US/China Tensions Ratchet Higher

March 17, 2010 — Mitul Kotecha

FX policy tension is a theme that looks to be making a come back. The potential for CNY revaluation continues to be hotly debated, with international pressure on China intensifying. For its part China continues to resist such calls, but growing speculation that the US will label China a “currency manipulator” in the semi-annual US Treasury report on 15 April suggests that the issue will remain very much on the radar screen.

Tensions have ratcheted higher in the wake of a proposed bill by US senators targeting countries with “fundamentally misaligned currencies” and those needing “priority action”. Any country that is targeted would then have a year to correct its currency or face a case at the World Trade Organisation. If China is labelled as a currency manipulator it could also result in anti dumping regulations.

Much of the increase in tension may be attributable to politicking ahead of the November mid-term Congressional elections but it is clear that the issue is not going away quickly. Chinese Premier Wen’s strong comments over the past weekend denying any need for revaluation of the CNY suggests that the stakes will get even higher over coming months.

It is looking increasingly difficult for the US administration to ignore Congress’ calls for stronger action on FX. Moreover, US President Obama’s pledge to double US exports within 5-years will require some USD weakness, but the USD will need to weaken against Asian currencies led by China and not just against the usual culprits such as the EUR.

There is little sign of this happening anytime soon as Asian central banks continue to intervene to prevent their currencies from strengthening. Nonetheless despite China’s insistence that it does not believe the CNY is undervalued China is likely to be edging closer to an eventual revaluation in the CNY sometime in Q2 2010 as it combined a stronger currency with higher interest rates and tighter lending to curb inflation. A stronger CNY will also spur other Asian central banks to allow stronger currencies.

A deterioration in the China/US relationship could have potentially significant FX implications. The latest US Treasury TIC report this week showed that China reduced its holdings of US Treasuries for the third straight month in January. Should China feel that it needs to retaliate against a more aggressive US trade or FX stance it could reduce its holdings of US Treasuries further.

Posted in Asia, Bond markets, central banks, China, Currencies, Economics, Economy, emerging markets, FX, Interest rates, Monetary Policy, Politics, US, US administration. Tags: , , , , , , , , , , , , , . 3 Comments »

What To Watch This Week

March 13, 2010 — Mitul Kotecha

A “crisis over” mode is being adopted across markets as worries about Greece wane and economic data provides support to recovery hopes, whilst importantly allaying fears of a “double-dip”. Equities, bonds and currencies are reacting accordingly; equities are close to year highs, bond yields have risen and spreads have narrowed, whilst the USD and JPY are weaker, and conversely risk currencies are stronger. Even EUR/USD pushed higher on its way to 1.3800 as a number of stops were cleared and shorts were squeezed.

The coming weeks will be important to determine whether there is any staying power in the upward move in risk assets. A lot of the February data in the US will likely be obscured by bad weather however, including industrial production figures this week, leaving markets with little to go on. In Europe, the key release is the March German ZEW investor confidence survey, and better news in Greece, will likely prevent a sharper decline in confidence.

After both the Swish National Bank (SNB) and Reserve Bank of New Zealand (RBNZ) unsurprisingly left policy unchanged last week this week sees the turn of the US Federal Reserve and Bank of Japan (BoJ). Neither central bank is likely to shift policy but the Fed statement will be looked upon for guidance on the timing of rate hikes. The comment in the FOMC statement that the Fed Funds rate is expected to remain low for an “extended period” is set to be retained, even if some FOMC members are itching to remove it soon.

The BoJ meeting will be particularly interesting. I have just returned from a week long trip in Japan and on the ground there is plenty of speculation that the BoJ will take extra action to combat deflation and weaken the JPY. Additionally comments by Japan’s Prime Minister and Deputy PM have highlighted the potential for action to weaken the JPY although the usual market hesitation to sell JPY into fiscal year end and repatriation talk may mean a weaker JPY path is not straightforward.

Greece will not move too far from the spotlight, with EU officials likely to give the official stamp of approval on Greece’s deficit cutting measures and plenty of discussion at the Eurogroup Finance Minister’s meeting and Ecofin meeting early in the week. Moreover, weekend press reports suggest that a bailout up to EUR 25 billion is close to being agreed. Other topics of conversation will include the possible formation of a European Monetary Fund, though this looks like it will be a non-starter given the many objections to it.

