Agreement at last!

February 10, 2012 — Mitul Kotecha

Greek politicians finally agreed on further austerity cuts totalling EUR 3.3 billion in order to secure a second bailout package. European official discussions now centre on the details of the bail out package, targeting a cut in Greece’s debt to GDP ratio to 120%.

However, the fact European Finance Ministers have withheld more funds for Greece until the austerity measures begin to be implemented suggests further uncertainty on the horizon. A Greek parliamentary vote set to begin this weekend may see some progress but markets will trade cautiously ahead of the vote.

EUR/USD rallied to a high of around 1.3322 but failed to break above its 100 day moving average at 1.3332 following the agreement. As expected the ECB offered no help to the EUR, with market attention continuing to centre on the second 3-year LTRO on 29 February.

The fact that there are still various issues to be resolved means that upside for EUR will be limited in the short term. In any case the currency was already pricing in a lot of good news. EUR/USD will face major resistance around 1.3388.

Notably risk measures are edging higher once again, implying some pressure on risk assets in the near term. Markets today will digest the status Quo from the European Central Bank and an additional but expected injection of GBP 50 billion in quantitative easing from the Bank of England. December US trade data and February Michigan confidence are the only data of note suggesting limited price action ahead of the Greek parliamentary vote.

Posted in Currencies, ECB, eurozone, FX, Greece, UK. Tags: , , , . Leave a Comment »

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 »

Why is the Swiss franc so strong?

February 7, 2012 — Mitul Kotecha

All eyes remain focussed on Greek developments today as the country vacillates towards acceptance of further austerity measures in order to gain the Troika’s (EU, IMF, ECB) approval for a second bailout for the country. The stakes are high with a potential disorderly default and Eurozone exit on the cards should no agreement be reached.

Against this background market nervousness is intensifying as reflected in the slippage in global equity markets and drop in risk assets in general overnight. The data and events slate today includes an RBA policy meeting and German industrial production, but neither of these will be significant enough to deflect attention and calm fraying nerves as markets await further Greek developments.

Contrary to many commentaries, the fall in EUR/CHF cannot be attributed to higher risk aversion (it has had a low correlation with my Risk Aversion Barometer over recent weeks). Instead, EUR/CHF is another currency pair that is highly correlated with interest rate differentials. Indeed, its high sensitivity provides a strong explanation for the drop in EUR/CHF since mid December 2011. This move has occurred despite an improvement in risk appetite over this period, a factor that would normally be associated with CHF weakness.

The implied interest rate futures yield advantage of the Eurozone over Switzerland has narrowed by around 47 basis points since mid December 2011. This is a problem for the Swiss National Bank, who will increasingly be forced to defend its 1.20 line in the sand for EUR/CHF. However, given that the drop in EUR/CHF has closely tracked yield differentials, any intervention is likely to have a limited impact unless there is renewed widening in the yield gap.

Posted in eurozone, FX, Greece, Switzerland. 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 »

EUR slips, Yen gains

January 31, 2012 — Mitul Kotecha

There has been good and bad news in Europe, with leaders’ rubber stamping the permanent bailout mechanism (ESM) and 25 out of 27 EU countries agreeing on the fiscal discipline treaty. Finally, EU leaders agreed that it was not all about austerity, with growth orientated policies as yet undefined, also required.

The bad news is that there has still been no final agreement on Greek debt restructuring and in turn a second Greek aid package said to total around EUR 130 billion while Portugal is increasingly moving into focus as the next casualty. Unsurprisingly the EUR has lost steam so far this week but markets remain short and any downside looks limited at technical support around 1.3077.

A cautious tone will prevail today, with risk assets likely to remain under mild pressure. Developments in Greece and the Eurozone will continue to garner most attention although US data in the form of the January Chicago PMI manufacturing survey and consumer confidence data will also be in focus.

Both surveys will reveal further improvement in confidence as the US economy continues to show signs of gradual recovery. This was supported overnight by a relatively positive Federal Loan Officers survey which revealed an increase in demand for business loans at banks in Q4 2011. Although the USD has been somewhat restrained by a dovish Fed stance the risk off tone to markets will likely bode well for the currency over the short term.

JPY is benefiting from the risk off market tone despite comments by Japanese Finance Minister Azumi who warned about action being taken to combat JPY strength. The JPY has benefited from the Fed’s dovish tone last week which has weighed on US bond yields relative to Japan. While FX intervention risks have increased, officials will remain wary given the underlying upward pressure on the JPY. The near term risk is for USD/JPY to retest the 2011 low around 75.38.

Posted in eurozone, FX, Japan, US. Tags: , , , , , , . Leave a Comment »
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