FX / Economic Preview

The European Union (EU) aid package for Greece and extension of collateral requirements by the European Central Bank (ECB) helped return a semblance of confidence to markets. Although the probability of a Greek default now looks extremely small, further austerity measures, fiscal issues in other EU countries and the negative impact on growth that all of this implies, suggest that Europe will be plagued by various problems for some time yet.

As a result of more favourable market conditions Greece is set to launch a syndicated bond issues today or tomorrow of up EUR 5 billion according to press reports. Attention will also turn to Greek debt rollovers, beginning with EUR 8.2 billion on April 20.

Improving sentiment following the Greece deal has extended to the EUR, with the currency bouncing off its lows around 1.3267. EUR/USD will now look to break through resistance around 1.3446, which would set up a test of 1.3516. There is plenty of scope for short-covering to help the EUR as reflected in the latest IMM Commitment of Traders’ report (a gauge of speculative market positioning) which revealed net EUR positions reaching yet another record low in the week to 23rd March. Whilst sovereign/official buying interest may keep EUR/USD supported this week the currency pair is best played as a sell on rallies.

A similar assessment applies for GBP. Speculative sentiment for the currency also hit a record low in the latest week but unlike the Greek deal helping the EUR, last week’s UK budget has done little to boost GBP’s prospects. Moreover, a report in the Financial Times highlighting hedge funds bets against GBP, suggests that there are still plenty of headwinds against the currency.

Volumes are set to thin out this week ahead of upcoming holidays, whilst the US March jobs report at the end of the week will likely prevent moves out of current ranges ahead of its release. The consensus forecast is for a 190k increase in non-farm payrolls though much of this is likely to reflect hiring for the 2010 US consensus and a rebound from adverse weather effects in February.

In Europe March economic confidence surveys will be watched closely to determine how much damage Greece and general fiscal woes are having on sentiment. Some improvement, in line with the Eurozone Purchasing Managers Index (PMI) and the German IFO business confidence survey, is expected, which will help to give further, albeit limited relief to the EUR.

The Japanese data slate kicked off the week in good form, with the release of February retail sales data, revealing its biggest annual increase in 12-years. It is difficult to see the recovery in sales taking much greater hold given persistent deflation pressures however, and part of the gain probably reflects the government’s shopping incentive program.

Aside from industrial production and jobs data in Japan the key release will be the results of the Q1 Tankan survey on Wednesday. The survey of manufacturers’ confidence is set to show further improvement. USD/JPY is likely to remain supported around 91.67 but will need a further widening in US/Japan 10-year bond yield spreads to push higher.

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3 Responses to “FX / Economic Preview”

  1. Tim Scala Says:

    Hi Mitul,

    The backdrop of a US real rate environment certainly underpins the dollar with the EuroZone problems stepping in and out of the spotlight.

    Your comment “…There is plenty of scope for short-covering to help the EUR as reflected in the latest IMM Commitment of Traders’ report (a gauge of speculative market positioning)…” was noteworthy. Do you really regard the IMM’s open interest as the best barometer of open positions, given the absolute size of the IMM when compared to the global interbank marketplace? I tend to view that (IMM) marketplace as a microcosm at best but then again, I’m a dinosaur and maybe the liquidity mix has changed a great deal. I would have thought that even the spot forex platforms would at least rival the IMM.
    I would be pleased to hear your thoughts.

    Tim Scala

    • Mitul Kotecha Says:

      Hi Tim,

      Thanks for your comments. You make a good point regarding the IMM data. IMM open interest is a very small compared to the global trade in currencies. At best I think it provides an indication of FX market positioning but I have found it useful to gauge the overall positioning in the market and it has correlated very well with the movement in various currencies. The only other data that I have found that is public and gives some idea of positioning, albeit in JPY, is the TFX data. The problem with the IMM data is that it is not forward looking so I guess at best it gives an idea about momentum if there is a trend in positioning that is developing.


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