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 »

Fed does the Twist, markets do the Shake

September 22, 2011 — Mitul Kotecha

Although it was widely expected the Federal Reserve’s decision to implement a fresh version of Operation Twist together with a downbeat assessment of the economy came as a disappointment to equities and risk assets in general. The only surprise was the larger size of the operation at $400 billion.

Moody’s downgrade of three US banks added to the malaise as US equities dropped sharply, commodities slid, longer term Treasuries rallied whilst shorter term bonds dropped. The USD registered broad gains both on the back of the fact that no more quantitative easing was announced and due to a shift away from risk assets. At least there was no more negative news out of the eurozone as talks between the Troika (ECB, IMF, EC) and Greek officials continue on the next tranche of the bailout.

Markets will continue to digest the Fed’s outcome today and the negative tone will likely filter through markets today. There is little on the data front to result in a shift in this tone. In the US data includes weekly jobless claims while in Europe attention will be on manufacturing and service sector confidence measures.

While the potential for a positive outcome to talks in Greece may provide a short term boost to sentiment the overwhelming tone is likely to remain negative especially as Operation Twist is unlikely to change the dynamic of a weak growth trajectory for the US and developed economies over the coming months. Against this background, selling risk assets on rallies remains the preferred option.

The USD will continue to look firmest against high beta emerging market currencies in the current environment. Currencies in this group are those that have the highest correlations with risk (as m measured by my in house risk barometer) over the past 3 months including CAD, ZAR, TRY, INR, MXN, ARS & RUB. In contrast currencies that also have high correlations but actually strengthen as risk aversion increases are CNY and JPY.

Posted in Asia, Asian currencies, central banks, Commodities, Currencies, ECB, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Federal Reserve, Financial crisis, FX, Greece, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Fed’s status quo fuels caution

June 23, 2011 — Mitul Kotecha

The Fed’s status quo did little to stir markets overnight although there was a decidedly negative tone to equities and commodities, perhaps spurred by the downgrading of US growth forecasts. The fact that the Fed did not indicate that it is considering further asset purchases but instead will keep its balance sheet at around $,2800 billion also acted as a drag on markets.

The major concern for markets remains the depth and length of the current ‘soft patch’. The Fed believes it will be temporary and we concur, but clearly the slide in equity markets over recent weeks, suggests that there has been a divergence between stock market expectations and reality. The USD however, may actually be finding a medium term bottom, with the fact that the Fed is not considering QE3,

The downbeat Fed stance combined with a cautious reaction to the Greek government’s passage of a confidence motion indicates that markets will remain cautious over the near term. Indeed, comments by the Greek opposition that they will not support further austerity measures dashed any hopes of unity and will add another obstacle towards an easing in Greek tensions.

As it is the continued wrangling between European officials over private sector participation in any debt rollover as well as uncertainty over how ratings agencies will react, threatens to keep sentiment under pressure. The EUR has remained surprisingly resilient but its muted reaction to the passage of the confidence motion has given way to some weakness and the currency remains a sell on rallies.

GBP was a major underperformer weighed down by the relatively dovish Bank of England MPC minutes in which some members were even discussing further asset purchases. The currency faces further risks from a the CBI reported sales data for June where a decline in sales is likely to be reported. GBP/USD looks vulnerable to a drop below its 200 day moving average around 1.6027.

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

US Economic Data Disappointments

June 2, 2011 — Mitul Kotecha

Risk gyrations continue, with a sharp shift back into risk off mood for markets driven in large part by yet more disappointing US economic data as the May ADP jobs report came in far weaker than expected at 38k whilst the ISM manufacturing index dropped to 53.5 in May, its lowest reading since September 2009. This was echoed globally as manufacturing purchasing managers indices (PMI) softened, raising concerns that the global ‘soft patch’ will extend deeper and longer than predicted.

The market mood was further darkened by news that Moodys downgraded Greece’s sovereign credit ratings to Caa1 from B1, putting the country on par with Cuba and effectively predicting a 50% probability of default.

The resultant jump in risk aversion was pretty extensive, with US Treasury yields dipping further, commodity prices dropping led by soft commodities, and equity volatility spiking although notably implied currency volatility has remained relatively well behaved.

