Euro pricing in a lot of good news

February 9, 2012 — Mitul Kotecha

Markets remain in limbo ahead of a potential Greek debt deal although US equities managed to eek out small gains overnight. Stocks in the US have entered a bull market helped by the dovish stance of major central banks.

The Federal Reserve’s commitment to maintain accommodative policy until the end of 2014 and the European Central Bank’s (ECB)3 year LTRO have been drivers of the rally in risk assets. The BoE will contribute to the easy stance of central banks, with an increase in UK quantitative easing set to be announced today. The ECB in contrast is set to remain in status quo.

Will it be a buy on rumour, sell on fact reaction for the EUR to a Greek debt deal? Over recent days anticipation has grown that a deal on debt writedowns and in turn a second bailout package will emerge soon. This has helped to propel EUR/USD higher, with the currency hitting a high of 1.3289 overnight.

So far a deal has been lacking but leaders are expected to approve a draft agreement on fresh austerity measures between the main Greek political parties today. This should pave the way a deal on debt restructuring and a new loan package for the country due to be discussed today between Eurozone finance officials.

However, the EUR has already priced in a lot of good news on this front and even agreements on the issues above may not see the currency push much higher, with strong resistance around EUR/USD 1.3388. Separately today’s ECB meeting is unlikely to provide much direction for the EUR, with the Bank set to maintain current policy settings.

USD/JPY has managed a recovery of sorts but still remains in the middle of multi month 75.5-78.5 range. Nonetheless, the momentum over the short term will continue to be for USD/JPY upside, with resistance around 77.49 targeted. News that the Japanese authorities conducted ‘stealth intervention’ to weaken the JPY in late October/early November will have emboldened JPY bears.

However, at the same time they should also be worried as it is clear that even after all the intervention the JPY remains overly strong. Reflecting this is the fact that speculative and margin trading JPY positioning is at a very high level.

Moreover, while much has been made of the deterioration in Japan’s current account balance over recent months and the potentially negative impact on the JPY it should be noted that Japan’s basic balance (sum of direct investment + current account + portfolio flows) position remains healthy (for now) and is acting as an obstacle to JPY weakness.

Posted in Currencies, Economy, Japan, FX, Federal Reserve, eurozone, ECB. Tags: , , , . Leave a Comment »

Still waiting for Greece

February 8, 2012 — Mitul Kotecha

The USD has taken a steady path of recent days, with little move in either direction, reflecting the general malaise in currency markets waiting for an outcome to the Greek debt talks. However, hopes that an agreement will be announced shortly saw the USD lurch lower overnight. The conflicting forces of firming US economic data on the one hand and uncertainties in Greece on the other have left market participants in a bind.

The USD has at least purchased some solace from reduced expectations of quantitative easing but as we noted earlier in the week the Fed may still carry out QE despite of better data. The USD could also suffer from the fact that US bond yields remain relatively low compared to some other major countries.

Indeed, the Fed’s commitment to maintain accommodative monetary policy until the end of 2014 suggests that the USD’s use as a funding currency could continue for a while longer. We look for the USD index to consolidate around the 78.50-79.00 level over the short term.

GBP’s recovery from its lows around 1.5233 on 13 January has been impressive. GBP’s gains are not as strong as that of commodity and Scandinavian currencies but it has outperformed the EUR. We expect this to continue.

Like other currencies GBP has benefited from a widening yield gap between the UK and the US. This has little to do with UK policy expectations given that the Bank of England is expected to initiate more quantitative easing this week. The move in relative US–UK yield differentials has more to do with the rally in US interest rate futures since the start of the year, supported by the recent dovish FOMC statement, which has put the USD under a degree of pressure.

GBP gains will be limited ahead of the BoE meeting tomorrow, with technical resistance seen around 1.5931 vs USD. Against the EUR much will depend on Greek debt talks but eventually we look for a retest of the EUR/GBP January lows around 0.82213.

Posted in Currencies, eurozone, Federal Reserve, Greece, Monetary Policy, UK. Tags: , , , . Leave a Comment »

All Eyes on Greece

February 6, 2012 — Mitul Kotecha

The USD is in a lose-lose situation courtesy of the Federal Reserve’s ultra easy stance. Positive economic data releases have been met with USD selling pressure as the data helps to fuel a rally in risk appetite. Although the USD benefited from the better than expected US January jobs report gains will prove fleeting as it is does not change expectations of more Fed quantitative easing (note the drop in the participation rate).

Following the jobs report, there is little on the data front over coming days (only December trade data for which a widening is likely and February Michigan confidence where a gain is expected) to shift USD direction. At best the USD will consolidate giving USD bulls some time to nurse their bruises.

A disaster in the Eurozone (e.g. Greek disorderly debt default) could help the USD but it appears that markets have become resilient to bad news giving officials in the region the benefit of the doubt. In particular, the ECB’s 3-year LTRO has calmed nerves somewhat.

