Foreign Exchange: Strategy - Weekly Currency View

Transcription

1 1 January 13 Short-term views on exchange rate direction For this week s trading ranges, the risks for USD/JPY are evenly balanced. On one-hand, the Bank of Japan could surprise aggressive market expectations and a market that s short JPY, by announcing open-ended monthly asset purchases in the order of trillion per month. On the other hand, years of policy disappointment is a difficult trend to change. Our strong medium-view is for further JPY weakness driven by the narrowing in Japan s current account surplus. We would use any corrective dip in USD/JPY down to 87.8 to reestablish long USD/JPY positions. The risk is the Bank of Canada is slightly more aggressive at this week s meeting now that concerns of a nearterm US fiscal cliff recession have subsided. We anticipate USD/CAD will ease back to.985 and AUD/CAD to ease down to AUD/USD risks softening modestly this week on a lower than expected Australian Q4 CPI; AUD/NZD would subsequently decline to 1.5. A softer GBP looks likely. High frequency activity data indicates that UK GDP is likely to have contracted in Q4, while the BoE meeting minutes should reiterate the MPC s easing bias. We continue to expect EUR/GBP to grind higher over coming weeks, and would use any dip in EUR/GBP below.835 to get long again. Majors One Week Bias USD We expect the USD to remain range bound over the near-term. Given the lack of important US economic data this week, external factors such as the BoJ meeting (see JPY section) could have more of a bearing on USD direction. The release of the IMF s latest World Economic Outlook (Wednesday GMT) is unlikely to generate a lasting impact on the USD or currency markets. Over the medium-term, broader themes such as improved Eurozone related market sentiment, the Fed s ongoing policy stimulus, negative US real rates and the US current account deficit (equal to 3 of US GDP) should weigh modestly on the USD SELECTED LEADING INDICATORS OF EUROZONE GDP Eurozone GDP (YoY) lhs EUR/USD Last week s New York close in EUR/USD below the previous week s close suggest to us that EUR/USD may consolidate further in the nearterm. EUR/USD may ease back down towards 1.35 as part of a broad period of consolidation. Nevertheless, we think EUR/USD should rise over coming months. The narrowing yield spread between peripheral and core Eurozone bonds illustrates the reduced perceptions of Eurozone tail risks. In addition, the Eurozone-US two-year yield differential is now at its narrowest level since March 11 and should eventually lift into positive territory over coming months. Further signs of stabilisation in the January Eurozone business surveys released this week (German ZEW on Tuesday, flash PMIs on Thursday, and German IFO on Friday) should support our view that the Eurozone economic downturn is close to bottoming. AUD/USD The AUD showed limited positive reaction to last week s better than expected Chinese economic data. Given that reaction, and based on the risks of a softer than expected Q4 Australian CPI (Wednesday) we think AUD/USD may drift down towards (5 day moving average) in the first half of the week. Nonetheless, over the medium-term we think the improving global environment, low volatility, and improving Asian growth are all AUD supportive factors. On that front, the flash -3. Eurozone Economic Sentiment (rhs) Eurozone Manufacturing PMI (rhs) Base 1 = Sep 3-6. Jun-7 Dec-8 Jun-1 Dec-11 Jun-13 Index CHINA MANUFACTURING PMI Official PMI HSBC PMI Jan-1 Sep-1 May-11 Jan-1 Sep-1 May Index Peter Dragicevich FX Economist T E. peter.dragicevich@cba.com.au Richard Grace Chief Currency Strategist & Head of International Economics T E. richard.grace@cba.com.au Joseph Capurso Currency Strategist T E. joseph.capurso@cba.com.au Andy Ji Asian Currency Strategist T E. andy.ji@cba.com.au Chris Tennent-Brown FX Economist T E. chris.tennent-brown@cba.com.au Important Disclosures and analyst certifications regarding subject companies are in the Disclosure and Disclaimer Appendix of this document and at This report is published, approved and distributed by Commonwealth Bank of Australia ABN AFSL

