Germany Caught in the Contagion

November 24, 2011 — Mitul Kotecha

Equity markets came off their lows overnight despite a 236 point drop in the Dow Jones, but sentiment remains extremely fragile and any let up in pressure on risk assets will prove temporary. A weak bond auction in Germany highlights the severity of contagion across Europe. If the core is being hit then there is no safe haven in Europe anymore. On a positive note it might just make German officials finally realise that they need to act quickly to provide solutions to the crisis.

Weak data notably outside the US adds to the malaise, with in particular China’s HSBC November weaker purchasing managers’ indices coming in below the 50 boom/bust level. Europe’s weaker purchasing managers indices highlight the prospects of looming recession while the news in Germany is not only bad on the bond front bad also on the data front. Today’s German November IFO survey will continue in the same vein, with further weakness in this business survey expected.

Bearing in mind the US Thanksgiving holiday today thin liquidity will mean that conditions are ripe for exaggerated market moves. EUR/USD has already sustained a drop below the important 1.3500 level as even the underling strong Asian demand appears to have been pulled back. More downside is expected but technicals suggests that it will be hard trudge lower, with near term support seen around 1.3285 (10 day Bollinger Band). The near term range is likely to be 1.3285-1.3505 although given the US holiday the range may be even tighter.

Aside from the IFO attention today will focus on a meeting between Chancellor Merkel, President Sarkozy and Prime Minister Monti. As usual expect a lot of hot air but little action. Also note there is a general strike in Portugal today protesting against austerity measures in the country.

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Sell Risk Currencies on Rallies

November 3, 2011 — Mitul Kotecha

The Federal Reserve FOMC outcome and Greece’s travails failed to dampen the recovery in risk appetite overnight. The Fed highlighted downside risks to growth and revised lower its forecasts. However, positively for risk appetite the Fed left open further policy easing options, hinting at more quantitative easing if needed.

Meanwhile European leaders tightened the noose around Greece by cutting off EUR 8 billion in aid payments and threatening to cut of all aid if the country’s referendum now scheduled for December 4 fails to endorse the EU rescue package announced last week.

At the emergency meeting of European leaders yesterday Greece’s Prime Minister also admitted that the referendum will not only decide the fate of the rescue package but also whether Greece wants to remain in the eurozone. Greece was not only the eurozone country in focus as Italy continues to be racked by political uncertainties, with Prime Minister Berlusconi failing push through legislation on structural reforms ahead of the G20 meeting beginning today.

The risk rally is highly unlikely to last, with the EUR, commodity and high beta emerging market currencies to face further pressure. Although the immediate market focus will be on the G20 meeting beginning today the fact that leaders are now seriously beginning to consider the prospects of a Greek exit from the eurozone while taking a tougher stance on the country highlights how important the December 4 referendum will be.

Ahead of the vote markets will remain highly nervous and risk aversion will remain elevated. Consequently risk assets are set to face further pressure. Moreover, the fact that China has downplayed the prospects of further bond purchases from the EFSF bailout fund suggests there will be no help from this quarter any time soon.

Aside from the G20 meeting markets will pay attention to Draghi and Co. at the European Central Bank (ECB) today as well as bond auctions in France and Spain but we do not look for much excitement from the ECB despite the increased uncertainty within the eurozone. While an interest rate cut today cannot be ruled out given the increased market uncertainty the ECB is likely to wait until December before cutting policy rates.

Posted in Asian currencies, central banks, China, Commodities, Currencies, ECB, Economics, Economy, emerging markets, Europe, eurozone, Federal Reserve, Fiscal/Budget, France, FX, Greece, Interest rates, Italy, Monetary Policy, US. Tags: , , , , , , , , , , , , , , . Leave a Comment »

Asian currencies at multi-year highs

July 4, 2011 — Mitul Kotecha

Asian currencies are stronger in the wake of a sharp improvement in risk appetite following the approval of Greece’s austerity measures. The rally in Asian FX is revealed in the ADXY (an index of Asian currencies) index which is approaching a test of its 2nd May high around 119.26 around its highest level since August 1997. Technical indicators have turned more bullish, with the ADXY breaking above its key moving average levels (20, 50 & 100 day) and the 14-day relative strength index also turning higher.

The Asian FX rally has been led by the KRW, the Asian currency that has had the highest correlation with risk over the past few weeks. Given that risk aversion has dropped sharply since mid June it is no surprise that this currency has strengthened the most. USD/KRW is trading around its lowest level since August 2008. Strong equity capital outflows had kept the KRW on the back foot over much of June but there has been a bounce back in flows recently. However, USD/KRW is likely to find it tough to break below 1060 over the short-term, especially given likely resistance from the local authorities.

