In Focus: RBA, ECB And BOE

Forex News and Events:

The Friday’s surprise in US payrolls couldn’t generate a stable demand in USD holdings; the dovish FOMC dominates the overall sentiment. The US 10 year government yields traded below 2.60% for the first time in three months. In Australia, the weakness in Chinese manufacturing weighs on AUD before RBA verdict (on Tue) and Chinese trade data due this week. EUR and GBP well recovered to pre-NFP levels and trade ranged before BoE and ECB meetings (on Thu). The implied vol in G7 hit the 7 year lows. The Turkish Lira is the biggest winner among EM, as the fastening inflation keeps the CBT doves subdued this Monday.

ECB and BoE meetings

The ECB and the BoE will meet on Thursday. Both central banks are expected to keep the policy rates unchanged at the current historical low levels. The ECB President Draghi’s monthly press conference will be the main focus point. We believe that the latest improvement in Euro-zone CPI estimates will be an excellent reason to not act, yet we will be chasing more details on a potential QE to counter the EUR-strength. This raises a downside risk in EUR-complex, which is relatively cheap to hedge on the option markets currently, given that the 1-month implied vol stands at the seven year lows (appr. 5-5.5%).

AUD highly exposed to China, RBA to keep the status quo

The RBA will give policy verdict on Tuesday and is widely expected to keep the policy rate unchanged at 2.50%. The softness in first quarter CPI should give flexibility to Australian policy makers to remain on their dovish position especially given the weakness in China. The HSBC final PMI read at 48.1 shows that the manufacturing activity in China remains in the contraction zone and the AUD is among the most vulnerable currencies vis-à-vis the soft Chinese recovery. We will be closely monitoring the Chinese trade data this week. Weakness in Chinese imports should further weigh on AUD-complex. In fact, China represents over one thirds of Australia’s total trade activity and roughly 65% of iron ore and coking coal exports. The AUD exposure to Chinese activity is thus noteworthy and the growing iron core inventories in China suggests no significant recovery in Chinese demand in the close future.

AUD/USD is currently stuck within 0.9209-0.9339 range (Fibonacci 50% and 61.8% on Oct’13 - Jan’14 drop), the negative bias places the lower band at higher risk this week. The key support is seen at 200-dma (0.9154).

Versus the kiwi, the selling pressures intensify on concrete RBA/RBNZ divergence. AUD/NZD will step into the broad downtrend channel for a close below 1.0680. The key support is seen at 1.0540 (March support), then 1.0493 (2014 low).

Turkey inflation tops at 9.38% in April

Turkey CPI y/y accelerated at the faster-than-expected pace of 9.38% in April, the CPI core hit 9.74%. As expected, the rising food prices (due to winter drought) are now quantifiable in inflation figures and should intensify in the coming three months before the expected ease in inflation begins. USD/TRY sold-off below 2.1000 post-CPI as expectations of a CBT cut faded given the price dynamics. The upside pressures in inflation raise our fears combined to the possibility of a rate cut in the coming months. We now see intensifying policy risk – a “too early rate cut from the CBT” - and underweight TRY holdings.

Today's Key Issues (time in GMT):

2014-05-05T13:45:00 USD Apr F Markit US Services PMI, exp 54.5, last 54.2
2014-05-05T13:45:00 USD Apr F Markit US Composite PMI, last 54.9
2014-05-05T14:00:00 USD Apr ISM Non-Manf. Composite, exp 54, last 53.1