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 »

Fed weighs on the dollar

January 26, 2012 — Mitul Kotecha

The USD was already losing ground over the last couple of weeks against the background of firming risk appetite but the currency was dealt another blow from the Fed when it announced in the FOMC statement new guidance for monetary policy, stating that interest rates would remain “exceptionally low until at least late 2014” while keeping the door open to further quantitative easing. The statement helped to counter the pressure on the EUR from rising Portuguese bond yields, with EUR/USD breaking above 1.3100.

The prospect of prolonged low US interest rates means that the USD could remain a funding a currency for longer than anticipated. My forecasts of only a gradual appreciation of the USD over coming months take this into account to a large extent. I remain positive on the prospects for the USD against the EUR, JPY and CHF but predict further weakness against high beta commodity currencies and emerging market currencies over coming months. However, should US bond yields continue to remain suppressed even expectations of USD gains against the EUR, JPY and CHF may be dashed.

Although the Fed downgraded its growth expectations over coming quarters US data releases are looking more encouraging and in this respect the US is beginning to outperform other major economies. In contrast Europe’s growth outlook looks even gloomier while there is a long way to go before the problems in the region are resolved. Portugal has moved increasingly into the spotlight as markets increasingly anticipate some form of debt restructuring while in Greece debt talks have so far failed to reach any agreement on the extent of debt writedowns.

As the end of the week approaches risk is definitely on the front foot and the EUR has confounded many expectations by strengthening against all odds. I have highlighted the fact that the market was extremely short EUR over recent weeks as well as the EUR’s increasing resilience to bad news. I also noted that the Eurozone external position is still very healthy providing underling support for the currency. While I still look for the EUR to weaken over coming months expectations of a one way will not be fulfilled. EUR/USD will face strong resistance around 1.3201 (the 21 December high and 61.8% retracement from its 1.3553 high).

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

The Devil is in the details

December 12, 2011 — Mitul Kotecha

The “partial solution” delivered by European Union (EU) leaders last week has failed to match the high hopes ahead of the EU Summit. Nonetheless, the deliverance of a “fiscal compact”, acceleration of the European Stability Mechanism (ESM) to July 2012 , no forced private sector participation in debt restructuring (outside Greece), and possible boost to the International Monetary Fund (IMF) of up to EUR 200 billion, are steps in the right direction. The fact that UK Prime Minister Cameron threw a spanner in the works to veto a joint proposal to revise the EU Treaty should not detract from the progress made.

Nonetheless, the measures may not be sufficient to allay market concerns, with disappointment at the lack of European Central Bank (ECB) action in terms of stepping up to the plate as lender of the last resort still weighing on sentiment. Data will add to the disappointment this week as “flash” Eurozone purchasing managers indices (PMI) drop further in December.

This week events in the US will garner more attention, including the Federal Reserve FOMC meeting, November inflation and retail sales data plus manufacturing confidence gauges as well as November industrial production on tap. The Fed will not shift its policy stance at this meeting but may sound a little more upbeat on the economy following recent firmer data. Inflation will likely remain subdued while the other data will continue to show gradual recovery.

Overall, the market is likely to thin further as the week progresses and holidays approach, with ranges likely to dominate against the background of little directional impetus. Our call to sell risk assets on rallies remains in place, however. The EUR will likely struggle to make much headway in the current environment, especially given that many details of the EU agreement still need to be ironed out and once again the risk to market confidence lies in implementation or lack of it. A range of EUR/USD 1.3260-1.3550 is likely to hold over the short term.

Posted in ECB, Economics, Economy, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , . Leave a Comment »

All Eyes On Europe

December 8, 2011 — Mitul Kotecha

EUR looks range bound ahead of key events including the European Central Bank (ECB) meeting, European Union Summit and release of bank stress test results. A senior German official poured cold water over expectations of a concrete outcome from the EU Summit, dampening EUR sentiment as a result.

There will be plenty of attention on the ECB to determine whether they will give a little more ground and provide further assistance to the Eurozone periphery. While a refi policy rate cut is highly likely as well as additional liquidity measures I do not expect any move in the direction of more aggressive action to support peripheral bonds in terms of becoming “lender of the last resort’.