Global growth worries led by the US have now surpassed Greek and eurozone peripheral country concerns as the main driver of risk aversion, especially as it increasingly looks as though agreement on a further bailout package for Greece is moving closer to being achieved. Moreover, it seems as though a ‘Vienna initiative’ type of plan is moving towards fruition involving a voluntary rollover of debt.

The lack of first tier economic data releases today suggests that it will be a case of further digestion or perhaps indigestion of the weak run of US data releases over recent weeks and the implications for policy. For instance, it is no coincidence that QE3 is now being talked about again following the end of QE2 although it still seems very unlikely.

Bonds may see some respite from the recent rally given the lack of data today although this may prove short-lived as expectations for the May US jobs report tomorrow are likely to have been revised sharply lower in the wake of the weak ADP jobs data and ISM survey yesterday, with an outcome sub 100k now likely for May US non-farm payrolls.

Meanwhile, FX markets are caught between the conflicting forces of higher risk aversion and weaker US data, leaving ranges to dominate. On balance, risk currencies will likely remain under pressure today and the USD may get a semblance of support in the current environment.

This may be sufficient to prevent EUR/USD from retesting its 1 June high around 1.4459 as markets wait for further developments on the Greek front. Once again the likes of the CHF and to a lesser extent JPY will do well in a risk off environment whilst the likes of the AUD and NZD will suffer.

Posted in Commodities, Currencies, Economics, Economy, equity markets, Europe, eurozone, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Greece, Interest rates, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Position Unwinding Boosts USD

May 9, 2011 — Mitul Kotecha

The USD’s multi-month fall has come to an abrupt halt, with the currency registering gains in reaction to what appears to be a major position unwinding across asset markets, led by a drop in commodity prices.

Will it continue? Whilst I am amongst the more bullish forecasters on the USD over the medium term, the current rally could prove to be short-lived in the absence of a shift in Federal Reserve rhetoric or end to quantitative easing (QE2). Nonetheless, the market had got itself very short USDs (as reflected in the CFTC IMM data as of early last week which showed an increase in net short positions) and the rally in the USD last week was likely spurred by major short-covering which could extend further into this week.

The move in the USD gained momentum as European Central Bank (ECB) President Trichet proved to be less hawkish than many expected in the press conference following last Thursday’s ECB meeting. Moreover, renewed worries about Greece at the end of last week, with a report in the German Der Spiegel, later denied by Greek officials, that the country was planning to leave the Eurozone dented the EUR,

Taken together with the improving trend in US April non-farm payrolls (April registered +244k increase, with private payrolls 268k), these factors colluded to provide further positive stimulus to the USD and negative fallout on the EUR. The room for EUR downside is evident in the net long EUR speculative position, which rose to its highest since December 2007 as of 3rd May.

This week’s batch of US releases including March trade data, April retail sales and CPI, are unlikely to result in a reversal in last week’s trend though a trend like reading for core CPI, with the annual rate below the Fed’s comfort zone will reinforce expectations of dovish Fed policy being maintained, which could inject a dose of caution into the USD’s rally.

Against the background of a likely widening in the US trade deficit in March there will plenty of attention on the annual strategic and economic dialogue beginning today, with markets interested in discussions on Chinese worries about the gaping US fiscal deficit and US concerns about China’s exchange rate policy.

Greece’s denial of plans to leave the eurozone and discussions over a further adjustment to Greece’s bail out package, may help limit any drop in the EUR this week though it will by no means mark the end of such speculation about the periphery especially with this weeks’ Q1 GDP data releases across the eurozone likely to further highlight the divergence between the core and the periphery even if the headline eurozone reading rebounds strongly as we expect.

In the UK the Bank of England Quarterly Inflation Report will be the main influence on GBP. Downward growth revisions will play into the view that inflation will eventually moderate, capping expectation of higher interest rates over the coming months. However, the likely upward revision to near term inflation forecasts will help limit any damage to GBP.

GBP has lost ground to the USD but it should be noted that it has outperformed the EUR over recent days, reversing some of the recent run up in EUR/GBP. Given that EUR sentiment is likely to remain fragile this week, GBP may continue to capitalise, with a test of EUR/GBP 0.8672 on the cards.

Posted in central banks, China, Commodities, Currencies, ECB, Economics, Economy, Europe, eurozone, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Germany, Greece, Interest rates, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »
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