2 estimate of the January HSBC PMI (released Thursday) should remain in expansionary territory. This should boost the AUD towards weeks end. NZD/USD Weaker than expected Q4 New Zealand CPI data released last week saw the NZD dip below.84. Despite this, NZD/USD remains near the top of the range that it has traded within over the past two months. There is no significant New Zealand data due this week, so NZD direction is likely to reflect global sentiment and USD developments. If volatility remains low, and the USD continues to remain soft, we expect NZD can gradually press higher over the coming weeks, and retest.845. GBP/USD Bearish In our view, there are a number of UK centric factors that should weigh on GBP in the near-term: (1) The January Bank of England (BoE) meeting minutes (released Wednesday) should reiterate the Monetary Policy Committee s (MPC) easing bias. On Friday, MPC member McCafferty indicated that more QE may not boost demand, and other forms of monetary easing might be more effective if needed. Expanding the recently created Funding for Lending Scheme is an option; () Following the fall in UK retail sales and industrial production, the first estimate of UK Q4 GDP (released Friday) is expected to show a contraction. Such an outcome would further raise fears of a triple dip UK recession and market pricing of further BoE policy easing; (3) Concerns about the UK s position within the EU is another factor that could weigh on GBP. UK Prime Minister Cameron s speech on the matter has been rescheduled for this week. USD/JPY For this week s trading ranges, the risks for USD/JPY are evenly balanced. Reflecting great uncertainty about what the Bank of Japan (BoJ) may decide at its policy meeting on Tuesday, pricing for USD/JPY at-the-money overnight straddle implies a move in USD/JPY on Tuesday. While market participants are uncertain, economists expect the BoJ to: (a) introduce a pa inflation target; and (b) increase its asset purchases by JPY 1 trillion. If the BoJ meets or disappoints expectations, there may be a buy the rumour, sell the fact reaction whereby the USD/JPY falls after the BoJ announces its easing measures on January. We recommend using dips in USD/JPY below 87.8 to accumulate short JPY positions because the current account surplus has collapsed. The merchandise trade balance (released Thursday) is likely to show Japan s trade deficit remained very large, implying Japan s current account surplus remains very small. If, however, the BoJ beats expectations with an open-ended commitment to increase its asset purchases, USD/JPY may spike 1- yen higher on Tuesday. USD/CAD Mildly Bearish The key focus for the CAD will be Wednesday s Bank of Canada (BoC) meeting. The risk is the Bank of Canada is slightly more aggressive at this week s meeting now that concerns of a near-term US fiscal cliff recession have subsided. We expect the BoC to remain the only G7 central bank to retain a modest tightening bias. The BoC is unlikely to significantly alter its economic forecasts. All in all we think should be CAD supportive. The two-year US-Canada yield differential risks becoming increasingly negative if we are right about the BoC, this should weigh on USD/CAD. Asian Currencies One Week Bias USD/CNY The People s Bank of China (PBoC) has kept its USD/CNY fixing steady since November. USD/CNY has continued to trade close to 1 below its midpoint, suggesting unabated demand for the domestic currency, (QoQ) 1 UK GDP & NIESR GDP -1-1 NIESR GDP 1st Estimate (QoQ, rhs) - - UK GDP First Estimate (QoQ, rhs) -3-3 Mar-6 Sep-7 Mar-9 Sep-1 Mar-1 Sep BOJ ASSET PURCHASE PROGRAM (JPY Trillion) Announced target Expectations Purchases Oct-1 Apr-11 Oct-11 Apr-1 Oct-1 Apr Employment Growth YoY 4 (lhs) Jan-98 Jan-1 Jan-4 Jan-7 Jan-1 Jan-13 ppt 5 CANADIAN EMPLOYMENT AND GDP GDP Growth YoY (lhs) GDP GROWTH Capital Formation (lhs) Real GDP Growth (rhs) Final Consumption (lhs) Net Exports (lhs) -5-5 Mar-9 Mar-1 Mar-11 Mar-1 Mar YTD YoY

