GBP vulnerable, AUD downside limited

May 22, 2012 — Mitul Kotecha

Finally after weeks of selling, risk assets perked up helped by China’s pledge to focus more on supporting growth and signs of cooperation between Germany and France, as leaders of both countries agreed to do ‘everything necessary’ to ensure Greece stays in the Eurozone.

Just what this will entail is not clear but reports suggest that European officials are formulating plans ahead of the EU Summit on Wednesday. Markets are by no means out of the woods and much uncertainty will remain ahead of Greece’s election in just less than a month.

GBP has dropped both against the USD and EUR. The currency has not been helped by some dovish tones from Bank of England MPC member Posen who last week suggested that his decision to withdraw his vote for more quantitative easing may have been ‘premature’. The renewed spectre of more QE will likely weigh on GBP over coming weeks.

The fact that the market has got itself very long GBP may also have contributed to some profit taking as some caution in being excessively long GBP sets in. UK inflation data today will likely play negatively for GBP too given the sharp slowdown expected to be registered in the April CPI inflation data.

My quantitative model for EUR/GBP reflects the potential risks to GBP over coming days, with the model output suggesting further downside risks to GBP. Technical resistance will likely be seen around the 0.8198 level.

AUD’s slide has been pretty dramatic over recent weeks. Despite a bounce overnight the currency has lost close to 9% of its value against the USD since the beginning of March, weighed down by rising risk aversion and China growth worries.

My quantitative model has been persistently calling for a drop in the AUD (a fact that I have highlighted previously). Interestingly the model now shows that the gap between the current level of AUD/USD and its short term ‘fair value’ estimate has almost closed, suggesting that the downside for the currency will be limited to around the 0.96-0.97 region.

The only caveat is that a stark deterioration in risk appetite from current levels would result in a sharper fall but for now we believe that a lot of the expected downward correction in the currency has already occurred. While I would not go and rush out to buy AUD just yet, taking a short position looks much less attractive.

Posted in Australia, FX, UK. Tags: , , , , , . Leave a Comment »

Euro under growing pressure

May 3, 2012 — Mitul Kotecha

A risk off tone has developed in the wake of disappointing economic data (Eurozone April purchasing managers indices, rise in March Eurozone and German unemployment, weaker US ADP jobs report). Additionally the second round of French Presidential elections is helping to keep Eurozone markets nervous. While hitting equities, the weaker market tone is likely to keep the USD buoyed.

The soft ADP report in particular highlights downside risks to the consensus for the April non-farm payrolls data, with analysts set to revise lower their forecasts fuelling concerns about a renewed weakening in the US jobs market. Ahead of this data, markets will contend with the outcome of the European Central Bank (ECB) policy meeting and bond auctions in France and Spain today. Several Fed speakers today will also be on tap.

The EUR will struggle to make any headway in the short term, having suffered in the wake of weak data. An unchanged policy decision from the ECB will give the EUR no assistance leaving EUR/USD vulnerable to a test of strong support around 1.3104. The ECB considers current policy settings as ‘appropriate’ but weaker growth data argue for lower rates.

The reality is that the ECB does not want to give Eurozone governments an excuse to renege on reforms. Should the ECB hint at lower rates in the near future it might actually play well for the EUR helping to alleviate growth concerns, but I suspect such a message is unlikely to emerge.

GBP has lost some ground after hitting a high just above 1.63 at the end of April but the currency looks reasonably well supported, especially against EUR. UK data remains relatively better looking as reflected in stronger readings for the PMI construction index, consumer credit and mortgage approvals.

EUR/GBP has broken its relationship with movements in EUR/USD for the time being, with independent GBP strength being seen. This is been reinforced by the shift in interest rate differentials between the UK and Eurozone, a move which has gone in favour of GBP strength. Indeed my quantitative model for EUR/GBP points to some further downside potential in this currency pair, with a test of technical support around 0.8067 on the cards.

Posted in Europe, France, FX, UK. Tags: , , , , , . Leave a Comment »

GBP rebounds, RBNZ warns about NZD strength

April 26, 2012 — Mitul Kotecha

The Fed unsurprisingly left policy on hold while lowering projections for unemployment and raising forecasts for higher near term inflation. The economy is still expected to grow at a ‘moderate’ pace in coming quarters, with the majority of FOMC members anticipating the first tightening in 2014 or beyond. The one sop to markets was the fact that the Fed is prepared to do more in terms of policy enhancement if needed. This helped to buoy risk assets overnight leaving the USD on the back foot. Data releases are thin on the ground today leaving markets to consolidate gains in a relatively ‘risk on’ environment.

