A lot to get through before year end

December 16, 2013 — Mitul Kotecha

As the end of the year nears markets will still need to get through a heavy week in terms of events and data releases before winding down. The main event is the Federal Reserve FOMC meeting on Tuesday and Wednesday and trading direction is likely to be limited ahead of this. There remains a considerable degree of uncertainty about the timing of Fed tapering, with most market participants split between this week and January 30th. We see a one in three chance of Fed tapering beginning this week, with our bet on a January move.

There are also plenty of US data releases on tap including the December Empire manufacturing and Philly Fed surveys, industrial production, CPI inflation, Q3 current account balance, housing starts, existing home sales and Q3 GDP this week. The data will be mixed with manufacturing surveys showing little improvement, home sales declining while in contrast GDP will be revised higher and industrial production will reveal a decent gain.

In Europe there is also plenty to digest amid thinning market liquidity. The final EU summit of the year on 19-20 December will focus on the steps towards banking union while Eurozone flash manufacturing and confidence purchasing managers confidence indices to be released today will show some, albeit limited improvement. Further gains in the German ZEW investor confidence and IFO business confidence surveys are likely to be recorded in December although the surveys are unlikely to match the pace of recent gains.

The UK will also reveal further economic clues in the form of the CPI inflation, jobs data and Bank of England Monetary Policy Committee (MPC) minutes. In particular, the minutes are unlikely to reveal any urgency to change policy despite the faster than anticipated drop in the unemployment rate. In terms of central banks the Bank of Japan is set to leave policy unchanged given recent the progress on inflation while the Reserve Bank of Australia (RBA) minutes will reveal further focus on the strength of the AUD.

The intense focus on the Fed means that there will very limited market movements until after the outcome of the meeting. It is unclear whether the recent slippage in US equities has been due to renewed nervousness about Fed tapering or simply year end profit taking. Either way, a delay in Fed tapering may provide some, albeit limited relief to risk assets.

The USD will benefit if tapering is announced this week, but much will depend on what US bond yields do. Recent moves in currency markets are looking increasingly stretched, with EUR and GBP failing to build on their recent gains, while USD/JPY is also struggling to move higher. This may continue over coming days as FX market activity thins further.

Posted in Australia, Bank of Japan, Federal Reserve. Tags: , , , , . Leave a Comment »

Beware of yield sensitive currencies

December 10, 2013 — Mitul Kotecha

Markets are becoming increasingly accustomed to the idea of an imminent Fed tapering as reflected in ongoing gains in risk assets. Indeed, these gains have taken place even in the face of comments by Fed officials overnight including Bullard and Fisher which on balance supported the view of beginning tapering sooner rather than later.

The fact that US bond yields continue to decline despite the release of a slate of firmer US and global data also suggests that a lot in terms of tapering expectations are priced in. Nonetheless, year end position adjustment may also account for some of the moves, particularly with the USD coming under near term pressure against most currencies except JPY as US yields slip.

I remain constructive on the USD given that US growth will outperform, with an attendant rise in US yields. Not only am I constructive on the USD against many major currencies, I expect the USD to strengthen versus many emerging market currencies too.

Those currencies most sensitive to US yields (10 year US Treasuries) will be among the biggest underperformers in 2014. This list includes the INR, TRY, MYR, and BRL. The rationale for weakness in these currencies is that Fed tapering and higher US yields will further increase capital outflows or at least reduce inflows to many countries.

Conversely some of the currencies least effected by tapering / higher US yields are in the top half of the likely outperformers next year including KRW and TWD.

Posted in Asian currencies, emerging markets, US. Tags: , , , , . Leave a Comment »

Firm US data not helping the dollar

December 9, 2013 — Mitul Kotecha

The US November employment report released at the end of last week helped to reinforce expectations that the Fed will begin tapering soon, possibly as early as the FOMC meeting in mid December. Non-farm payrolls rose by 203k while the unemployment rate dropped to 7%. Job gains have averaged around 180k per month over the last 6 months. The jobs data followed on from several other firm US data releases over the week highlighting strengthening signs of recovery.

Equities reacted well, rising as fears over tapering were outweighed by concrete signs of recovery. Meanwhile bond yields rose over the week although they slipped on Friday. Attention will turn to next week’s Fed FOMC meeting while this week’s data flow will be more limited. The main event will be the November US retail sales report where a moderate gain in sales is expected in terms sales outside of autos, providing the final clues to the Fed’s decision next week.

Elsewhere markets are still reeling from the ECB’s less dovish than expected statement last week as reflected in the subsequent strength of the EUR. Data this week in the Eurozone will be encouraging, with Eurozone industrial production set to rebound. This will be echoed in the UK, with hard data reflecting the strength in manufacturing surveys.

In Japan this morning’s data slate was disappointing, with Q3 revised lower and the current account registering a deficit for the second straight month in October although the JPY impact will be limited. Finally, the RNBZ is will hold a policy rate meeting this week although no change is expected from the central bank as recent mortgage restrictions will have reduced the need to tighten policy. Nonetheless, as reflected by the latest NZ housing data loan to value mortgage restrictions have yet to have a significant impact.

