Asian currencies benefit from weaker US jobs data

October 23, 2013 — Mitul Kotecha

Weaker than forecast US September jobs data, delayed in the wake of the government shutdown, spurred risk appetite overnight pushing equities higher helped further by encouraging US Q3 earnings. The employment report revealed that jobs growth slowed to 148,000 while the unemployment rate declined slightly to 7.2%.

In contrast to the reaction in risk assets, 10 year US Treasury yields dropped to around 2.5% and the USD took another hit as the data was perceived to provide more concrete evidence that the Fed will only begin to slow its asset purchases next year, with many now looking for tapering to only begin in March 2014.

Unfortunately for the USD this effectively means its attraction as a funding currency may continue for longer than previously expected. Consequently gold prices rallied benefiting from both the drop in yields and weaker USD.

Data today (Bank of England MPC minutes, Bank of Canada rate decision, terms of the European Central Bank’s Asset Quality Review) will not be as important for markets but it is clear that fundamentals are taking a bigger grip on market direction after a period of being relegated to the sidelines in the wake of US political mayhem.

Asian currencies have benefitted from the drop in the USD overnight and the potential further delay in tapering to Mach next year. The main gainers of recent weeks are those that stand most to gain from delayed tapering (ie those with external funding requirements and that are most sensitive to US Treasury yields). In this respect the IDR, MYR and INR have been the best performing Asian currencies so far this month and look best placed to benefit in the short term from the consequences of the weaker US jobs report.

Against the backdrop of delayed tapering equity capital inflows to Asia have continued their steep recovery since the beginning of September, providing another layer of support to Asian FX. India, Korea and Taiwan have been major winners in this respect, with a surge in equity flows registered to these countries. However, the INR’s ability to benefit is partly negated by continued outflows from India’s bond markets.

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Consolidating ahead of payrolls

October 22, 2013 — Mitul Kotecha

Ahead of the belated release of the US September jobs report markets are set to remain range bound, with most assets consolidating recent moves. For instance, the VIX “fear gauge” edged higher following steep declines while US Treasury yields gained a few basis points helping the USD index to push slightly higher. Equity investors will have one eye on earnings reports hoping that the recent run of positive Q3 US earnings surprises continues.

The consensus for US September non farm payrolls is 180k, with a low of 100k and high of 256k according to Bloomberg and unemployment rate likely to remain 7.3%. The data will have important implications for Fed tapering expectations, with the outcome likely to help support expectations that the Fed will not begin tapering until early next year.

Like other asset classes little movement is expected in FX markets ahead of the release of the US jobs report. A payrolls outcome around the consensus will have little market impact but it appears that the consensus is skewed towards a weaker outcome, suggesting a bigger FX reaction should there be an above consensus outcome (around 200k+).

Both the EUR and JPY are struggling to make further headway against the USD. There is nothing of note on the data front from the Eurozone or Japan today suggesting that attention will be mainly centred on US data. Stabilisation in US bond yields leaves the USD in better form against both currencies and given that a lot of bad news is now priced into the USD its downside looks more limited although much will depend on today’s jobs data.

The AUD is the outright winner in terms of gains versus the USD so far this month alongside other commodity currencies, NOK and NZD. AUD has benefitted from receding expectations of interest rate cuts, and firmer Chinese data alongside improving risk appetite. While I have been far more bullish than the consensus on AUD, it may be worth taking profits on recent gains versus USD as consolidation is likely in the short term. I see more scope for gains in AUD versus NZD over coming weeks, however.

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US dollar languishing at multi month lows

October 21, 2013 — Mitul Kotecha

Following the resolution to the uncertainty and stress surrounding the political conflict on raising the US debt ceiling and thereby avoiding a US debt default markets will likely take a more upbeat tone this week extending last week’s rally in risk assets. We will also be able to scrutinise delayed US data releases, in particular the US September employment report which will be released tomorrow and possibly September US retail sales this week.

These and other US data may however, take some of the shine off buoyant equity markets given that they are unlikely to be particularly impressive. Indeed, clues will now be sought to determine exactly what impact the government shutdown and protracted political friction will have had on the economy but the news may not be particularly good in terms of US recovery hopes.

On the plus side and as reflected by the bull flattening in US interest rate markets, markets appear to be pushing back expectations of Fed tapering especially as US politicians will likely gear up for another fight over coming months when the debt ceiling / budget will need renewed agreement.

Fed tapering by December now looks highly unlikely unless the US delivers a series of very positive data surprises. The net impact on the USD is clearly a negative one, with the currency continuing to languish at multi month lows and showing little sign of turning around over the near term.

Elsewhere, in Europe the data will be a little more encouraging, with the ‘flash’ purchasing managers’ indices and the Germany IFO business confidence survey expected to show further improvement while in the UK a healthy reading for Q3 GDP is likely to add to the view that further Bank of England asset purchases are moving off the table. The EUR will likely benefit from the weakness in the USD and relatively better data releases although the sharp increase in EUR positioning suggests that further upside momentum may slow.