The THB, the worst performing Asian currency in June, has rapidly reversed some of its losses. The THB looks set to consolidate its gains following a decisive election result which saw the opposition Puea Thai Party gain control of parliament. The biggest relief for markets was the fact that the outcome was relatively clear cut, suggesting a potentially a smooth handover of power. Nonetheless, the currency has already jumped and after having dropped to around 30.40 from a high of around 31.01 USD/THB is likely to trade off gyrations in risk appetite.

The fact that the USD has lost some ground in the wake of firmer risk appetite and better news in Greece has also allowed Asian currencies to strengthen although it’s worth noting that amongst Asian currencies only the MYR has maintained a significant correlation with the USD index over the past 3-months. In other words, although USD weakness has helped to facilitate Asian currency strength, the recent strengthening in Asian FX is more likely to have been due to a rebound in capital inflows to the region.

Further Asian FX gains are likely over the near term especially as China continues to fix the CNY higher versus USD but given the recent rapid gains in some currencies, there is a risk of growing official resistance and intervention to slow or stem Asian FX gains. Moreover, the end of QE2 in the US suggests that the downside risks for the USD in general are not likely to be as prevalent, with a potential recovery in the USD over H2 likely to stand in the way of strong Asian FX gains over coming months.

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US dollar on the rise

June 27, 2011 — Mitul Kotecha

Risk aversion is on the rise as uncertainties about Greece and worries about weaker economic data weigh on sentiment. A number of key events rather than data will be the main drivers this week. First and foremost amongst these is the vote in the Greek parliament on the country’s budget reform plan, which if passed will pave the way for the way for a disbursement of EUR 12 billion from the European Union / IMF and a new bailout package.

Meanwhile in the US talks on raising the debt ceiling are likely to resume in earnest, with the market likely to become increasingly nervous about the lack of resolution on the issue. Nonetheless, it is Europe that will dominate the headlines and on this front even if the reform plan is passed any market relief is likely to be limited given the ongoing uncertainty about private sector participation in any Greek debt roll over. This suggests that the EUR will remain under pressure over the week despite reassuring comments from Chinese Premier Wen.

Data releases will be relegated to background noise but what there is will not help sentiment. Signs of slowing activity remain evident as revealed in disappointing eurozone manufacturing surveys last week and this will be echoed in the US ISM manufacturing survey at the end of this week. Economic sentiment gauges in Europe are also set to reveal a decline. Given the lack of ammunition and/or unwillingness to risk using further stimulus from the Fed, the sensitivity of markets to weak data will be high, keeping risk aversion elevated.

Indeed, although well flagged the end of the Fed’s QE2 this week will mark a major shift in market dynamics, especially in currency markets where the USD will finally see a massive weight lifted from its shoulders. As indicated by Fed Chairman Bernanke following the FOMC meeting the Fed is not considering a further round of asset purchases, a fact that will help the USD to find firmer support.

Notably the USD index moved has above its 100-day moving average providing a positive technical signal given that it has failed on its last two attempts. The USD index now looks set to break its April high around 76.610.

Posted in China, Currencies, Economics, Economy, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Greece, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , . Leave a Comment »

Asia Helps The Euro Again

May 26, 2011 — Mitul Kotecha

Following the pressure on markets over recent days there is some relief filtering through markets today although sentiment remains fickle. Weaker than expected US April durable goods orders data failed to dent confidence with equity markets ending in positive territory overnight even though the data added to a plethora of global data disappointments over recent weeks.

Once again the EUR has been saved by Asian demand, this time not directly for the EUR itself but by reports that China and other Asian investors will purchases EFSF bailout bonds, with China apparently reported to be “clearly interested” in the mid June sales of Portuguese bailout bonds, with Asian investors representing a “strong proportion” of the buyers.

Despite the reassuring news about Asian official interest in eurozone debt, problems in the periphery remain a major drag on the EUR. Developments at the two day G8 heads of governments meeting in Deauville and various speeches by officials from the European Financial Stability Facility (EFSF), European Union (EU) and European Central Bank (ECB) regarding Greece’s travails will be particularly important for EUR direction.

The various speakers are likely to maintain the pressure on peripheral countries to continue their austerity programmes in order to gain external support. Nonetheless, there still appears to be conflicting comments about what Greece will do with regard to its debt burden. Whilst some EU officials have espoused the benefits of extending Greek debt maturities on a voluntary basis, the ECB has steadfastly stood against any form of restructuring.

Other than the events above, in the US the second reading of Q1 GDP will be released. The consensus looks for an upward revision to a 2.1% annual rate from an initial estimate of 1.8% due mainly to an upward revision to inventories. US weekly jobless claims will also be of interest especially as the recent increase in the 4-week average for jobless claims has provoked renewed fears about the jobs market recovery.

Posted in Asia, central banks, China, Currencies, ECB, Economics, Economy, Europe, eurozone, FX, Greece, Portugal, US. Tags: , , , , , , , , , , , , , , , . Leave a Comment »
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