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FX Commentary: New York Open

Posted by Marge Maresca on Jun 23, 2014 9:07:00 AM

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CBA FX Strategy

23 June, 2014

New York Open


Thoughts from our Strategy Team


  • AUD/USD and NZD/USD spike higher after China PMI prints above expectations.

  • AUD/CAD still below pre-Canada inflation report levels.

  • There was a dramatic post-MPS sell-off in New Zealand rates. But lower vol. likely to endure.

  • Global forces are likely to drive Australian swap rates this week.


AUD/USD spiked higher after the release of the flash estimate of the China June HSBC PMI.  At 50.8 pts, the PMI is the strongest since November 2013.  The output sub-index was also the strongest since November 2013.   This week, the only Australian domestic item of note is a speech by RBA Deputy Governor Lowe (Wednesday) at a G20 Conference.  Market implications are expected to be limited. We maintain our AUD/USD end-June 0.9400 forecast, complied in mid-April.

AUD/CAD fell almost 1.0% on Friday to its lowest level this month after Canadian May inflation and Canadian April retail sales both surprised to the high side. Reflecting a stronger Canadian dollar, USD/CAD fell to its lowest level this year. Canadian annual headline May inflation lifted to 2.3%, its third consecutive lift. The Bank of Canada had indicated in their previous monetary policy meeting that they were unconcerned about the lift in inflation because core inflation remained low. But the May inflation report revealed a sharp 0.3% increase in annual core inflation to 1.7%.  AUD/CAD partly recovered Friday’s losses after the China PMI was stronger than expected.  Canada’s two-year swap rate lifted to 1.45%, its highest level since October 2013. Unless we hear from the Bank of Canada that they remained unconcerned about inflation, the market will bring forward the pricing of the first Bank of Canada interest rate rise and put some further downward pressure on AUD/CAD. 

In Australian rates, global forces will dictate where our market goes this week.  There is little out in terms of “market moving” data announcements.  The Australian 3-year bond futures contract is trading back above 97.20 (at 97.21) and looks comfortable for the time being.  The 3s10s bond futures curve is currently 92bps, smack in the middle of the recent 84 to 98bp range.  Receivers of swap rates won the battle last week, and yields finished down.  The run of good news came to an end, and slightly dovish rhetoric from the RBA has pushed out expectations of any rate hikes further into the distant future.  We expect yields to be held down by a relatively stable week in US rates.  Again, we see a bias towards an eventual lift higher in yields globally and also in Australia.

NZD/USD remains very firm and we see modest upside from current levels this week.  The flash estimate of the China HSBC manufacturing PMI provided NZD with some support as the Chinese economy begins to gather momentum.  Our New Zealand economists are predicting a bumper New Zealand trade surplus in May because of a rebound in dairy export volumes that may give some intra-day support to NZD.  While we see upside risks to NZD this week it is unlikely to hit its post-float record high of 0.8843. Today’s May net migration inflows into New Zealand are likely to show a continuation of the strong trend maintaining solid support for housing demand and related activity. May New Zealand credit numbers are also likely to record strength.

New Zealand swap yields lifted 2bps today.  There has been a dramatic post-MPS sell-off in rates.  The RBNZ told us they were likely to hike again in July, and stick to the aggressive 90-day rate track delivered in March.  Yields have become attractive again, especially given the period of “quiet” expected over coming weeks.   We have seen renewed interest from offshore receivers, and fixed rate bond issuance is putting receiving interest on the belly of the curve. The receive-side interest is enough to soak up the pay-side interest coming through from mortgage books for the time being.   Mortgage books pay fixed-rates when their customers (mortgagees) fix their mortgage rates (this is a hedge).  We suspect the NZ rates may have entered a relatively sideways trading period ahead of New Zealand CPI mid-July with supply/demand dynamics more evenly balanced and have reduced short positions accordingly.

