CBA FX Strategy
5 June, 2014
New York Open
Markets range-bound ahead of today’s important ECB meeting. An easing is expected.
We anticipate EUR/USD will endure a “sell the rumour, buy the fact” moment and lift if the ECB only meets expectations.
NZD/USD has picked up slightly in Asia, but remains over 3.5% below its May highs.
AUD edges modestly higher and lifts on cross-rates. Market participants ignore the surprise monthly Australian trade deficit.
USD/CAD lifts after BoC policy statement indicates core inflation remains “significantly” below 2.0%.
While moderating somewhat in today’s session, the USD index continues to hover near its recent highs. USD movements will remain heavily contingent on the ECB announcement. Given our expectations, the USD index may ease off if the ECB only meets elevated expectations.
EUR/USD firmed into European trading despite mixed economic data. More specifically, May retail PMI in the Eurozone was weaker than expected while April retail sales beat market consensus comfortably. In fact, Eurozone retail sales grew by 2.4% from a year ago, its fastest since the GFC. Nonetheless, the pair continues to hover near its recent lows. The main focus today is the ECB rate announcement (7:45am) and press conference (from 8:30am). We and the overwhelming consensus expect the ECB to announce further stimulus today. We think the ECB will announce an array of measures, including a 10-15bpt cut to both the refi rate (currently 0.25%) and the deposit rate (currently 0%). This would push the deposit rate into negative territory for the first time. In terms of market reaction, intra-day volatility is likely to rise around the announcements. Should the ECB only meet expectations, EUR could rally in a “sell the rumour, buy the fact” scenario. In our view, further large declines in EUR/USD 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.
NZD/USD has edged up slightly in today’s session but is over 3.5% below its early May highs. The decline in dairy prices has been a key driver. Reflecting the slightly softer economic conditions, New Zealand two-year swap rates have also edged lower since early April when NZD/USD was up at 0.8750. NZD/USD should continue to find good support around the 200 day moving average of 0.8365 because broader fundamental conditions remain supportive for the NZD. We think AUD/NZD can hang around 1.1000 for now. There is nothing of note on either side of the Tasman over the remainder of the week. Global events such as the ECB meeting and US non-farm payrolls are the main market focus.
AUD/USD remains in a tight range. The unexpected monthly Australian trade deficit (-A$122mn vs consensus A$510mn) had little lasting impact on the AUD. The April outturn was the first trade deficit following four months of surplus. The low vol. environment in the market is generally supportive for the AUD. Further policy easing by the ECB today should help keep a lid on financial market volatility. With vol. low, Australia’s superior relative economic health and interest rate advantage should continue to support AUD vs the EUR and JPY.
USD/CAD continues to grind up, and is back around the 50-day moving average (1.0944). Apart from observing core inflation remains “significantly” below 2.0%, the Bank of Canada’s (BoC) post-meeting statement was balanced and very similar to the previous statement. The next CAD-centric focus is tomorrow’s Canadian employment report. With annual employment growth below its long run average and growth in the Canadian economy patchy, we think the risk is the spring back in monthly employment is not as strong as expected by consensus. The better economic outlook in Australia suggests AUD/CAD can rebound from the seasonal weakness experienced in May.
GBP/USD continues to hold above its 100-day moving average (1.6678). The UK PMI data released this week continues to illustrate the positive momentum in the UK economy. Today’s Bank of England (BoE) rate announcement was a non-event. The contrasting outlooks for the ECB and BoE and deeply negative German UK two year swap spread should continue to dampen EUR/GBP. Absent an ECB surprise, EUR/GBP could spike higher towards 0.8200. We would sell into such a rally. GBP/AUD should remain in the range it has occupied since late March.
Upcoming Economic Calendar Highlights Important for Exchange Rates and Interest Rates
USD – Non-farm payrolls (Friday).
AUD – Employment (12 June).
NZD – RBNZ meeting (12 June).
EUR – ECB meeting (today).
CAD – Employment (Friday).