Overall, risk appetite is set to continue its upward trajectory, likely keeping the USD on the back foot. Some deterioration in USD sentiment was reflected in the fact that net long aggregate USD speculation positioning has turned negative again according to the latest CFTC Commitment of Traders (IMM) report. Much in terms of FX direction will depend on what the FOMC says rather than does tomorrow.

EUR/USD may take a crack at resistance around 1.3840 on improving Greek news but it is difficult to see much upside from current levels. The one to watch will be the JPY, especially if the BoJ embarks on aggressive actions at this week’s meeting, leaving USD/JPY plenty of scope to test resistance around 92.16.

Posted in Bond markets, central banks, Currencies, Economics, Economy, equity markets, Europe, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Germany, Greece, Interest rates, Japan, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

GBP bulls brave or crazy?

March 10, 2010 — Mitul Kotecha

The UK Pound’s (GBP) performance over recent months has been dismal. The currency has failed to show any real sign of recovery, having fallen to and below the psychologically important level of 1.50 against the USD. A number of factors including fiscal/debt concerns, political worries, and uncertainties about whether the Bank of England will step up asset purchases, have accumulated to turn even the most ardent GBP bulls into bears.

The outcome of the upcoming UK general election widely expected on May 6, remains a major weight on GBP sentiment. Until the outcome is clear or unless one or other party develops a clear lead in the polls, it is difficult o see GBP sustain any durable recovery. In the near term GBP/USD is vulnerable to a test of its 2010 low around 1.4780 and then towards 1.44. The risk to this is that the market is very short GBP which could result in a sharp bounce in GBP in the wake of any good news. However, a rally in GBP will only result in fresh sellers.

Ahead of the elections will be the budget and this will be closely scrutinized for steps to reduce the size of the burgeoning fiscal deficit. Whichever party comes into power will need to convince markets that a credible and timely plan exists to reduce the size of the deficit and prevent a sovereign ratings downgrade. If not, GBP could see itself under much more pressure. In this respect it’s worth noting the Fitch ratings warning that the UK sovereign credit profile has deteriorated.

It’s not all bad for GBP, however. By some measures it’s now the most undervalued major currency, opening up the possibility of a sharper bounce back over the medium term. Moreover, UK debt markets are already trading as if a ratings downgrade has taken place, whilst arguably GBP has also priced in a lot of negative news already, as reflected in the very negative speculative positioning in the currency.

The economic news is also not as bad as the headlines might suggest and although recent housing data has been a bit mixed, both consumer spending and the housing market have held up reasonably well. Bearing all this in mind GBP is set to recover over the medium term, but it would be very brave to buy the currency any time soon, at least until UK elections are out of the way.

Posted in Bond markets, central banks, Currencies, Economics, Economy, Financial crisis, Fiscal/Budget, FX, Interest rates, Monetary Policy, Politics, UK. Tags: , , , , , , , , , , , , , . 1 Comment »

What to watch

March 7, 2010 — Mitul Kotecha

US February non-farm payrolls released at the end of last week put the finishing touches to a week that saw risk appetite continue to improve each day. There were no big surprises from the various central bank decisions including the RBA, BoE and ECB last week though Malaysia’s central bank did surprise by hiking 25bps. The RBA’s 25bps hike was a close call but in the event the Bank delivered a 25bps hike too.

Sentiment towards Greece has improved in the wake of the announcement of fresh austerity measures by the Greek government, which provoked a short covering EUR/USD rally from around 1.3435 lows though the EUR never really showed signs of embarking on the sort of rebound the massive short EUR speculative position had suggested.

US jobs report revealed that non-farm payrolls dropped by 36k and was all the more remarkable given the potentially very negative impact of severe weather distortions to the data. The data provides the setting for a firm start to the week in terms of risk appetite which will likely put the USD under a bit of pressure into the week.

