CBA FX Strategy
3 June, 2014
New York Open
Thoughts from our Strategy Team
USD held onto yesterday’s gains while US yields rose ahead of the ECB announcement on Thursday.
EUR/USD was volatile but little changed following the weaker than expected May Eurozone CPI.
AUD edged up after the RBA’s post-meeting statement contained no major surprises.
USD held onto yesterday’s gains. In the absence of major US economic data releases today, we expect the USD to remain within established ranges in the lead up to the European Central Bank meeting (Thursday) and US non‑farm payrolls report (Friday). A break out in the USD is unlikely unless either event throws up a large unexpected surprise. In US rates, the US 10-year rose quickly to into European session to above 2.56% and the 2s10s curve is a little steeper at 217bpts at the time of writing. We expect US yields to continue grind higher into the ECB announcement on Thursday.
EUR endured intraday volatility in the European session after the weaker than expected May Eurozone CPI but remains little changed ahead of Thursday’s ECB meeting. Following yesterday’s weaker than expected German CPI print, combined with the lower Spanish and Italian inflation data released last Friday, it wasn’t surprising when both core and headline CPI underperformed market expectation. Annual Eurozone CPI eased from 0.7% to 0.5% when market expectation was looking for a higher print of 0.6%. The slower than expected Eurozone inflation data further solidify expectations looking for the ECB to announce further policy easing on Thursday. EUR is likely to remain heavy in the lead up to the ECB meeting. Should the ECB simply “meet expectations”, EUR may recover later in the week in a classic “sell the rumour, buy the fact” scenario. In our opinion, further large declines in EUR/USD will require a more aggressive than expected policy announcement from the ECB and/or strong signals in the press conference that further policy easing is in the pipeline. The Eurozone’s large current account surplus remains a key fundamental support for the EUR.
AUD edged up in today’s session, but still remains around 0.5% below its weekly open. The positive run in Australian retail sales continued, with the 0.2% (MoM) increase in April (although slightly below the consensus looking for 0.3%(MoM)) marking the 12th straight monthly lift. Data also revealed that Australia’s current account deficit narrowed sharply to just 1.4% of GDP in Q1. This is the lowest since quarterly records began in 1980 and is positive for the AUD from a valuation perspective. Late in the day, the RBA’s post meeting statement contained no major surprises. The RBA repeated that "the most prudent course is likely to be a period of stability in interest rates". The RBA's view remains that "inflation should remain consistent with the target over the next one to two years". The interest rate market doesn't have the first RBA rate hike priced until late 2015. With regards to the exchange rate, the RBA repeated the observation that "the exchange rate remains high by historical standards". But in a slight change added that this was particularly so “given the further decline in commodity prices." If commodity prices don't recover somewhat as we expect, Australia's terms of trade will continue to drift lower, which will guide the AUD lower. But this influence has to be offset against a narrowing Australian current account deficit, and a positive local economy. The next focus for the AUD will be the Q1 Australian GDP (tonight 9:30pm EST). The larger than expected contribution from net exports released today has our economists now expecting growth of 1.1% (QoQ). When coupled with the limited expected upside in the USD, the net effect should see the AUD remain range-bound for the moment.
Australian interest rates were slightly higher across the curve today. Long-end yields have risen slightly more. The lead-in from offshore, relatively positive data and RBA statement were the key drivers. The risk is tilted towards a continued sell-off (higher rates) over the coming session, particularly if Q1 Australian GDP is as firm as we expect. But as is generally the case, offshore developments will dominate.
Despite the recent pullback, GBP/USD continues to track above its 100-day moving average (1.6671). The contrasting outlooks for the ECB and BoE and deeply negative German‑UK two‑year swap spread should continue to dampen EUR/GBP, particularly in the lead-in to the ECB meeting on Thursday. GBP/AUD is unlikely to break out of the range it has occupied since late March.
Upcoming Economic Calendar Highlights Important for Exchange Rates and Interest Rates
USD – Fed’s Beige Book (Wednesday), trade deficit (Wednesday), non-farm payrolls (Friday).
AUD –Q1 GDP (tonight).
NZD –Q1 building (tonight).
EUR – ECB meeting (Thursday).