Asian currencies will continue to benefit from a double dose of good news from the US debt ceiling agreement as well as a run of positive Chinese releases over recent weeks. This is set to continue this week, with solid Chinese purchasing managers indices (PMI) data expected on Thursday and firm Q3 Korean GDP data on Friday. Meanwhile the central bank BSP in the Philippines is likely to keep policy on hold this week given the well behaved inflation backdrop.

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USD edges higher, AUD supported, KRW in focus

October 10, 2013 — Mitul Kotecha

US equities and risk assets in general edged higher overnight as US politicians edged towards a budget deal. The nomination of Janet Yellen as next Fed Chairman was met with a positive reaction from risk assets as it was perceived that she would be more likely to maintain the easy policy of her predecessor, with markets in any case delaying expectations of tapering into next year.

The Fed FOMC minutes released overnight gave little clarity on the timing of Fed tapering however, but it did highlight the split within the FOMC between those wanting to begin tapering in September and those preferring to wait. More consolidation is likely today as markets await political developments in the US.

Contrary to our expectations the USD has actually edged higher over recent days shaking off some the pressure associated with the budget impasse in the US. News that President Obama will meet around 20 senior Republicans from the House following a similar meeting with Democrats highlights progress of sorts, with hints of compromise in the air.

A slight uptick in US bond yields has managed to provide the USD with a semblance of support and further consolidation is likely in the short term as market fears over a US default gradually recede. Indeed, it appears that the USD is in a bottoming out process at present, with short term pain likely to give way to medium term gain.

GBP has lost ground over recent days undermined yesterday by disappointing August manufacturing/industrial production data and a worse than expected trade deficit. The data is unlikely to affect the outcome of today’s Bank of England MPC meeting however, with an unchanged outcome both on policy rates and asset purchases on the cards.

Despite yesterday’s data disappointments UK data has been improving and point to a reasonably good growth outcome in Q3 and a reduced likelihood of further asset purchases by the BoE. Nonetheless, GBP’s gains look overdone, with scope for short covering having diminished. Further pressure is expected against both EUR and GBP in the short term.

Australian jobs data revealed an increase of 9.1k in employment evenly split between full time and part time jobs and a surprise drop in the unemployment rate to 5.6%. The headline increase in employment was below consensus. Moreover, there was a marginal drop in the participation rate which helped to push the unemployment rate lower. On balance, the data will leave the AUD unperturbed, with the AUD/USD likely to remain supported over the short term. AUD/USD looks primed to test resistance around the 0.9530.

Asian currencies are on the back foot in the face of a slightly firmer USD. KRW will be in focus, with the Bank of Korea delivering an unchanged policy outcome but revising lower its growth and inflation forecasts. Against this background KRW appreciation looks overdone and appears to face strong resistance on any breach down to USD/KRW 1070. Nonetheless, downside risks will be limited. Encouragingly Korea has been a major beneficiary of the prospects of a delayed Fed tapering, with the country recording a strong return of equity portfolio flows over recent weeks

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Little respite for the dollar

October 8, 2013 — Mitul Kotecha

Given that the government shutdown has reduced the number of market moving US data releases on tap, tensions surrounding the US budget and likely debt ceiling impasse continue to weigh on sentiment. Signs that senior Republicans are becoming less focussed on defunding Obamacare hint at potential for a compromise. However, a deal looks a long way off and nervousness is set to grow ahead of the October 17 debt ceiling deadline.

Reflecting this, risk measures rose overnight, with the VIX “fear gauge” spiking higher and equity markets lower. Safe haven currencies including CHF and JPY remain well supported against this background although gold prices have been range bound. Giving some relief from politics markets will be able to focus on the onset of the US Q3 earnings season this week.

The USD is susceptible to further slippage as traction towards a US budget deal remains out of reach. The USD index has now dropped by over 5% in the last three months, undermined more recently by a potential delay in Fed tapering and lower US Treasury yields. Uncertainty about the economic impact of the budget delay and prospective failure to raise the debt ceiling over coming weeks suggests that any upside traction for the USD will be extremely limited.

What is clear is that the longer the delay in reaching a deal the bigger hit on the economy and in turn the bigger the pressure on the USD. A delay in the release of trade data originally scheduled for release today will mean that market angst over the political impasse will be the bigger driver of the USD today. The USD index is set to edge further below the 80.00 level over coming days.

JPY is a clear beneficiary of the malaise in the US over recent days and looks set to strengthen further in the short term especially as risk aversion continues to increase and US yields remain constrained. The day’s ahead will be particularly important for the JPY from a domestic policy perspective too. Japan’s parliament meets from October 15 to December 16, marking a crucial period to pass legislation on Prime Minister Abe’s “growth strategy”.

Given past disappointment with Abe’s “third arrow” markets will look for strong evidence that reforms will move Japan to a higher and non deflationary growth trajectory. This is by no means guaranteed. Further disappointment would imply a firmer JPY. Having tested its 200 day moving average around 96.72 near term technical support for USD/JPY is seen around 95.92.

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