This week’s events include central bank decisions in New Zealand and Switzerland. The RBNZ has already indicated that it sees no reason to raise interest rates in H1 and an unchanged decision will come as no surprise to the market. The NZD offers better potential for appreciation than the AUD in the short term and I suspect that a “risk on” tone at least early in the week will keep the Kiwi supported.

The SNB in Switzerland is also unlikely to offer any surprises in its rate decision with an unchanged outcome likely. It appears that the Bank has take a somewhat more relaxed tone to the strength of the CHF and any comments on the currency will be scrtunised for hints of intervention.

It probably isn’t much of a shock to expect Greece to remain in the spotlight this week as markets continue to deliberate whether Greece needs financial aid and if so, whether it will be provided by EU countries such as Germany and/or France, at least in terms of some form of debt guarantee.

Further tensions within Greece, with more strikes in the pipeline will test the resolve of the government to carry through austerity measures while likely acting as a cap on any EUR upside over coming days. I still think EUR/USD 1.3789 is a tough nut to crack.

Meanwhile, GBP/USD looks like it will find it tough going to gain much traction above 1.50 with political uncertainties in the form of a likely hung parliament as well as what looks like various efforts by the BoE officials to talk GBP down, likely to prevent an real recovery.

Posted in Australia, central banks, Currencies, Economics, Economy, Europe, Financial crisis, Fiscal/Budget, FX, Greece, US. Tags: , , , , , , , , , , , . Leave a Comment »

The Ball Is In the EU’s Court

March 4, 2010 — Mitul Kotecha

A run of data and events have continued this week’s theme of improving risk appetite. Greece lived up to expectations, with the government announcing a EUR 4.8 billion package of austerity measures amounting to around 2% of GDP. The US ADP jobs data was in line with expectations, with employment dropping by 20k in February, whilst ISM non-manufacturing index delivered an upside surprise to 53.0 in February, contrasting with a weaker eurozone Purchasing Managers Index (PMI).

Greece now believes it has lived up to its part of the bargain and the ball is now in the court of EU countries. However the issue of aid from the EU remains highly sensitive with little sign of any aid forthcoming from EU partners. Moreover, Germany dealt a blow to Greek hopes by stating that financial aid would not be discussed when the Greek Prime Minister visits tomorrow. Failure to provide such assistance could see Greece turn to the IMF. The key test will be the roll over of around EUR 22 billion of debt in April/May.

Markets have reacted positively to recent events, with Greek debt rallying and the EUR strengthening to a high of 1.3727 overnight amidst reports that regulators are investigating hedge fund trades shorting the EUR. The 17 February high of 1.3789 will provide strong resistance to further EUR/USD upside but the currency looks vulnerable to selling on rallies above its 20-day moving average around 1.3631. The EUR will be driven by news about any aid to Greece rather than data whilst the medium term outlook remains bearish.

In the US the steady but gradual recovery in the economy is continuing to take shape. The Fed’s Beige Book revealed that economic activity “continued to expand” but severe snowstorms restrained activity in several districts. Overall, the report revealed little new information following so soon after Fed Chairman Bernanke’s testimony. Today’s US releases are second tier, with a likely upward revision to Q4 non-farm productivity to around 6.5% and a 1.5% increase in January factory orders.

As has been the case recently the weekly jobless claims data will garner more attention than usual given that it has recently signaled deterioration in job conditions. One factor that could have distorted the claims as well as the payrolls data is harsh weather conditions in parts of the US. Indeed, this has led us to cuts in forecasts for February non-farm payrolls scheduled to be released tomorrow, with the real consensus likely to be much weaker than the -65k shown in the Bloomberg survey.

There are four central bank decisions of interest today no change is likely from all of them. Indonesia and Malaysia are both edging towards raising interest rates but are likely to wait until Q2 2010 before hiking. There will be no surprises if the Bank of England (BoE) and European Central Bank (ECB) leave policy unchanged too, but there will be particular interest in the ECB’s announcement on changes in liquidity provision and the BoE’s signals on the potential for further expansion in quantitative easing. A dovish signal from the BoE will deliver GBP a blow, leaving GBP/USD vulnerable to a drop back below 1.50.

Posted in central banks, Currencies, Economics, Economy, Europe, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Germany, Greece, Interest rates, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , , , . Leave a Comment »
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