CBA FX Strategy
24 June, 2014
New York Open
Thoughts from our Strategy Team
It has been a very quiet start to the week in both currency and rates space.
Antipodean currencies have held onto gains made following the bumper Chinese PMI data yesterday.
Antipodean rates are lower today, following a small rise in yields yesterday.
On a positive note, BoE’s Miles said the recovery has become entrenched, and the BoE should start to hike rates in the coming months.
On a not-so positive note, the weaker Eurozone PMI data continued. This does support our bullish GBP/Euro call.
Most of the major currencies held in very tight ranges overnight, and were virtually unchanged.
The antipodean currencies held onto the gains made following the stronger than expected Chinese PMI data yesterday.
The antipodean currencies are likely to remain range bound today. A lack of economic data will keep traders focussed more on the soccer rather than the markets. The AUD/NZD (“widow maker”) cross is trading at 1.08, and is likely to remain between 1.0750 and 1.0850 until the next RBNZ meeting in July. With a small bias towards NZD strength. The RBNZ will almost certainly raise the OCR another 25bps in July. That said, the next major move in the “widow maker” is likely to be a break higher back through 1.10. We expect the RBNZ to pause over September and October, and this will allow the AUD to appreciate against the diary giant. We expect a move through 1.10 and possibly towards 1.15.
In Antipodean rates, global forces will continue to dictate where our markets trade this week. The problem is, global forces are non-existent. There is little out in terms of “market moving” data announcements. Australian yields have fallen in Asian trading, but not materially so. So hang onto your seat, grab a pillow and turn back to the soccer (or football for you northerners). For those of you still reading, we suspect the NZ rates market has entered another prolonged period of “sideways” trading. Kiwi yields are 1-2bps higher in Asian trading. Over the next few weeks there is little out in the way tier 1 data, until the CPI report on the 16th of July. The market will then come to life following the CPI report and into the RBNZ’s 24 July meeting. In terms of swap flow, there is consistent, but not overwhelming mortgage fixing taking place (borrowers moving from floating rate mortgages to fixed rates). Mortgage rate fixing keeps a bid tone in the front end of the swap market. The mortgage flow is currently being (easily) offset by the “positive carry” and fixed rate issuance related receiving. The spread between front end NZD (2-year or 1y1y) and AUD (2-year or 1y1y) yields is back out to record (+15-year) wides. The 2-year swap spread differential is back to 135bps. Following the RBNZ’s next move in July, we would expect this spread to compress. Again, there is no data to focus on today.
EUR/USD may continue to drift slightly lower this week, and EUR swap rates should grind lower. The disappointing Eurozone PMIs overnight are likely to be followed by a disappointing German IFO tonight. 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. AUD/EUR should remain firm in the near-term, supported by low volatility and Australia’s yield advantage.
GBP/USD focus now 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 – 3rd estimate of Q1 GDP (Wednesday). Fed speakers: Plosser, Williams (Tonight), Lacker, Bullard (Thursday).
AUD – RBA Speakers: Lowe (25 June).
GBP – BoE speakers: Carney (Thursday).
EUR – German IFO (Tuesday).
CAD – April GDP (30th).
NZD – Trade balance (Friday).
AUD & NZD Today
Aud remains trapped in a range once again coming under some slight pressure during London morning on the back of EurAud short covering. Today corporate buyers awaiting 0.9375-65 will be act as good support. We continue to watch strong selling interest 0.9430-9450 which has capped the top several times in the past week. With little on the data front this week and chatter of large 0.9400 expiries rolling off later in the week look for the pair to remain sidelined at 0.9370-0.9450 for time being.
Nzd – overnight migration data rose to its highest level in 10 years but did little to inspire movement in the pair as we sit in a 20 point range. The orderbook today contains exporter bids 0.8695-85 and macro sellers 0.8740/50 which should dictate todays range. Will need a break of yesterdays 0.8749 to get bulls excited again, however with trade balance looming for Thursday night better chance we remain range-bound till then.
Thoughts from our Trading Team
The main event of the day saw the IFO come in weaker across the board, seeing EUR dip from 1.3610 to a low of 1.3592 on the release. This only saw Central bank buying come out of the woodwork, with us also losing to a headed name under 1.3600. The move back to 1.3610 / 15 was quick after the low and we saw buying of EURUSD at 1.3623, trading to a high of 1.3626 as soon as they paid us.
CHF: 0.8928 & 1.2160
Followed the EURUSD move.
The USDJPY has drifted off from 102.00 with fast money being blamed for the selloff. Good support still can be found between 101.30 / 50 and offers are camped up to 102.20 / 50.
GBP: 1.7000 & 0.8112
All about the comments out of the BoE today. The message, once again, was mixed and unclear, but due to the positioning in the currency the longs started to run for the door. GBPUSD traded from 1.7020/25 to a low of 1.6973 and EUR/GBP from 0.7995 to high of 0.8025. This bought longer term GBP buyers out of the woodwork and we saw buying int against the crosses. Gravitating back to 1.7000 once again at the time of writing.
Very quiet, with the AUDUSD continuing to drift lower. We have traded to a low of 0.9394, however with a large 0.9400 strike for Thursday, this has seen buying interest, with us losing AUDUSD to hedge fund as well as gamma player names sub 0.9410.
Very quiet, with corp bids sub 0.8700 and spec offers from 0.8740 up; resulting in a lack of movement.