The overall tone to markets remains a positive one. Core bonds (Treasuries, bunds) have taken on a bearish tone in the wake of strengthening economic data and have established the usual bullish equities / bearish bonds relationship. Meanwhile volatility measures both in equity and currency markets have dropped to historically low levels.

The USD has been propelled by higher US bond yields but looks vulnerable as US Treasuries consolidate in the short term. Data this week is fairly light, suggesting that direction will be limited as only housing data in the US and purchasing managers’ indices in Europe will be of interest. Overall, the start to the week will see markets in consolidation mood.

The USD index had made up plenty of ground since hitting its lows around 78.095 at the end of February. Higher US bond yields in the wake of strengthening economic data and receding expectations of more Fed money printing have boosted the USD. Nonetheless, US Treasuries appear to be consolidating their losses (ie yields have failed to push higher recently), limiting the ability of the USD to strengthen further.

Data releases in the US this week will be mainly centred on the housing market and are unlikely to be strong enough to warrant a further strengthening in the currency. Much will also depend on gyrations in risk. My Risk Barometer has moved into ‘risk loving’ territory, which plays negatively for the USD versus many high beta currencies. The USD will struggle to make further gains in the short term.

The agreement to furnish Greece with a second bailout gave the EUR no help whatsoever. Instead, higher US Treasury yields relative to bunds dealt the EUR a strong blow and the currency came dangerously close to dropping below the 1.3000 psychologically important level versus USD. Even a narrowing in peripheral bond spreads against the core has failed to give the EUR a lift. Further EUR losses will be limited over coming days but only because US yields have not pushed higher.

Nonetheless, the technical picture has turned bearish and any relief could prove temporary. A mixed batch of data releases including ‘flash’ purchasing managers’ indices which overall will reveal the composite PMI below the 50 boom/bust level for a second month in a row, will not be particularly helpful for the EUR. EUR/USD is likely to be stuck in a 1.2974 – 1.3291 range over coming sessions.


3 Responses to “Consolidation”

  1. mykleman Says:

    Hi Mitul,
    This is lovely overview, Thank you for sharing. I am of the opinion that AUDUSD and NZDUSD still has upside potential, but with Bernanke’s positive outlook in recent words/tone wont we see the USD take on some strength this week if he stays on his current tone. Does your barometer take this into account?
    Tx again.

    • Mitul Kotecha Says:

      Hi Graham, apologies for the belated reply. I have been in Beijing over the last few of days. Looks like you view on the USD strength this week has worked out. Once the market finally dispells any notion of more US quantitative easing it should allow the USD to strengthen further and this is increasingly being priced in following some good data releases in the US. Regarding AUD and NZD I still see some further short term downside risks according to my models but I too am bullish over the medium term.

  2. mykleman Says:

    thank you.but it is more luck that my view worked out.My macro-economics vision/grasps are lacking to put it mildly. I have to rely on analysts like yourself for the most part. Hence my appreciation of well written content like you post. Persons with little macro-economic understandings often dont realize how helpful content like yours is. thanks again, and todays post is great.

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