CBA FX Strategy
30 May, 2014
New York Open
US yields recovered, lifting Australian and New Zealand bond yields across the curve.
EUR/USD tracked above its lowest levels since mid-February, awaiting ECB meeting next Thursday.
AUD/USD is trading comfortably above 50-day moving average ahead of May Chinese manufacturing PMI data release on Sunday.
USD/CNY lifted steadily throughout today’s trading despite a softer USD and closed at its intraday high of 6.2471 or 1.3% above its midpoint.
USD remained mostly range bound into European session. The main story was US Q1 GDP was weak because of poor weather. While Q1 was weak, partial indicators suggest an improvement is in the offing in Q2, though the ongoing rise in inventory-to-sales suggesting a strong rebound is unlikely. Today, the May readings of the Milwaukee ISM (9:00am) and Chicago PMI (9:45am) are released. While the regional readings are unlikely to generate much of a market movement, they will provide a guide to next week’s more important ISM survey (Monday) and provide further indication whether the bounce back in the US economy is coming through.
US 10y yields continued to lift today trading again above 2.47% into European trading. The modest rise in US and European yields has been reflected down under. Australian and New Zealand bond yields are up 2bpts across the curve. Although offshore movements continue to dominate, the breadth of Australian data released next week may increase intra-day volatility.
EUR/USD continued to track just above its lowest levels since mid-February. The market remains focused on next Thursday’s ECB meeting, where we and the overwhelming consensus expect the ECB to announce further policy stimulus. These expectations are likely to dampen the EUR in the lead up to the ECB meeting. Today’s data releases in European session were somewhat mixed. German April retail sales rose by 3.4% from a year ago, with March contraction revised smaller. It is also the strongest on-year expansion in two years. On the other hand, preliminary reading of May CPI for Spain slowed despite acceleration in Q1 GDP. While EU harmonized CPI matched market expectation, the Spanish measure slowed to 0.2% from 0.4% (YoY) in the preceding month. Similarly, the preliminary reading of Italia’s May EU harmonized CPI moderated to 0.4% from a year ago, underperforming market expectation of a flat 0.5% (YoY). The softer CPI data released so far point to weaker Eurozone aggregate CPI data released on Tuesday, which is the last major data point before the ECB meeting.
USD/JPY failed to sustain yesterday’s intra-day lift and is back trading just above its 200-day moving average (101.40). As expected, Japan's core CPI (ex. fresh food) surged rising from 1.3%pa in March to 3.2%pa in April. The lift reflects a one-off lift in the price level because of the increase in the consumption tax from 5% to 8% on 1 April. Roughly 2.0% of the 2.2% month-on-month lift in core CPI in April reflects the tax increase. This leaves the core CPI ex tax increase at 1.2%pa, close to the average since late 2013. By contrast, Japan's industrial output underwhelmed expectations, falling by 2.5% in April. Japanese Q2 2014 GDP is likely to show a large decline of around 1% (QoQ) as spending is "unwound" following the "beat the tax increase" spending in Q1. Today's inflation is unlikely to be a catalyst for more BoJ policy easing. Rather the activity data will be more important, such as industrial production and consumer spending over next few months. In the near term, USD/JPY movements should continue to track movements in long-end US bond yields.
In a quiet trading day, AUD/USD has lifted slightly and is trading above its 50-day moving average (0.9300). AUD/NZD continues to trade near its highest levels since mid-December 2013 and is fast approaching the 200-day moving average (1.0992). EUR/AUD also looks set to test its 2014 lows and GBP/AUD is drifting down to the bottom of the range it has occupied since late March. Despite all of the recent volatility and focus on the decline in iron ore prices AUD/USD is now slightly up on the month. If sustained over today’s European and US sessions, this will be the first time AUD/USD has increased in May since 2009. With no major data released today we expect AUD/USD to remain supported around current levels. However, volatility in the AUD could pick up early next week with the release of data in China and Australia. The May reading of the official Chinese manufacturing PMI is released on Sunday. The market is looking for a modest uptick (consensus 50.7). We think the risk is for the PMI to consolidate around recent levels. A slightly lower than expected China PMI could weigh modestly on the AUD in early Monday morning Asian trade.
USD/CAD has drifted lower, and as is generally the case CAD has outperformed the AUD and NZD in May. Today, Canadian Q1 GDP is released (8:30am). As was the case with the US, economic growth in Canada slowed in Q1 due to adverse weather. On an annualised basis, we are looking for growth to have slowed from 2.9% in Q4 2013 to 1.6%. This is roughly in line with the Bank of Canada’s April forecast (1.5%saar) and slightly below the market consensus (1.8%saar). While we expect momentum in the Canadian economy to pick up over coming quarters, a slightly softer than expected Q1 Canadian GDP print should weigh on the CAD and help AUD/CAD and NZD/CAD reverse some of the declines observed this month.
USD/CNY midpoint was 7pts below our expectation but continued to hover around 6.17 levels. Throughout today’s trading, the pair rose steadily despite a range-bound USD and closed the session at its intraday high of 6.247 or 1.3% above its midpoint. Yesterday’s quick fall in USD/CNY was mainly due to month-end exporter demand. We maintain the short-term risk to USD/CNY remains firmly on the upside. Hitting the wire, the People’s Bank of China (PBoC) injected a net 124bn through open market operations (OMOs) in May. Market participants broadly interpret the net injection following mainly withdrawals in the preceding two months as indicative of impending monetary easing. We however believe seasonality explains the shift in OMOs as liquidity conditions normally tighten in the month of June on banks’ mid-year performance evaluation and more tax payments (less liquid fiscal deposits) etc. On that note, the interbank Shibor rates rose by 2.5% on average in 2010-13. As such, the liquidity injection is aimed at primarily alleviating June cash crunch, in our view.
Upcoming Economic Calendar Highlights Important for Exchange Rates and Interest Rates
USD –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).
AUD – China PMI (1 June). Retail sales, RBA policy meeting (3 June). Q1 GDP (4 June).
CAD –GDP (today). BoC meeting (5 June). Employment (6 June).
AUD & NZD Today
30 odd point ranges for both AUD and NZD overnight with good two-way flow in both noted within the confines of these tight ranges …. NZD found demand early on from Funds before running into plenty of supply above 0.8510 with this enough to force the pairing back to current levels near 0.8480 … we look for a 0.8460/0.8520 range to hold on the day noting stops that have built up thru the topside. AUD also had a brief run to the topside taking out weak stops before running into Corp sellers and intraday profit taking; we continue to watch further selling interest from Corps into 0.9340/50 while buyers on the day sit below 0.9270. A large option expiry at 0.9290 this morning will ensure we don’t go too far in the next few hours before month end flows may see both AUD and NZD drift a touch lower. AUDNZD is content to trade 1.0950/80 and has made no real challenge on the 200 dma at 1.0993. Iron-Ore continues to fall dropping to new multi-year lows of $91.80/tonne with AUD continuing to ignore it. Chinese PMI released over the weekend is the key data release next up for AUD and NZD’s fortunes.