The lack of a final deal on Greek debt restructuring has failed to dent the EUR although notably EUR/USD failed to extend gains above 1.32 and has drifted lower. EUR/USD will remain on tenterhooks ahead of a midday deadline today set by Greek PM Papademos for party leaders to accept strong terms to qualify for a second bail out.

In the absence of agreement prospects of a disorderly debt default will loom large especially given that there is a EUR 14.5 billion bond repayment on March 20. Such an outcome will undoubtedly derail the EUR. Moreover, a meeting of Eurozone Finance ministers this week will give some direction to the EUR while the ECB’s likely status quo on Thursday suggests that there will limited EUR reaction following the meeting.

The risk of JPY intervention has increased significantly as USD/JPY brushes the psychologically important 76.0 level. However, the feeling on the ground is that USD/JPY will need to broach 75.0 before intervention is actually seen. Jawboning by Japanese officials has intensified suggesting increased official concern.

However, in the short term the ability of the authorities to engineer a sustained drop in the JPY is limited given the compression in US – Japan bond yields. This appears to be outweighing even the drop in risk aversion, which in theory should be playing for a weaker JPY. USD/JPY will struggle to make any headway, with strong multi day resistance seen around 77.49.

Posted in Currencies, eurozone, Federal Reserve, Greece. Tags: , , , , , . Leave a Comment »

Risk currencies flying high

February 1, 2012 — Mitul Kotecha

The first month of 2012 passed rather more positively than anticipated and clearly was a good month for risky assets. Even the beleaguered EUR strengthened despite calls for an extended decline. Assets that were most heavily sold over 2011 were the biggest winners over January. Further signs of improvement in US economic data, receding fears of a China growth crash and even signs of tentative progress in the Eurozone debt crisis mean that sentiment may have finally turned a corner. This has been reinforced by the Fed’s commitment to maintain accommodative monetary policy until the end of 2014 and the ECB’s long term LTRO. I’m not entirely convinced but it wouldn’t pay to buck market optimism just yet.

Interestingly currency markets aren’t necessarily behaving as one would expect. In particular the JPY and CHF, both safe haven currencies, have not weakened despite an improvement in risk appetite. In contrast they have actually strengthened. Other currencies are behaving much as would be expected, especially high beta (risk sensitive) currencies, including AUD, NZD and many emerging market currencies, which have rebounded. Even the EUR has jumped past the 1.30 mark against the USD. Even the slow progress in agreeing on the magnitude of Greek writedowns has failed to dent confidence, with Eurozone peripheral bond yields dropping. Risk / high beta currencies are set to remain well supported over the short term.

Looking ahead the outcome of the US January jobs report at the end of the week as well as a final agreement on Greek debt will help determine whether the positive sentiment for risk assets will be maintained into next week. Meanwhile the USD looks as though it will remain under pressure especially given the continued downward pressure on US bond yields, which only continues to reinforce its role as a funding currency. This explains why both the JPY and CHF have stubbornly refused to weaken as narrowing US versus Japanese and Swiss bond yield differentials have kept these currencies under upward pressure. However, risks of FX intervention by both the Japanese and Swiss authorities suggests that upside may be limited.

Posted in ECB, Federal Reserve, FX, Greece, US. Tags: , , , , , . Leave a Comment »

US dollar remains under pressure

January 30, 2012 — Mitul Kotecha

Hopes of progress on the Eurozone debt crisis and encouraging data in the US have helped boost market confidence. However, the slightly disappointing US Q4 GDP report (2.8% Qoq annualised growth) revealed the markets continued vulnerability while Fitch’s downgrade of six Eurozone countries’ sovereign ratings brought a dose of reality back to the region.

Nonetheless, the Eurozone Central Bank (ECB) unlimited 3-year loans to banks and Fed hints at quantitative easing (QE3) have provided markets with a fillip and will help underpin risk assets over coming weeks. If Greek debt talks are wrapped up this week markets will take further solace but the European Union (EU) Summit beginning today will need to deliver on rubber stamping recent agreements for positive sentiment to be maintained.

This is a big week for US data releases and in turn the USD. Heavy weight data including January non-farm payrolls, ISM manufacturing confidence and consumer confidence readings are on tap over coming days. Although payrolls will not be as strong as in December the trend of data releases will continue to be one of improvement as likely to be revealed in the forward looking confidence surveys this week.

The USD may not benefit as much as it would otherwise have done given that the Fed has committed to easy monetary policy for a long while to come to end 2014. It is becoming increasingly clear that firmer activity data may still not prevent a further round of quantitative easing and attendant USD downside risks. Against this background a cautious stance on the USD over coming days is warranted, with the USD index likely to remain under near term pressure.

Posted in ECB, Federal Reserve, FX, US. Tags: , , , , , . Leave a Comment »
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