3 which reflects continued improvement in the domestic economy. Although the whole year real GDP growth of 7.8 is hardly inspiring, fears of a Chinese economic hard landing have all but dissipated. Domestic demand has kept apace, especially as the residential property market is showing signs of revival. Our neutral near-term expectations for the USD suggest USD/CNY is likely to track sideways with a bias to ease lower. 5 5 MALAYSIA EXPORT GROWTH 5 5 USD/MYR We maintain that domestic Malaysian factors, such as the upcoming election, are likely to keep investors wary of building up aggressively long MYR positions in the short-term. The Malaysian economic data flow remains relatively light this week, pointing to a lack of catalyst for any substantial directional moves. With the USD expected to drift sideways, the USD/MYR cross should remain range bound. USD/IDR The Bank Indonesia (BI) managed to guide the USD/IDR spot lower, after the cross lifted to 9,8. Despite Indonesia s favourable Balance of Payments (BoP) position and stable foreign holdings of local currency bonds, inflation risks remain, as both headline and core inflation have stayed elevated. However, foreign holdings of Indonesian government securities rose in the past months, suggesting subsiding outflows. As we expect the USD to consolidate this week, we believe that the USD/IDR is likely to remain around 9,8. AUD Crosses One Week Bias AUD/NZD AUD/NZD is trading near the middle of the 1.4 to 1.8 range that it has largely traded within over the past three months. Beyond the Australian Q4 CPI on Wednesday, there is little in the way of data on either side of the Tasman to influence the currency pair. Last week s New Zealand Q4 CPI was on the weak side of expectations, and AUD/NZD lifted. We believe this week s Australian CPI would need to be much stronger than expectations to alter expectations of further RBA rate cuts, and support AUD/NZD. Improvement in the HSBC China Flash PMI could provide some short-term AUD/NZD support, but overall we think it is likely that AUD/NZD trades in a narrow range around 1.55 this week Dec 6 Dec 8 Dec 1 Dec 1 IDR trn 3 1 pa 3 INDONESIA GOVERNMENT SECURITIES outstanding amount (lhs) foreign holding (, rhs) Dec-3 Dec-6 Dec-9 Dec-1 IMPLIED VOLATILITY: AUD/EUR (1 week at the money options) pa3 AUD/EUR We expect AUD/EUR to remain in a tight range this week. While AUD/EUR one-week volatility has lifted by.71 vols to 8.38 vols, volatility remains well below its long run average of Low volatility, a recovery in the Chinese economy and rising commodity prices is typically supportive for the AUD/EUR cross rate. But a low Australian CPI (released Wednesday) may add some downside pressure this week. AUD/EUR (EUR/AUD) is likely to fluctuate between the 3-day moving average of.7946 (1.585) and.78 (1.81). AUD/GBP Mildly Bullish We expect AUD/GBP to trend higher this week, driven mainly by UK developments. The BoE January meeting minutes (released Wednesday) should reiterate the Monetary Policy Committee s (MPC) easing bias. Following the fall in UK retail sales and industrial production, the first estimate of UK Q4 GDP (released Friday) is expected to show another contraction, raising fears of a triple dip UK recession. But the lift in AUD/GBP is likely to be held back by the risks of a soft Australian CPI on Wednesday. AUD/JPY We expect the main influence on AUD/JPY to be the BoJ s policy announcement on Tuesday. If the BoJ meets or disappoints 1 Jan-7 Jan-9 Jan-11 Jan-13 1 JPY AUD/JPY EXCHANGE RATE (last three months) 8 19/1/1 19/11/1 19/1/1 19/1/13 1 JPY

