DB FX Daily: Treasury on China, Still CAD Bears, AUD&NZD Strength in Asia

[RTFX-Trading]

FX Daily: Treasury on China, Still CAD Bears, AUD&NZD Strength in Asia

Treasury steps up rhetoric on China

While sticking to expectations by not naming China as a currency `manipulator', the Treasury has upped the rhetoric in its semi annual report. In particular it noted that "the Chinese currency is undervalued" although it went on to say that "China did not meet the technical requirements for designation" with "Treasury . unable to determine that China's exchange rate policy was carried out for the purpose of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade". Elsewhere the report noted "that allowing the currency to adjust is a matter of international interest and responsibility". While the language is a step up from that contained in the December report the focus of the US Administration will likely remain on the strategies it already has in place - notwithstanding pressure from Congress.

BoC's Dodge repeats rate hike rhetoric

We felt it noteworthy that Governor Dodge choose to repeat the key sentiments from the BoC's very hawkish May Statement - in particular that "that some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target." The repetition suggests to us that the BoC remains on track to hike in July and will likely hike further beyond that. The Governor also noted that the appreciation in the Canadian dollar since April "appears to have been stronger than historical experience would have suggested". As our chart below suggests, we view the bulk of this most recent appreciation in the CAD as having been driven by the sell-off in the front end of the Canadian debt market. In fact, the most recent (globally inspired) sell off has the rates market now arguably more priced than the currency.

AUD and NZD have been mostly stronger in the Asian time zone so far in June

RBA Governor Stevens today delivered a less-hawkish-than-expected speech today, resulting in the front two Australian bill futures rallying by around 8bps at time of writing. Despite this, AUD/USD was only marginally lower, following the pattern of NZD/USD which weakened only marginally following much-weaker-than-expected retail trade data. This has been a consistent pattern this month, where AUD and NZD have mostly been stronger in the Asian time zone (with the notable exception of NZD on the day when the RBNZ intervened), which we view as consistent with the theme that Asian retail demand has been the key support for these currencies recently.