USD is likely to remain in its 80-81 index point trading range this week.  Today’s US June Markit PMI will give an early read on economic activity, is likely to be firm, but is not usually a big mover of the USD.  Meanwhile the third estimate of US Q1 GDP is likely to be revised down again because of unusually cold weather and downward revisions to consumer spending (Wednesday).  With few catalysts to pull US rates off near their recent lows (see below) it is difficult to see a big move up in the USD this week.

In US rates, swap yields were pulled lower into week’s end.  The yield curve flattened into week’s end, but remains broadly unchanged from the previous week.  Market participants remain cautious, and the markets continue to trade in a seemingly directionless manner.  Inflation expectations, as measured by TIPs breakevens and inflation swaps, have risen a little, but remain low (by historical standards).  Volatility in rates space continues to grind lower, and suggests complacency in the markets.   Yields are likely to remain in a low range for a little while yet, especially as European rates are held in a lower range by an active ECB.  With only minor data releases due out this week, yields are likely to hold in their recent range.  We continue to look for a move higher over the second half of the year and the global economic outlook improves.

EUR/USD is a little stronger but may continue to drift slightly lower early in the week, and EUR swap rates should remain near their recent lows.  The Eurozone PMIs (Monday) and German IFO (Tuesday) are likely to ease in June.  But over the medium-term we still think EUR/USD will grind back up towards 1.4000 on the back of the Eurozone’s large current account surplus and ongoing real interest rate advantage over the US.  AUD/EUR should remain firm in the near-term, supported by low volatility and Australia’s yield advantage. 

GBP/USD focus this week will be on the BoE Governors parliamentary testimony (Tuesday) and the Financial Stability Report (Thursday).  Indications that the BoE could look at other policies to help cool the UK housing market could exert mild downward pressure on front-end UK swap rates and GBP during the week. AUD/GBP is likely to remain in a tight range.

Upcoming Economic Calendar Highlights Important for Exchange Rates and Interest Rates

USD – Markit PMI (today), 3rd estimate of Q1 GDP (Wednesday).  Fed speakers: Plosser, Williams (Tuesday), Lacker, Bullard (Thursday).

AUD – China HSBC flash manufacturing PMI (today); RBA Speakers: Lowe (25 June). 

GBP – BoE speakers: Carney (Thursday).

EUR – Flash PMIs (today); German IFO (Tuesday);  ECB speakers: Constancio (Monday).

CAD – April GDP (30th).

NZD – May Net migration and May Credit Card spending (today); trade balance (Friday).


AUD & NZD Today

AUD - spiked higher after the release of the flash estimate of the China June HSBC PMI which had its highest print since Nov 2013. With the 2014 highs of 0.9461 clearly in sight we will first watch corporate offers on the books that are plentiful  0.9445-0.9460 region and have been indicative of tops over the past weeks. Bids today sitting 0.9420 area, with intraday longs looking to stop out 0.9410-0.9400. Nzd has taken the ride along with the Aud pushing to new highs overnight. With little in terms of US data today look for range bound session.  Exporter bids 0.8720-0.8700 should support the downside with macro sellers 0.8750-0.8760. Watch for tonight’s NZ migration and credit data, both likely to show continuation of the strong growth trend in housing which could be the catalyst for the next leg higher in Nzd.

Thoughts from our Trading Team

Good Morning New York- London G7 Spot Twitter


Despite softer PMIs and rates suggesting Euro should be trading sub 1.3550. The pair has been quietly support and is only 25 tics lower from our open.





CHF: 0.8962 & 1.2172

$ Strength, cross subdued.










JPY: 101.90

As with market in general JPY is very quiet.





GBP: 1.7020 & 0.7979

Very Quiet.











A very subdued start to the week, with the AUDUSD being the main beneficiary overnight from the better than expected Chinese data. We have subsequently traded in a 15 tick range, with offers camped from 0.9445 yp to 0.9470. Boids now appear near 94 cents.

L 0.9432    H  0.9445


NZD: 0.8702

As with the rest of the G10 complex we have traded in a very tight range at the start of this week.

L  0.8730    H  0.8749



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