Contest of the uglies

June 21, 2011 — Mitul Kotecha

Although there is plenty of event risk in the form of the Greek confidence motion today market sentiment has taken a turn for the better as a ‘risk on’ mood has filtered through. There was little justification in the turn in sentiment aside from some reassuring comments from the EU’s Juncker but clearly markets are hoping for the best.

The contest of the ugly currencies continues and recently the EUR is running neck and neck with the USD. News that a final decision on a further tranche of aid for Greece and a second bailout package will not take place until early July was not digested well by European markets, although EUR/USD managed to show its resilience once again overnight.

EUR/USD looks like it will settle into a range over the short-term, with support around the 100 day moving average of 1.4170 and resistance around the 15 June high of 1.4451. A weak German June ZEW investor confidence survey may result in the EUR facing some resistance but the data is likely to be overshadowed by events in Greece.

Although Greece continues to dominate the headlines, the looming Fed FOMC meeting and press briefing tomorrow may just keep USD bulls in check especially given the likelihood of downward growth revisions by the Fed and no change in policy settings. Ahead of this news on the housing market is likely to remain bleak, with a likely drop in May existing home sales as indicated by pending home sales data.

USD/JPY continues to flirt with the 80 level but as yet it has failed to sustain a breach below this level. Contrary to speculation the JPY is not particularly reactive to risk aversion at present but instead continues to be driven higher by narrowing US – Japan bond yield differentials. This is pretty much all due to declining US Treasury yields rather than any increase in Japanese bond (JGB) yields.

However, while Japanese officials continue to back off the idea of FX intervention, even at current levels, data releases such as the May trade balance yesterday continue to build a strong case for weakening the JPY. Even economy minister Yosano sounded worried on the trade front in his comments yesterday. Despite such concerns, it will take a renewed widening in bond yield differentials to result in renewed JPY weakness which will need an improvement in US data to be forthcoming.

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Greek Decision Delayed

June 20, 2011 — Mitul Kotecha

European Union Finance Ministers have agreed that additional funding for Greece will come from both official and private investors, with the later likely through a voluntary rollover of existing Greek debt as per the ‘Vienna Initiative’ of 2009 applied at the time to Emerging Europe. Agreement was reached following the decision by Germany to ease its demands for private sector participation in a debt restructuring. The news brought some relief to markets on Friday.

However, the announcement today that a final decision on a further tranche of aid and a second bailout package will not take place until early July will come as a blow to markets and likely lead to a more cautious start to this week. The onus is now on Greek Prime Minister Papandreou to gain approval for further austerity measures following the recent government cabinet reshuffle and in the face of a no confidence vote tomorrow. Failure to pass the confidence motion could provoke a political crisis, leading to likely contagion across Europe.

Europe has given the Greek government until the end of this month to implement measures including budget cuts and asset sales, with failure to pass further austerity measures likely to lead to a delay of any further aid. There will be plenty of noise surrounding Greece over coming days, with the issue likely to dominate the EU summit in Brussels on June 23-24. In the meantime the EUR/USD looks like it will settle into a range over the short-term, with support around the 100 day moving average of 1.4165.

EUR speculative positioning is currently around its 3-month average, with the market continuing to hold a sizeable long position in EUR/USD according to the CFTC IMM data. The risks remain skewed to the downside as nervousness about a Greek deal grows. Should the Greek Prime Minister pass a no confidence motion there will be some short term relief but tensions are likely to persist for a long while yet. Moreover, other eurozone countries are not in the clear yet as reflected by Moody’s announcement that Italy’s AA2 government bond rating is on review for possible downgrade.

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US Dollar Finding Support

June 13, 2011 — Mitul Kotecha

The US dollar is finding growing relief from the fact that the Fed is putting up a high hurdle before more quantitative easing (QE3) is even considered. As highlighted by Federal Reserve Chairman Bernanke last week he is not considering QE3 despite a spate of weak US data. Of course until US bond yields move higher the USD will fail to make much of a recovery and in turn this will need some improvement in US economic data.


The May retail sales release is unlikely to provide this with headline sales likely to undergo an autos related drop while core CPI released on Wednesday is set to remain benign in May. There will be better news on the US manufacturing front, with surveys and hard data likely to bounce back.

There is still plenty of scope for USD short covering as reflected in the fact that IMM USD positions fell further as of the 7th June, with the market still heavily short USDs. The USD index has likely found a short term bottom, with a break above the 50-day moving average level around 74.6874 in focus.

EUR has lost momentum , with the European Central Bank’s (ECB) confirmation of a July policy rate hike prompting a major sell off in the currency, even with interest rate markets barely flinching. The EUR is susceptible to developments regarding Greece and the news on this front is not good. Divisions between policy makers including the ECB about the extent of private sector involvement in a second bailout package threaten to prolong the pain.

