CBA FX Strategy
12 June, 2014
New York Open
Thoughts from our Strategy Team
RBNZ hikes 25bps and delivers a hawkish statement. We now expect another hike in July (change of forecast).
Aussie employment disappoints but details are not too bad.
GBP/USD hangs on to most of the previous day’s gains.
NZD/USD lifted to 0.8625 (and AUD/NZD dipped below 1.0900) after the Reserve Bank of New Zealand increased the cash rate and delivered a hawkish statement. NZD lifted further as the day went on as economists brought forward their call for the next RBNZ rate hike to July (including our own economists). The RBNZ rebased their TWI projection higher and slightly lowered its end-point in March/June 2017. Governor Wheeler also re-stated he wants the NZD to fall and that its current level is not sustainable. But it is hard to make the case for a big fall in the NZD when the terms of trade is high (despite recent falls in dairy prices), the RBNZ is lifting the cash rate and delivers hawkish statements.
AUD and NZD remained very firm in the London session. It is not just their “commodity” status that is supporting these currencies – iron ore and dairy prices have fallen considerably so far this year. Instead, it is their “high yield” status that is supporting their currencies. The Reserve Bank of New Zealand is well into its tightening cycle, the first among the G-10. The RBNZ's decision overnight to give no impression that it is thinking of pausing its tightening cycle was most critical in keeping NZD supported. In Australia, the labour market is holding up better than the RBA has expected (the unemployment rate is looking much less likely to hit 6.25-6.50% next year) and the “economic transition” away from mining investment to other drivers of the economy is occurring more smoothly than was earlier hoped for.
The bottom line is economies and markets are evolving in line with our published views. We reiterate our forecast that AUD/USD will get close to parity with the USD late in 2014/early 2015. We also expect AUD/JPY to touch 100.00 before the end of the year (published last month and attached below). And we also see EUR/AUD falling to 1.3803 because the ECB’s recent decisions to push the deposit rate negative is likely to see some funds flow into Australia (see attached note using global quote conventions for details).
Even the GBP/USD is starting to look like a high yield currency compared to Japan, the US and most places in the Eurozone. The yield on a two year UK government bond is greater than in Spain and Italy, which have had greater credit concerns compared to the UK. The relatively high yields in the UK are supportive by the UK economic data has generally outperformed expectations. Yesterday’s strong very strong jobs growth and larger than expected fall in the UK unemployment are cases in point. We are
sticking with our guidance that EUR/GBP will soon test 0.80. One possible catalyst to strengthen GBP even further is if Fitch upgrades the UK government credit rating tomorrow.
The environment is not a great one for the USD. USD has been on a gentle upward trend as US yields increase. US retail sales are expected to show a rebound from April’s weakness but the overall trend is likely to be modest (8:30am). We see the risks that US retail sales falls short of lofty expectations. And we still expect the USD index to stay in a range of 80-81.
AUD & NZD Today
NZD rocketed higher (biggest daily gain in 4 months) late yesterday afternoon as the RBNZ lifted the OCR by 25bp as widely expected on rising inflation expectations and then delivered an accompanying hawkish statement resulting in the market consensus shifting forward their next rate hike from Q4 (CBA was in Dec) to next month … Governor Wheeler also re-stated he wants the NZD to fall and that its current level is not sustainable but this was totally ignored, Assistant Governor McDermott also commented “The terms of trade could be at a turning point, we’re certainly getting prices for dairy falling” as a further potential heads up that the Kiwi’s current lofty levels may be briefer than the market currently thinks …. 0.8700/20 is the next line of resistance with intraday initially looking to sell into here, a break of here will target early May’s high of 0.8780 ... bids this morning 0.8620/40.
AUD has again ticked over 0.94c driven by the Kiwi’s run and yields, the slightly weaker Jobs data (-4.8k v +10k exp however F/time was strong, Unemployment rate steady at 5.8%) has tempered the AUD’s rise with again solid selling seen in the 0.9400/30 region from predominately Aust Corps and s/term accounts …. We continue to expect this resistance to protect stops that have built up now thru 0.9435/40 before the next wave of resting Aust Corp orders thru to 0.9480 … no panic yet from the Exporters who wait patiently for dips into the 0.9320/50 area. AUDNZD has felt the full effects of the RBNZ/Employment data effect dropping nearly 1.5% from near 1.10c yesterday … 1.0800/30 is now stacked with plenty of buying interest and should hold this pairing from slumping further. Iron-ore fell 2% overnight to $91.50/tonne after tracking sideways for the last few days.
Thoughts from our Trading Team
The single currency is vulnerable as large strikes roll off today at 1.3550 and 1.3600. I believe the gamma from these has been supportive of Eur/$. As far as the morning goes it’s been very quiet again with the pair some 30 pips off our high. Keep an eye on 1.3500 a close below signals further losses as corporate demand will have been satisfied for the time being. Market isn’t overly short as mentioned previously.
Range: 1.3512 -1.3549
Quiet morning with a large 101.85 coming off today. Eurjpy vulnerable with a close below 138.00
Ranges: 101.96-102.11 & 137.80 – 138.31
Real money liquidation of EUR/GBP this morning takes us through the .8050 barriers, and lifts Cable up through the wedge resistance at 1.6820… .8000 in full view now for the cross, and looks an inevitable target.
Ranges: 1.6796-1.6840 & .8035-.8063
It’s all happened in Sydney today… the double whiplash moves to print the .9348 & .9415 range extremes both proved unsustainable.
With all the overnight RBNZ and NZD euphoria, London made an early attempt to the topside, but although we breached the overnight NZD high, we could only match the Sydney high in AUD, before lounging back into the dull .9390’s for the latter half of the morning.
London Range .9387-.9414
As with AUD, NZD fireworks all went off overnight, and although we attempted to continue moves on our open, we only managed to briefly breach the Asia highs with an .8686 print, before sliding back into a dull .8660-70 range ever since.
Support now lies at .8630 and .8590, with topside resistance very much around .8690-8710.
In the distance of course also lies the all-time high at .8842.
Of note, these contradicting couple of headlines also help sum up the London day so far:
*RBNZ'S MCDERMOTT SAYS TRADERS MISPRICING NEW ZEALAND DOLLAR
*MCDERMOTT: RBNZ EXPECTS TO RAISE RATES ANOTHER 50BP THIS YEAR
London Ranges: .8660-8686 & 1.0835-1.0847