If however, the ECB hints at intensifying its securities market purchases of Eurozone bonds this will likely bode well for the EUR. Indeed, reports overnight suggest that the ECB will announce a set of measures to stimulate bank lending including easing collateral requirements for banks.

More weak UK data in the form a bigger than consensus drop in manufacturing and industrial production in October add to the soft BRC retail sales and house price data, in putting pressure on the Bank of England (BoE) to increase its quantitative easing at today’s policy meeting. While the BoE is set to keep policy unchanged it is only a matter of time before additional asset purchases are announced.

Despite the weaker IP data GBP has held up relatively well against the USD although downside risks appear to be intensifying. If I am correct in the view of no change by the BoE today we expect little change in GBP although there could be a risk of a push higher in EUR/GBP if the ECB delivers some positive news, with resistance seen around 0.8665.

The RBNZ unsurprisingly left policy rates unchanged at 2.5%, sounded less hawkish than the previous meeting and also lowered growth forecasts. The NZD was left unmoved by the rate decision and looks well supported at current levels perhaps due to relief that the statement was not more dovish. The kiwi has been an underperformer over the year but unlike the AUD it has not been particularly influenced by gyrations in risk aversion.

Interest rate futures differentials have seen a renewed widening versus the US over recent weeks. This is significant given that the NZ-US interest rate differentials have a very strong correlation with the performance of NZD/USD. If this widening is sustained it will point to upside potential for the Kiwi.

Posted in Currencies, ECB, Economics, Economy, Europe, eurozone, Fiscal/Budget, FX, Interest rates, Monetary Policy, New Zealand, UK. Tags: , , , , , , , , , , , , , , , . Leave a Comment »

High Hopes for the EU Summit

December 7, 2011 — Mitul Kotecha

Following the knock to the EUR from the S&P ratings news on Eurozone countries yesterday the currency has managed to regain a semblance of stability ahead of the European Union Summit beginning tomorrow. Expectations that the Franco-German deal announced late Monday (Fiscal compact etc) will be rubber stamped at the summit are high and the warning shot by S&P suggests that the stakes are even higher should there be no further progress this week.

Aside from putting the ratings of 15 Eurozone countries on negative watch S&P stated overnight that the EFSF bailout fund could be downgraded too. The EUR however, looks supported ahead of the summit and European Central Bank (ECB) meeting tomorrow, with news of discussions to beef up the bailout fund to two separate entities likely to further underpin the currency. EUR/USD short term support is seen around 1.3330.

The cut in the Reserve Bank Australia (RBA) cash rate piled on the pressure on the AUD, especially as a rate cut was not fully priced in although its weakness was limited by the relatively neutral RBA policy statement. The statement did not support expectations of more significant easing in the months ahead and data this morning in the form of a much stronger than expected Q3 GDP reading reinforced our view that markets are too dovish on Australian interest rate expectations.

Next it’s the turn of the Reserve Bank of New Zealand (RBNZ) but unlike the RBA we do not expect an interest rate cut. The room for policy easing in New Zealand is limited, especially given that inflation is above the Bank’s 1-3% target band. Both the AUD and NZD are highly correlated with interest rate differentials and therefore any shift in rate expectations will have an important bearing. AUD and NZD have benefitted from a widening in yield differentials with the US and are likely to find garner some resilience from this fact over coming sessions.

EUR/GBP has continued to grind lower over recent months while GBP/USD appears to have settled into a range. GBP sentiment has clearly worsened over recent weeks as reflected in the deterioration in speculative positioning in the currency, with the market becoming increasingly short. Data releases have not been particularly helpful, with data yesterday revealing that UK house prices fell in November and retail sales dropped more than expected.

There will be more disappointment, with October industrial production likely to drop today. Our forecast of a 0.8% monthly highlights the downside risks to consensus expectations and in turn to GBP today. The data releases will if anything add to pressure on the Bank of England to embark on more quantitative easing, which will be another factor that restrains GBP over coming weeks. We continue to look for more GBP strength versus EUR but weakness against the USD over the short term. A move to support around GBP/USD 1.5469 is on the cards over the near term.

Posted in Currencies, Economics, Monetary Policy. Tags: , , , , , , . Leave a Comment »
« Older posts
Follow

Get every new post delivered to your Inbox.

Join 110 other followers