The USD failed to benefit from the solid data in the US last week undermined by some slippage in US yields, with the reaction indicative of a market that is becoming increasingly accustomed to the idea of an imminent Fed tapering. The USD index appears to be struggling into year end, with the EUR taking advantage of the USD’s inability to push higher especially given that the ECB did not appear to be in any hurry to add more monetary accommodation last week.

Conversely USD/JPY looks set to continue to edge higher as sentiment for JPY continues to deteriorate; latest IMM positioning data shows that net JPY positions have hit their lowest since July 2007. The next key technical resistance level is around 103.74. Firm trade data in China over the weekend helped to bolster AUD and NZD although the latter is benefitting the most, boosted overnight by strong house price data in November. Consequently AUD/NZD continues top plumb new depths.

Posted in Australia, ECB, Federal Reserve. Tags: , , , , . Leave a Comment »

Rising risk aversion

December 5, 2013 — Mitul Kotecha

The US ADP November jobs report and October new home sales both beat expectations yesterday piling on the pressure on US Treasuries and adding further weight to support those looking for the Fed to taper at the December 17-18 FOMC meeting. Consequently non farm payrolls expectation will likely be revised higher from the current consensus of around 180k. In contrast the ISM non manufacturing index came in below consensus, with the jobs component slipping. US equities ended marginally lower while the USD held its ground. However, risk measures such as the VIX “fear gauge” moved higher. Rising risk aversion may reflect expectations of imminent tapering and some angst ahead of US budget talks.

US November payrolls data to be released tomorrow will be crucial to provide more decisive clues to the timing of Fed tapering. Attention ahead of the jobs report will turn to the European Central Bank policy decision where no action is expected although some downward revisions to staff forecasts are likely. We continue to expect a more aggressive ECB stance into 2014. The Bank of England and Norges Bank will also decide on policy rates but no change is expected in both cases. In the US an upward revision to Q3 US GDP is expected to around 3.1% QoQ annualised while jobless claims will also be in focus. Market nervousness is likely to continue today although activity is likely to be limited ahead of the US payrolls data tomorrow.

The USD should be supported due to higher US Treasury yields although USD/JPY has lost some ground in the wake of higher risk aversion. The large short JPY market position may also be limiting the JPY’s downside for now. EUR/USD is trading shy of its recent highs above 1.36 and could be vulnerable to a dovish ECB statement today as well as to growth forecast downgrades by the ECB. AUD continues to remain under pressure having traded just below 0.90 overnight in the wake of disappointing GDP data yesterday and is likely to remain vulnerable to further slippage. CAD was further undermined by a relatively dovish Bank of Canada statement following the decision overnight to leave policy rates unchanged.

Given that US Treasury yields have risen by around 33bps since the end of October it is worth looking at which currencies are most sensitive to rising yields. In Asia the most correlated currencies with 10 year US Treasury yields over the last 3 months and therefore most vulnerable currencies are the SGD, THB, and MYR. The least sensitive have been CNY, IDR and KRW. Playing long KRW / short SGD appears to be a good way of playing an environment of rising US yields, especially given that yields are set to continue to rise over the coming months.

Posted in Asian currencies, Bank of England, ECB, US. Tags: , , , , , , . Leave a Comment »

USD firms, JPY bears in the ascendency, RBA weighs on AUD

December 3, 2013 — Mitul Kotecha

Despite some encouraging economic news from manufacturing surveys globally equity markets and risk assets in general failed to benefit overnight, with stocks showing a little fatigue following recent gains. The US ISM manufacturing confidence survey beat expectations rising to its highest level since April 2011 while its components looked upbeat, especially the employment component.

This was echoed in the UK and even in the Eurozone the final manufacturing purchasing managers index was slightly higher than forecast. Consequently core bond yields and the USD continued to push higher while gold came under further pressure. The US data also has put the spectre of a December tapering on the table although the November employment report will be scrutinised for further clues.

While JPY bears have been encouraged by the rise in Japanese inflation revealed last week (which was not only energy price led) there’s a long way to go before claiming success in hitting the BoJ’s 2% inflation target. The good news is that the higher real yield differential between the US and Japan is consistent with USD/JPY upside.

The bad news is that more BoJ policy easing is likely to sustain the move and we suspect the central bank will oblige early next year. Indeed, BoJ Governor Kuroda alluded to this yesterday, and his comments were taken at face value by markets, pushing the JPY even lower, with USD/JPY breaching 103 overnight. We keep open our trade idea to buy USD/JPY initiated on 28 October at 97.64 targeting 103.74.

AUD/USD has lost close to 6% since its high around 0.9759 on 23rd October but has found some respite recently from short covering over recent days. The Reserve Bank of Australia however, continues to do its best to weaken the currency. Unsurprisingly left policy rates unchanged today but the accompanying statement noted that the currency remained “uncomfortably high”.

The AUD has been particularly sensitive to a renewed rise in US Treasury yields, being one of the most correlated currencies over recent months and in this respect remains vulnerable to any increase in US yield. Given that we expect US yields to continue to push higher into next year this suggest only a limited AUD recovery over the coming months. In the near term AUD/USD has found some solid technical support around 0.9038.

Posted in Australia, Japan, US. Tags: , , . Leave a Comment »
« Older posts
Newer posts »