4 expectations, there may be a buy the rumour, sell the fact reaction whereby AUD/JPY falls after the BoJ announces its easing measures on January. We recommend using dips in AUD/JPY below 9.5 to accumulate short JPY positions because Japan s current account surplus has collapsed. If, however, the BoJ beats expectations with an open-ended commitment to increase its asset purchases, AUD/JPY may spike 1- yen higher. Beyond the near term move, we expect AUD/JPY to trend higher to 1.. AUD/CAD Mildly Bearish We expect AUD/CAD to ease modestly this week though AUD/CAD should remain in a relatively tight range. We expect the BoC to keep policy unchanged but to state that the downside risks to US and Canadian growth have eased, undermining AUD/CAD. Following the low New Zealand CPI last week, risks are tilted towards a low Australian CPI this week (Wednesday). However, we do not expect a large fall in AUD/CAD. The HSBC flash China PMI (Thursday) is likely to continue to track higher, supporting AUD/CAD. Ratio AUD/CAD & CHINA PMI-ISM RATIO AUD/CAD (rhs) AUD/CAD China PMI / US ISM Manufacturing Ratio (lhs) Nov-1 Jun-11 Jan-1 Aug-1 Mar-13 8 GERMANY - UK YIELD SPREAD & EUR/GBP Bpts EUR/GBP.95 EUR/GBP (rhs) European Crosses One Week Bias EUR/GBP Mildly Bullish The easing in Eurozone tail risks, and resultant flow of funds from the currently AAA-rated UK, continues to be a factor supporting the rise in EUR/GBP. The mix of improving Eurozone business surveys, retention of the BoE s easing bias, and risk of a negative Q4 UK GDP print should add to the EUR/GBP tailwinds for a push higher in EUR/GBP this week. The widening in the two-year Eurozone-UK yield spread, which is now at its widest level since July 1 is another factor that points to a rise in EUR/GBP. We maintain a (published) strategy of buying EUR/GBP on dips. EUR/JPY Our weekly view on EUR/JPY is dominated by the evenly-balanced risks surrounding USD/JPY. On one-hand, the BoJ could surprise even aggressive market expectations and a market that s short JPY, by conducting open-ended monthly purchases in the order of trillion per month. On the other hand, years of policy disappointment is a difficult trend to change. EUR/USD is likely to consolidate. EUR/JPY vol. is high, equivalent to the levels associated with the June 1 peak in Eurozone-break-up fears. We would consider selling EUR/JPY vol. post the BoJ s Tuesday meeting, and use any post meeting dips in EUR/JPY down to 117. to re-establish long EUR/JPY positions. Our medium-term view is EUR/JPY further appreciates on a recovering Eurozone economy and a narrowing in Japan s current account surplus. EUR/CHF and USD/CHF & Safe-haven demand for CHF was a market feature during periods of heightened Eurozone stress. Given the improvement in various measures of Eurozone related tail risks, we think these safe-haven CHF inflows are in the process of reversing. When combined with our expectations of a firmer EUR, we think EUR/CHF should press higher over coming months. However over the coming week, expected consolidation in EUR/USD should see EUR/CHF track sideways. Since September 11, the Swiss National Bank s (SNB) exchange rate policy has meant that moves in USD/CHF mirrored moves in EUR/USD. However, with Eurozone related perceptions improving, we think increased CHF safe-haven outflows will outweigh the anticipated weaker USD. Hence, USD/CHF is likely to drift modestly higher over the coming months Germany - UK Yield Spread (average,5, and 1 year yields ) (lhs) -6 Mar-11 Aug-11 Jan-1 Jun-1 Nov-1 Bpts SYNTHETIC EUROZONE CDS & EUR/CHF EUR/CHF 1. Synthetic Eurozone CDS (weighted according to debt outstanding) (lhs) 1 Sep-1 Jun-11 Mar-1 Dec-1 CHF EUR/CHF (inverse, rhs) EUR/CHF TRADING RANGE Daily EUR/CHF Trading Range Average EUR/CHF Daily Trading Range Since 6 September 1. Sep-11 Jan-1 May-1 Sep CHF

