Pulling the rug from under the Euro

January 6, 2012 — Mitul Kotecha

The USD was spurred by stronger US data and a further deterioration in EUR sentiment. The data including an improvement in consumer confidence and in particular a strong (+325k) ADP private sector jobs report, support the case for medium term USD outperformance amid growing evidence of relatively superior US growth.

While having a limited impact on interest rate expectations due to the Fed’s commitment to maintain very accommodative policy and thus also limiting the scope of USD gains, the data nonetheless, highlights the scope for a relative rise in US bond yields relative to bunds over the medium term and in turn a firmer USD versus EUR.

Whether the December ADP data translates into a similarly strong December payrolls outcome today is debatable but consensus forecasts have been likely revised higher. We look for a 190k increase, which ought to provide more evidence of US economic and USD outperformance.

Part of the explanation for USD strength is simply a weaker EUR. Although France’s debt auction yesterday was not particularly negative it did reveal an increase in borrowing costs while yields in peripheral bond markets continue to move higher. As noted, data releases in the Eurozone are providing little support to the currency and today’s November retail sales release will add to the evidence of weakening growth, with a further contraction expected.

Central banks and official investors in general appear to be pulling the rug from under the EUR’s feet, meaning that the usual support for the currency is disappearing fast while German bond yields have moved below US 2-year yields. Nonetheless, the market is heavily short EUR and further downside may not be as rapid. Technically, a break below EUR/USD support around 1.2767 will open the door to a drop to 1.2642.

Following yesterday’s slightly disappointing trade data markets will turn their attention to next week’s November retail sales, building approvals and January consumer confidence data in Australia. AUD has held up relatively well in the first week of the new year despite the ongoing tensions in the Eurozone and related rise in risk aversion.

Fortunately for the AUD its correlation with risk aversion is quite low, suggesting some resilience to higher risk aversion. Nonetheless, the market appears long of the AUD and it may extend yesterday’s pull back as investors take profits ahead of the US jobs report.

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Euphoria fades, risk currencies weaker

October 31, 2011 — Mitul Kotecha

The euphoria emanating from last week’s eurozone agreement will likely fade into this week as renewed doubts creep in. Details of how the EFSF bailout fund will be leveraged or how the special purpose vehicle will be utilised have yet to emerge while the firewall to protect countries such as Italy and Spain may still be insufficient given that the use of the European Central Bank (ECB) to provide unlimited support has been ruled out.

With more questions than answers markets will be hungry for further details over coming weeks and until then it is difficult to see risk appetite stretching too far. One indication of such concern was the fact that Italy’s borrowing costs climbed to euro-era highs the day after the European Union (EU) plan was agreed. The G20 meeting on 3-4 November will be eyed for further developments as well as further reaction to the EU agreement.

There are plenty of events to digest this week that could add to any market nervousness. In terms of central banks we do not expect to see any change in policy stance from the ECB, Federal Reserve or Reserve Bank of Australia (RBA) this week but the decisions may be close calls. The ECB under the helm of new President Draghi will be under pressure to ease policy as growth momentum has clearly weakened but the Bank will likely hold off for the December meeting when new growth and inflation forecasts will be released.

The RBA may also take some solace from a better global economic and market climate but the market disagrees having priced in a cut this week. The Fed will look to see how ‘Operation Twist” is faring before moving again but recent indications from some Fed officials suggest growing support for purchases of mortgage backed securities.

On the data front eurozone inflation today will be the key number in Europe while the US jobs report at the end of the week will be the main release in the US. Ahead of the payrolls data, clues will be garnered from the ISM manufacturing data and ADP jobs report. The consensus is for a 95k increase in non-farm payrolls and the unemployment to remain at 9.1% maintaining the trend of only gradual improvement in the US jobs market.

Recent data releases have turned less negative, however, and at the least have helped to alleviate renewed recessionary concerns. Overall, I suspect that markets will come back down to the reality of slow growth and unanswered questions this week, with risk assets likely to lose steam over coming days.

Posted in Australia, central banks, Currencies, ECB, Economics, Economy, Europe, eurozone, Federal Reserve, Financial crisis, FX, Greece, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , . Leave a Comment »

Plenty of event risk

October 17, 2011 — Mitul Kotecha

This week is heavy with event risk, with a lot expected from EU leaders. So far the risk on tone to markets has held up, with for example the VIX fear gauge resting below the key 30.0. The G20 meeting over the weekend set the deadline for action for concrete solutions to the eurozone debt crisis for the October 23 EU Summit.

