Favour Fading Bounce In AUD/USD
Australia’s Q4 GDP data was better than expected, with the economy growing a solid 3.0% y/y versus expectations for a 2.5% print. Rate market pricing for the RBA has responded in turn, delaying easing expectations to September/November from July/August previously, and the AUD/USD has firmed to a level uncomfortably close to the stop (0.7280) on our short trade recommendation. However, we expect strong resistance to come in at the 200-dma (currently just below 0.7260) which has not been broken since September 2014. Going forward, the next key release in Australia will be retail sales on Friday. We continue to see downside risks to AUD/USD, particularly in light of the signals from both our short- and medium-term valuation models and BNPP FX Positioning Analysis suggesting the market has fully unwound its short AUD/USD position. We target 0.6850 on our short recommendation
BOC Likely Wary Of Recent CAD Gains
Canada Q4 GDP came in firmer than expected, however we note that the data showed little sign of the long-awaited rebalancing away from commodity exports toward manufacturing, with domestic demand driving the expansion. We suspect that the recent strengthening of the CAD and reduced scope for Fed tightening will move the Bank of Canada in a more dovish direction than is currently reflected in rates, and we remain bullish USD/CAD accordingly. Furthermore, BNP Paribas (PA:BNPP) STEER™ signals USD/CAD is oversold with short-term fair value well above 1.3500.
Watch For USD Feedback Loops
The better run of US data and continuing recovery in equity and credit markets over the past few sessions has allowed the rates markets to begin cautiously increasing pricing for renewed Fed tightening in the coming months. The July Fed funds future is now implying a yield of 49bp, about 11bp above the current mid-point of the Fed’s target range and the highest since late January. If sustained and extended, the combination of rising US front-end yields and an improving risk environment would be constructive for further USD gains vs. low-yielding currencies. However, we remain sceptical that rates markets will be able to rebuild pricing for H1 Fed hikes without derailing the nascent recovery in financial market sentiment. Moreover, a firming USD would presumably revive concerns about CNY devaluation and could put renewed pressure on commodity prices. We remain near-term bears on the USD relative to the EUR and JPY, but continue to expect the USD to outperform commodity currencies. Ahead today, focus will be on the ADP payroll report and a speech from San Francisco Fed President Williams.