CBA FX Strategy
16 June, 20214
New York Open
Thoughts from our Strategy Team
USD was modestly softer in the London session, comfortably in the recent 80-81 range. The Fed is likely to continue to taper it asset purchases by another US$10 billion to $35 billion per month, and there should be a downward revision to 2014 GDP estimates of 2.9% because of the very weak weather-affected Q1 GDP. US ten-year swap rates should remain supported by the 30 day moving average of 2.67%. The risk is the FOMC revise down their 2014 and 2015 core PCE inflation forecasts of 1.5% and 1.85%, guiding US yields lower. Our medium-term view remains an upward drift of US yields.
AUD/USD was unaffected by comments from RBA Assistant Governor Chris Kent. Kent expects the unemployment rate to decline “later in 2015” and for wages to remain soft because of job security concerns. Interestingly, when asked, Kent did not seem concerned about the recent softness in retail sales, noting retail was very strong in late 2013/early 2014. When prompted, Kent skipped the opportunity to describe AUD “uncomfortably high” even though a divergence has opened up between a stable AUD and falling commodity prices, noting this has occurred before (see our chart below). In our view, the good performance of the Australian economy, a weak USD, and AUD/EUR inflows continue to provide good support for the AUD. However, downside pressure could mount on AUD/USD if copper prices continue their decline, following the iron ore price, which is putting downward pressure on Australia’s terms of trade. Support for the AUD is likely to be the 30 day moving average of 0.9322. This week, the major domestic influence is the minutes of the RBA’s June monetary policy meeting on Tuesday. However, the minutes are unlikely to reveal any major new change of thinking by the RBA, so should have little impact on intra-day AUD movements. Overall, we see downside risks to the AUD this week due to the impact of lower commodity prices and the drift lower in Australia-US two-year swap spread. The minutes of the RBA’s meeting due Tuesday are unlikely to be a major influence on Australian swap rates. Australian ten-year yields are feeling the weight of the drift lower in global swap rates, led by the ECB’s monetary easing and negative deposit rates.
NZD/USD is likely to be supported this week by a current account surplus (Wednesday) and strong GDP growth of 1.1% (Thursday). However, the falling dairy price, and geo-political tensions in Ukraine and Iraq are a headwind to big gains in the NZD this week. The next fortnightly Global Dairy Trade auction is due Tuesday. While the New Zealand economy is very strong and the Reserve Bank of New Zealand is raising rates it appears external events will conspire to prevent the NZD/USD from reaching its post-float record high of 0.8843 reached on 1 August 2011.
GBP remains near its highest levels since August 2009. We expect the minutes from the BoE’s previous policy meeting released on Wednesday to show a growing split amongst policy makers around how much excess capacity exists in the UK. Following BoE Governor’s hawkish comments last week, we also expect a few policy makers to indicate the need to change the policy stance soon. Any upside surprise to the UK CPI on Tuesday will only support expectations for BoE tightening. But with 90day Sterling futures now pricing a very high chance the BoE starts the tightening process as soon as the September quarter 2014, GBP may not benefit much from the release of the BoE minutes or the CPI this week. GBP has struggled as it approaches 1.7000, and may again this week, but we do expect it will break through 1.7000 eventually.
EUR has remained heavy since 8 May when ECB President Draghi hinted further policy easing was likely. The divergence in future monetary policy between the US FOMC is likely to be highlighted again this week when the FOMC meet to taper asset purchases and release new economic forecasts. But the Eurozone’s very large current account surplus (released Friday) is supportive for EUR so we do not expect EUR to fall too much farther.
USD/JPY is likely to trade in a range this week. But the bias is for USD/JPY to fall if geo-political tensions continue to rise in Ukraine and Iraq. So far the prices of gold and oil have increased only modestly. Japan’s trade balance is likely to expand again in May after April’s (strange) sharp narrowing. The collapse in Japan’s trade and current account surpluses will eventually weaken the JPY but not this week while the USD remains heavy and geo-political issues remain prominent.
Upcoming Economic Calendar Highlights Important for Exchange Rates and Interest Rates
USD – industrial production (Monday), CPI (Tuesday), FOMC decision (Wednesday).
AUD – RBA minutes (Tuesday).
NZD – GDP, current account (Thursday).
GBP – CPI (Tuesday), BoE minutes (Wednesday), retail sales (Thursday).
EUR – CPI (Monday), current account (Friday). ECB speakers: Constancio (Thursday), Mersch (Friday).
CAD – retail sales, CPI (Friday).
AUD & NZD Today
40 point ranges to kick off the new week so far in AUD and NZD … AUD has again failed to hold above 0.94c overnight on a number of attempts with mainly Option desks the sellers which has encouraged intraday selling so far as well … ahead of the RBA June minutes tonight we look for a 0.9350/0.9420 range to contain the pairing with any move above 0.94c continuing to draw out the sellers … the US/Aust 2 Year swap spread has contracted to is narrowest range for 2014 currently sitting near 220 bps and will weigh on the AUD as well. Iron ore down another 2% overnight and has fallen just below $90/tonne for the first time in nearly 2 years.
NZD trades quiet ahead of a number of releases over the week including tomorrow’s milk auction, Wednesdays Current Account and Thursday Q1 GDP, with the current yield advantage we see no reason why Kiwi will not be supported on dips with 0.8630/60 containing the interest this morning with only tomorrow’s milk auction offering the only potential for Kiwi to take a sustained hit lower … AUDNZD trading heavy as a result and after safely navigating away from the 200 dma near 1.10c looks set to test May support into 1.0700/50 in the coming days with tonight’s RBA minutes a possible catalyst.
Thoughts from our Trading Team
Good Morning New York- London G7 Spot Twitter 7am-11am
Very quiet. Fails to push on lower and sits mid-morning range as I write.
Range: 1.3552 -1.3513
Attention will be on SNB Thursday. In the meantime it’s quiet
Ranges: 0.8991-0.9013 & 1.2180-1.2173
Very quiet in in the JPY after the selloff in the Nikki overnight and strengthen in the JPY on Iraq tensions. Support is eyes between 101.30 and 101.60, with resistance once again found above 102.30 / 50. The EUR leg is offered with the continuation of EUR/Cross sales across the G10 complex.
Cable lower with the general currency block move during early London, and has now latched onto Gamma range plays which appear concentrated inside 1.6960/80….
Range 1.6963-1.7011 & .7959-.79785
An early USD sell off induced by a move above 1.7000 in GBPUSD, saw AUDUSD trade to a high of 0.9417 as I sat down. The Gamma sellers emerged once again and this saw us trade back below 0.9400 extremely quickly. There has been LHS selling on the hourly bench marks from a custodian name so far this morning, with us trading 0.9380 / 90 for a few hours now.
As we opened it appeared a barrier was triggered with a .8700 high print, and we have ever since drifted back down into the .8670’s alongside the ‘currency block’ move in general… RBA Minutes tonight will be one to watch as the AUD/NZD cross which continues to trade under pressure against natural buyers below 1.0820, with the respective 1 year correlated interest rate spread suggesting the cross should be trading nearer 1.0550. ANZL appears to be behind all of the bids which currently stall us inside 1.0810/20.
Range .8668-.8700 & 1.0816-1.0826