GBP came tumbling down from its highs following news that the UK economy entered a technical recession after GDP surprisingly contracted by 0.2% in Q1. However, the drop was short lived, with GBP/USD recovering from its losses, helped by a stellar reading for UK Nationwide consumer confidence in March. Notably however, Nationwide cautioned that the bounce in confidence could be short lived and we would be cautious of reading too much into the data. GBP gains against the EUR look as though they have reached its limit, and our models suggest that EUR/GBP is trading close to short term ‘fair value’.

There was no change in policy from the RBNZ as expected, with policy rates on hold at 2.5%. However, governor Bollard did attempt to talk the NZD lower while highlighting concerns about the global outlook. Concerns about kiwi strength will raise the spectre of FX intervention although it may also mean a delay in rate hikes. The statement was relatively more positive on the domestic outlook. Although rates are ‘appropriate’ according to the RBNZ we still think there is a good chance of a rate hike in Q3. The NZD ignored Bollard’s comments, firming on the back of improved risk appetite. We still see downside risks to the currency, especially as the current risk environment remains fragile.

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EUR bounces, GBP gains limited

April 17, 2012 — Mitul Kotecha

Eurozone stress, particularly in Spain continues to act as a weight on market sentiment, with equity markets ignoring a relatively strong US retail sales report. My risk barometer remains at elevated levels and is unlikely to ease anytime soon, suggesting that a cautious tone towards risk assets remains warranted.

Mixed US data releases (firm retail sales but weak Empire Manufacturing) did little to help the USD overnight but the EUR managed to register gains despite ongoing Spanish worries. Fitch ratings stating that Italy’s austerity measures were credible and Moody’s noting that there would not be an imminent change in its ratings outlook for France may have helped the EUR which rose solidly from lows just below 1.30 versus USD.

I continue to see plenty of support for EUR/USD around this level. A heavy data slate today will give further direction but the news will not be so positive out of the Eurozone, with a small drop in the German April ZEW survey expected. Meanwhile, a subdued reading for US housing starts and small increase in industrial production will do little to perk the USD up.

There are plenty of data releases in the UK for markets to get their teeth into including inflation data today, Bank of England minutes tomorrow and March retail sales on Friday. Ahead of the data releases GBP continues to trade with a positive bias against the EUR but has failed to extend gains against the USD.

I do not expect the data to result in a significant change in GBP’s tone, with the MPC minutes in particular likely to reveal a divided view on the need for more quantitative easing. Although we look for a rebound in retail sales in March overall spending is only growing modestly.

After predicting the latest drop EUR/GBP my quantitative model reveals that there is limited scope for further gains in GBP versus EUR over the short term. I had also anticipated gains in GBP versus AUD but there is now limited room for further GBP upside.

Posted in Currencies, eurozone, UK, US. Tags: , , , , . Leave a Comment »

JPY pullback risks, GBP to slip versus USD

March 27, 2012 — Mitul Kotecha

A combination of market friendly comments by Fed Chairman Bernanke, a better than expected outcome for the German IFO business confidence survey in March and hopes of a bolstering of the Eurozone bailout fund, have managed to lift risk assets while pressuring the USD. Markets appear to have shaken off, at least for now, growth worries emanating from weaker manufacturing confidence surveys in China and Europe last week.

Nonetheless, while Bernanke maintained that accommodative monetary policy is still required especially given concerns about the jobs market, he did not hint at more quantitative easing, suggesting that market optimism may be tempered in the days ahead. Data and events today include US and French consumer confidence as well as bill auctions in Spain and Italy. US consumer confidence is likely to slip slightly while the bill auctions are likely to be well received.

While I remain bearish on the JPY in the medium term (beyond 1 month), over the near term I believe there is scope for a pull back. The move in USD/JPY has gone beyond what would be expected by the shift in relative yields. This is corroborated by my short term quantitative model which shows that USD/JPY should be trading around 80.

The speculative market is positioned for JPY weakness but also points to some scope for short covering; both CFTC IMM data and Japanese TFX data (a gauge of local margin trading positioning) reveal significant short JPY positions. If as I expect, USD/JPY does pull back it will offer better levels for investors to initiate medium term JPY bearish trades.

Ultimately the JPY will regain its attraction as a funding currency for carry trades and the bigger the shift in relative yield with the US, the more the potential for capital outflows from Japan into higher yielding assets.

GBP has failed to sustain gains above 1.59 against the USD over recent weeks let alone manage to test the psychologically important 1.60 level. The current bounce above 1.59 is unlikely to last. It will require a renewed downtrend in the USD in general provoked by a sharp improvement in risk appetite and/or a drop in US bond yields for GBP to move much higher. Neither seems likely.

Indeed, GBP will be vulnerable to a general firmer USD over the remainder of the year. While I would not suggest playing a bullish call on GBP versus the USD I think there is much more juice in holding GBP versus EUR, with downside risks to this currency pair likely to open up. Indeed, my quantitative models reveal that GBP is mispriced against both EUR and AUD.

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