism income from the coup and ensuring curfew becomes apparent.
Upcoming Economic Calendar Highlights Important for Exchange Rates and Interest Rates
USD – US Q1 GDP second estimate (today). ISM (2 June). Fed’s Beige Book (4 June). Payrolls (6 June).
EUR – May CPI (3 June). ECB meeting (5 June).
GBP – Manufacturing PMI (2 June). Services PMI (4 June). BoE meeting (5 June).
JPY – CPI, industrial production (Friday).
AUD – China PMI (1 June). Retail sales, RBA policy meeting (3 June). Q1 GDP (4 June).
CAD – Current account (today), GDP (Friday).
NZD – April Building permits (Friday).