5 NZD Crosses One Week Bias NZD/AUD NZD/AUD is trading near the middle of the.78 to.81 range that it has largely traded within over the past three months. Beyond the Australian Q4 CPI on Wednesday, there is little in the way of data on either side of the Tasman to influence the currency pair. Last week s New Zealand Q4 CPI was on the weak side of expectations, and NZD/AUD eased. We believe this week s Australian CPI would need to be much stronger than expectations to alter expectations of further RBA rate cuts, and weigh on NZD/AUD. A strong HSBC China Flash PMI could provide some short-term AUD outperformance, but overall we think it is likely that NZD/AUD trades in a narrow range around.797 this week. NZD/EUR EUR appears to be in a consolidation phase, and there are no clear catalysts on the data front to influence either NZD or EUR significantly this week. We expect NZD/EUR to be bound within a range this week. However, our expectation of an ongoing EUR recovery suggests NZD/EUR should press modestly lower over the coming months, towards our March-end target of.6. NZD/GBP Mildly Bullish NZD/GBP movements this week are likely to be a function of GBP direction. We expect GBP to remain heavy, with BoE January meeting minutes (released Wednesday) likely to reiterate the MPC s easing bias, and there is a risk the first estimate of UK Q4 GDP (released Friday) shows a contraction. If FX vol. stays low, these developments favour a higher NZD/GBP, but with the pair already trading near the six-month high of.584, we think the pair will likely meet some resistance in the area. 1.4 NZD AUD/NZD & INTEREST RATE DIFFERENTIALS AUD/NZD (lhs) AU-NZ Two-Year Interest Rate (Swap) Spread (rhs) 1. Mar-7 May-8 Jul-9 Sep-1 Nov-11 Jan NZD/EUR INTEREST RATE SPREAD NZ minus Eurozone 3 Year Swap Interest Rate Differential (lhs) NZD/EUR (rhs) 1. Jan-11 Jul-11 Jan-1 Jul-1 Jan-13. Pp NZD/EUR NZD/GBP NZD/GBP INTEREST RATE SPREAD 3..6 NZD/JPY NZD/JPY is expected to strengthen further over the coming months, but this week could be quite volatile, with the potential for the JPY to move in either direction due to BoJ developments (see USD/JPY section). Once the BoJ meeting has passed, we expect NZD/JPY vol. to decline, and the NZD/JPY lift that has been taking place since mid-october is likely to resume. A move up in NZD/JPY beyond 76. is expected over the near-term NZD/GBP (rhs) NZ minus UK 3 year Swap Rate Differential (lhs).6 Jun-11 Dec-11 Jun-1 Dec

6 FX Trade Recommendations CBA Foreign Exchange Research - FX Spot Trade Recommendations 13 Returns are Adjusted for the Cost of Carry EXIT CUMULATIVE TRADE ENTRY DATE ENTRY SPOT TARGET STOP RETURN () (CURRENT SPOT) RETURN () STATUS 19 December 1 - Large Dow nw ard Revisions to JPY Forecasts (USD/JPY spot at time of publication 84.31) Buy EUR/USD 11-Jan Jan Open Buy EUR/GBP 14-Jan Jan Open Buy EUR/CHF 16-Jan Jan Open Buy NZD/CHF 16-Jan Jan Open 16 January 13 - Change of Foreign Exchange Forecasts (Upw ard Revisions to EUR, AUD, NZD, CAD. Dow nw ard Revisions to CHF) Last Updated 1 January 13 Foreign Exchange Forecasts End Period End Period Mar-13 Jun-13 Sep-13 Dec-13 Mar-13 Jun-13 Sep-13 Dec-13 Majors European cross rates EUR/USD EUR/JPY USD/JPY EUR/GBP GBP/USD EUR/CHF AUD/USD EUR/AUD NZD/USD EUR/NZD USD/CAD GBP/JPY USD/CHF GBP/CHF USD/CNY GBP/AUD AUD cross rates GBP/NZD AUD/EUR Non-Japan Asia AUD/GBP USD/SGD AUD/JPY USD/HKD AUD/NZD USD/THB AUD/CAD USD/IDR AUD/CHF USD/TWD AUD/CNY USD/KRW AUD/SGD USD/MYR NZD cross rates USD/VND NZD/EUR USD/PHP NZD/GBP USD/INR NZD/JPY NZD/AUD NZD/CAD NZD/CHF NZD/CNY * Forecasts were adjusted on 16 January 13 * JPY forecasts were originally lowered on 19 December 1 6

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