CBA FX Strategy
18 June, 2014
New York Open
Thoughts from our Strategy Team
Markets quiet ahead of today’s FOMC announcement and press conference.
AUD lower as iron ore prices heavy, Asian currencies lower & Aust. swap rates decline.
No change in the BoE MPC voting pattern. GBP dipped on the “surprise”. But it remains a matter of when and not if the BoE starts to normalise policy.
AUD/NZD likely to stay heavy if NZ reports strong Q1 GDP growth.
The USD index has retraced most of the gains generated by yesterday’s upward surprise in US CPI. Long-end US swap yields have eased slightly today but remain near one-month highs, as attention turns to the FOMC meeting announcement (2pm EDT) and Fed Chair Yellen’s press conference (2:30pm EDT). We and the market consensus expect the FOMC to announce a further US$10bn step down in the pace of its monthly asset purchases (from US$45bn to US$35bn). Hence, more interest will be on any material changes in the FOMC’s economic projections and/or comments by Yellen. As expected, there was no news from yesterday’s Fed Board of Governors meeting to discuss “medium term monetary policy issues”. The outcome of the Board of Governors meeting is likely to be included in the minutes of the FOMC’s policy meeting released on 9 July or potentially discussed by Yellen. We expect the USD to trade in a range ahead of today’s FOMC announcements. Retention by the FOMC of its previous interest rate forecasts may generate an intra-day lift in the USD, but this could easily be reversed by the typically dovish Yellen.
NZD/USD has ground up modestly over the past 24 hours. Post the FOMC meeting, NZD focus will turn to the Q1 New Zealand GDP (6:45pm EDT). The market consensus, the RBNZ's recent forecasts and our own New Zealand economists have penciled in 1.1% (QoQ) growth. On the back of the construction sector, the risks appear tilted to a stronger GDP number. With New Zealand likely to report a strong Q1 GDP, AUD/NZD risks falling to test 1.0700 over coming sessions. Given the low volatility and New Zealand's far superior rate advantage over Switzerland, NZD/CHF has pushed higher recently. A positive New Zealand GDP surprise could give NZD/CHF a further lift heading into tomorrow’s quarterly Swiss National Bank (SNB) meeting.
GBP has dipped lower and UK money market rates have eased slightly after the minutes of the June Bank of England (BoE) Monetary Policy Committee (MPC) meeting revealed a 9-0 vote against a rate hike. Given the recent comments the market expectations appear to have been tilted towards 1-2 votes in favour of a rate hike. The minutes continue to indicate that for “some members” the policy decision had become more balanced. In terms of the other interesting comments, the MPC appears to be conditioning the market for an eventual tightening. According to the MPC there was a “risk that growth would not slow in the second half of the year so that, without a corresponding rise in supply, slack would be absorbed more quickly than had previously been expected. In that context, the relatively low probability attached to a Bank Rate increase this year implied by some financial market prices was somewhat surprising”. However, on the other hand, the MPC cautioned that if “policy were tightened prematurely” that could be associated with “considerable costs” to the economic outlook. In our view it still remains a matter of when, and not if the BoE raises rates. Front-end interest rate support and positive momentum in the UK economy should continue to support GBP on dips. The divergence between the ECB and BoE, and negative Eurozone-Germany two-year swap spread continues to suggest a lower EUR/GBP. We would look to fade the most pick up in EUR/GBP generated by the BoE minutes.
AUD/USD has consolidated just above the 30-day moving average (0.9322). Recent downside in AUD/USD has been driven by: (i) lower iron ore prices; (ii) lower non-Japan Asian currencies, including CNY; (iii) a lower Australia-US two-year bond spread (now 216bpts); (iv) a slight firming in the USD following yesterday’s higher than expected US May CPI and subsequent lift in US long-end yields. Given the low vol. environment, we think further AUD/USD downside will be limited unless the FOMC meeting provides an unexpected positive surprise for the USD.
EUR/USD has edged slightly higher in quiet European trade following the even less lively Asian session. The FOMC meeting is the next focus for EUR/USD. EUR/USD should remain within recent ranges in the lead up. Our medium-term view remains for a higher EUR/USD driven by the Eurozone’s large current account surplus and ongoing core Eurozone real interest advantage. We continue to think that once the capital outflows attempting to avoid Eurozone negative deposit rates have been exhausted, EUR/USD should grind back up towards 1.4000. EUR/AUD should remain in a 1.45-1.47 range in the near-term.
Upcoming Economic Calendar Highlights Important for Exchange Rates and Interest Rates
USD – FOMC decision (today). Fed Chair Yellen speaks (today).
NZD – GDP (today BST / Thursday AEST).
GBP –retail sales (Thursday).
EUR – Current account (Friday). ECB speakers: Constancio (Thursday), Mersch (Friday).
CAD – Retail sales, CPI (Friday).
CHF – SNB meeting (Thursday).
AUD & NZD Today
Ahead of the FOMC it is no surprise that AUD and NZD have not gone too far from where NY left them yesterday …. NZD remains supported after the better Dairy Auction results yesterday and then the overnight Trade data which printed a surplus of $1.4 bio for Q1 … tonight’s Q1 GDP is expected to come in at 1.1% … a Kiwi range of 0.8640/0.8720 should cover the pairing over the FOMC/NZ GDP events, Exporter bids are seen then into the 0.86c mark. AUD has had no real bounce from yesterday’s lows drifting a little lower overnight to just under 0.9330 … plenty of Exporter demand around however and we expect 0.9300/30 to continue to be very supportive for the Aussie while any move again towards 0.9380/0.9420 to draw out all the sellers … AUD will be one of the more vulnerable pairings to any kick up in US Yields post the FOMC, Aust-US 2 Year spreads remain on 2014 lows this morning at 216 bps. AUDNZD still remains on track for a test of the 1.0700/50 support.
Thoughts from our Trading Team
Good Morning New York- London G7 Spot Twitter 7am-11am
Market awaits Yellen
Range: 1.3542 -1.3566
Attention will be on SNB Thursday. In the meantime it’s quiet
Ranges: 0.8999-.8985 & 1.21825-1.2189
Range: 102.08 / 102.31
With all eyes on FOMC tonight, It was all about the BOE Minutes this morning as the final hurdle… the result proved as expected - 9-0 – but the accompanying statement ‘BOE SURPRISED BY LOW PROBABILITY ATTACHED TO 2014 RATE RISE’ saw Cable trade upto 1.7005, and EUR/GBP down to .76685… .7675 Strikes helped parachute this move and caught the market wrong footed… in turn we eventually saw a slow latter morning squeeze in the cross back upto .8011 with Cable in turn falling to 1.6932…
Ranges: 1.6932-1.7005 & .78685-.8011
Exporter buying and Gamma bids below .9340 very much containing us in a tight range this morning, with Expiry likely to yield .9350 choice price action… all eyes on the FED late this evening.
Range: 0.9332 / 0.9346
AUD/NZD continues to trend lower, assisted by the Dairy Auction results yesterday, and the probability of a better NZ GDP release tonight… we currently rest against REG bids at 1.0770, which have been the theme every spread since 1.0815.
Ranges: .8659-76 & 1.0770-1.0781