Similarly divisions within the Greek parliament about further austerity measures needed to secure a second bail could also derail the process. Further negotiations this week will be closely scrutinised, likely taking more importance than data releases, with only the final reading of May inflation and industrial production of note this week.

As revealed by the CFTC IMM data, EUR long positions jumped early last week leaving plenty of scope for unwinding, something that is likely to take place this week. Nonetheless, support around the 30 May low of EUR/USD 1.4256 is likely to prove difficult to break on the downside this week.

GBP took a hit in the wake of yet more weak activity data in the form of May industrial and manufacturing production data. The economic news will be no better this week, with retail sales set to drop in May and CPI inflation set to rise further in April. The data will only add further to the confusion about UK monetary policy as the dichotomy between weak data and persistently high inflation continues.

Admittedly the weak data releases can at least partially be explained away by the Royal wedding and Easter holidays but this will provide little solace to GBP bulls. GBP will likely struggle against a firmer USD this week although its worth noting that GBP speculative position has been negative for 3-straight weeks, suggesting that at least there is less room for GBP position unwinding. GBP/USD is likely to hold above support around 1.6055 this week.

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Euro weaker despite hawkish ECB

June 10, 2011 — Mitul Kotecha

The bounce in EUR/USD following the European Central Bank (ECB) press statement following its unchanged rate decision proved short-lived with the currency dropping sharply as longs were quickly unwound, with EUR/USD hitting a low around 1.4478. The sell off occurred despite the fact that the ECB delivered on expectations that it would flag a July rate hike, with the insertion of “strong vigilance” in the press statement.

The reaction was a classic ‘buy on rumour, sell on fact’ outcome and highlights just how long EUR the market was ahead of the ECB meeting. Interestingly the interest rate differential (2nd futures contract) has not widened versus the USD despite the hawkish ECB message and in any case interest rate differentials are not driving EUR/USD at present as reflected in low correlations.

This leaves the EUR susceptible to Greek developments and the news on this front is less positive. ECB President Trichet ruled out any direct participation (ie no rollover of ECB Greek debt holdings) in a second Greek bailout whilst potentially accepting a plan of voluntary private participation in any debt rollover. The ECB’s stance is at odds with that put forward by German Finance Minister Schaeuble pressuring investors to accept longer maturities on their Greek debt holdings.

In contrast the USD appears to be finding growing relief from the fact that the Federal Reserve is putting up a high hurdle before QE3 is considered. As highlighted by Fed Chairman Bernanke earlier this week the Fed is not considering QE3 despite a spate of weak US data. This was echoed overnight by the Fed’s Lockhart and Plosser, with the former noting that there would need to be a substantially weaker economy and the latter noting that there would have to be a “pretty extraordinary” deterioration in the economy to support QE3.

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EUR Supported, AUD dives, NZD jumps

June 9, 2011 — Mitul Kotecha

Today is probably not the best day to sell EUR given that the ECB policy decision looms on the horizon. Whilst there is a risk of a ‘buy on rumour, sell on fact’ impact on the EUR following the European Central Bank (ECB) decision later today the relatively high probability that the ECB flags a rate hike in July will likely give further support to the EUR especially as it is not fully priced in by the market.

Of course should ECB President Trichet fail to mention “strong vigilance” in his press conference the EUR could suffer but this is likely to be a lower probability event. Some justification for higher rates will come from an upward revision in the ECB’s inflation forecasts. Consequently EUR/USD looks well supported around 1.4450.

The Bank of England is unlikely to deliver any surprises today, with an unchanged policy rate outcome and asset purchases target likely. The outcome will keep GBP restrained versus USD but given the likely contrast with the ECB, EUR/GBP could head higher as the currency pair continues to set its sights on the 0.90 level.

Even against the USD, GBP is unlikely to extend its gains, with 1.6474 likely providing a near term technical cap. The dichotomy of weaker activity and higher inflation is clearly causing a problem for policy makers but we still believe a rate hike is likely later in the year. In the meantime GBP remains vulnerable to further data disappointments over coming weeks.

There was more bad news for the AUD today in the form of a weak than forecast May employment report. The data will reinforce expectations that the RBA will not hike interest rates over coming months, with July and August effectively ruled out, though a hike in September remains probable.

The data had major impact on AUD which dropped sharply below the 1.0600 handle versus USD. Clearly the combination of the RBA statement and weak jobs data has resulted in a major headwind against further near term AUD appreciation. AUD will remain under downward pressure in the short-term, with technical support seen at 1.0440.

Unlike the RBA the Reserve Bank of New Zealand (RBNZ) opened the door for higher interest rates following its unchanged policy decision today, with the Bank stating that “a gradual increase in the overnight cash rate over the next two years will be required”. Despite noting some caution about the strength of the NZD and its impact on the economy the Kiwi strengthened versus the USD

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