However, there will be little detail on issues such as banking sector recapitalisation, private sector involvement in any debt restructuring or ‘leveraging’ the EFSF bailout fund until the report on Wednesday night by the Troika on Greece. The reward to EU leaders would be the potential for more aid from the IMF but even now it seems that a German government official has poured cold water of a plan being announced at the EU Summit which will disappoint markets.

There are also plenty of data releases for markets to digest over coming days including inflation releases, manufacturing surveys and industrial production data in the US while in Europe the German IFO and ZEW surveys are scheduled for release. The data will follow on from the better than expected September US retail sales releases at the end of last week continuing to dampen expectations that the global economy is falling in recession though there will be a marked deceleration in European data.

Meanwhile the US Q3 earnings season rolls. The risk on tone will likely continue to weigh on the USD and weigh on bonds but unlike a few weeks ago when a lot of bad news was priced in, the scope for disappointment is becoming increasingly high.

Many currencies remain highly correlated with gyrations in risk and in this respect the improvement in risk appetite is good news for high beta / commodity. AUD, NZD, CAD and JPY are amongst the most sensitive currencies and therefore prone to a bigger reaction as risk improves, with the former three strengthening and the JPY weakening. Asian currencies poised to benefit from firmer risk appetite include INR and KRW, both with relatively high correlations with risk.

EUR/USD has made a solid recovery over recent days from its lows around 1.3146 spurred by hopes of action by European officials. Such hopes may yet be dashed but the EUR looks supported over coming days ahead of the EU summit Speculative positioning also reflects a slight improvement in EUR sentiment as IMM short positions have declined in the last week but its worth noting that this week’s European data are unlikely to be supportive for the EUR.

Posted in Asian currencies, Australia, Bond markets, central banks, Currencies, ECB, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Financial crisis, Fiscal/Budget, France, FX, Germany, Greece, IMF, Interest rates, Japan, Monetary Policy, New Zealand, South Korea, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Strengthening risk appetite hitting the dollar

October 13, 2011 — Mitul Kotecha

Strengthening risk appetite is taking its toll on the USD, with the USD index now down around 3.5% from its 4 October peak. Although equity markets probably liked the news the USD was dealt another blow from the FOMC minutes which revealed that some Fed officials were keen on embarking on further large-scale asset purchases after recognizing that the impact of Operation Twist will not be so potent.

Earnings will have some impact on risk and in turn the USD, with Q3 earnings from JP Morgan and Google on tap today. However, risk appetite looks well supported and in a market that became long USDs very quickly, this suggests some scope for squaring long positions in the short term.

What comes next for the EUR? The currency has bounced from its lows and has made considerable ground against the USD over recent sessions. Markets quickly got over Slovakia’s initial rejection of the EFSF’s enhancement as agreement was reached by officials in the country to approve the mechanism in a second vote. However, there is not much news on the progress on issues such as European banking sector recapitalisation, ‘leveraging’ the EFSF or the any change in creditor participation in any Greek debt restructuring.

Although European Commission President Barroso gave some broad outlines of what should be done to recapitalise banks disagreement among officials meant that there was little detail. Perhaps no news is good news and in any case markets will have to wait for the delayed EU Summit for further news, but the longer the wait the greater the scepticism and attendant downside risks to EUR.

The Swiss National Bank must be content with their stance on the CHF. Since the imposition of a ceiling for CHF versus EUR at 1.2000, and after an initial sharp jump higher the currency pair has continued to edge upwards. Meanwhile, speculation that the SNB may even raise the ceiling to 1.30 has grown as domestic complaints such as those from the country’s largest telecoms operator yesterday about the ongoing strength in the currency, continue.

The SNB has not indicated that it favors such a move and may be content with a gradual decline in the CHF as is taking place now, but should the fragile market calm at present disintegrate the SNB may have another battle on their hands as appetite for the currency strengthens anew. On the top side resistance is seen around 1.2469 for EUR/CHF.

Like many other high beta currencies AUD is being influenced less by domestic factors and more by risk aversion. Even more influential to the direction of AUD/USD is the movement in commodity prices and like risk aversion this had a negative influence on AUD as commodity prices dropped sharply over September.

Due to a bounce in both risk and commodities AUD has bounced sharply from its recent lows back above parity with the USD. AUD will have found further support from the firm September jobs report today. It is difficult to go against rising risk appetite at present but there is still a significant risk that hopes of a solution to the eurozone’s woes do not materialise while growth expectations are pared back further. Against this background the AUD will remain susceptible to sharp

Posted in Australia, central banks, ECB, Economics, Economy, equity markets, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Greece, Interest rates, Monetary Policy, Switzerland, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »
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