GBP – services PMI (Wednesday), BoE meeting (Thursday).
CAD – BoC meeting (Wednesday), employment (Friday).
AUD & NZD Today
AUD was lifted overnight following a narrowing of the c/a deficit thanks to spike higher in export volumes. In addition the RBA was upbeat on labor and growth prospects while refraining from aggressively talking down the currency. Corporates were the main buyers taking out stops through 0.9280 however macro offers 0.9290-0.9310 have put a lid on the rally for time being. With Aus Q1 GDP tonight look for the recent range to hold, bids 0.9220 ahead of strong 0.9210-10 support we have watched for past week and a touted barrier at 0.9200. Ahead for Aus GDP tonight, the larger than expected contribution from net exports released today has our economists now expecting growth of 1.1% (QoQ).
Nzd tested recent March 0.8440 lows overnight but was lifted following the move higher in Aud however the short term bear trend remains intact. Our Nzd trader will look to sell on rallies up towards 0.8500 with further offers stacked 0.8500-.8520. Look for stops positioned at 0.8440 today and then bids 0.8425-0.8410. Note another dairy auction will be released this morning and given the recent sequence of declines any weak print could weigh further on the pair.
Thoughts from our Trading Team
Large 1.36 strike & corporate buyers contains Euro/$
EU CPI on the lower side - back to the March low of 0.5% y/y - adds further support to ECB easing expectations for Thurs. Reaction in EUR confirms market looking on the dovish side as 1.3586 given then 1.3605. I can only surmise bids were pulled into the number and then reinstated immediately thereafter. So picture unchanged sub 1.3580 gives comfort to shorts above 1.3680 will cause pain with 1.3740 the final straw.
CHF weakens a tad.
The USDJPY and JPY complex has seen a bounce overnight with the 10 year yield trading higher in European trade at 2.56 at the time of writing. USDJPY has subsequently traded up to the top of the cloud base (102.52, a high of 102.46 has been seen) with large offers noted at 102.50.
A similar subdued story to yesterday, EUR/GBP taking the early weight trading from .8125 to .8105… Construction PMI was then released softer than expected, and lifted us back to mid-range, with Cable also giving back its early 1.6782 high print. Option Gamma trades appear to be dictating the cross in a range pivoting around .8120.
Support: 0.9230, 0.9200, 0.9170
Resistance: 0.9280, 0.9330, 0.9360
Yesterday saw the AUDUSD encapsulated in very tight trading ranges, at the start of an important trading week in the G10, packed with central bank meetings and finished off with NFP on Friday. Overnight there has been a range of economic data, initially starting with slightly weaker than expected retail sales coming in at 0.2% against an expectation of 0.3% which saw us print a low overnight of 0.9229. However a better net export contribution, as well as current account deficit coming in positive (however slightly below expectations) saw the AUDUSD rebound from the low, with many suggesting this could result in an upgrade of the GDP forecasts. The focus in the afternoon session in Asia was the RBA, who literally mirrored the statement from last month, not providing any new insight and continuing to include the passage that “the $A remain high by historical standards”.
So what for today? Overall I think the session in Asia as provided nothing new in terms of details to the market that was not known before, however I feel the key piece of information that needs to be digested is the fact that the large barrier at 0.9200 is expected to roll of today at 3pm London time. The pair has failed to rally, even with an extremely short market and with the resurgence of the 10 year yield, as well as the USD against the G10 complex; consequently I personally feel it is only a matter of time before the market wants to test the 92 cent level once again. Of course there is the release of the AU GDP data tomorrow Asia, however with increased expectations due to the reasons noted above I feel the danger lays firmly to the downside. On the day I will look to sell AUDUSD initially at 0.9280 / 0.9300, with the clear topside level noted at 0.9330; looking for a move to the 200 day moving average at 0.9180 pre NFP.
The short term Kiwi bear trend remains intact, with yesterday’s sell off in the cross respecting the 1.0915/20 breakout level on the revisit. This remains key for NZD bears, and any move back below 1.0900 and ultimately 1.0875 will likely shake out the cross longs. NZD failed against the previous lows around .8440 overnight, and .8430 could be the home of break entry sales, although I’d be cautious of dip selling with the amount of Gamma that continues to be rife around the .8470 area.