GBP well supported ahead of GDP data

UK Q4 GDP today is likely to offer some further encouraging news on the economy. Indeed, the risk of an upside surprise compared to the consensus expectation of 0.7% QoQ suggests that GBP will also benefit.

After hitting a high around 1.6669 on 24 January GBP/USD slipped slightly but is showing little sign of reversing its gains and has jumped strongly this morning. A break of GBP/USD 1.6669 will open the door to a test of 1.6747

The fact that speculative sentiment for GBP is by no means excessive, suggests scope for even more gains in the weeks ahead. In particular, given the view that EUR/USD is set to decline further, I would suggest on capitalizing on further GBP appreciation prospects by playing the currency versus EUR too.


AUD oversold, to push higher in the short term

Not much is going right for the AUD. Board members of the Reserve Bank of Australia appear to be competing in outdoing themselves in talking the currency down, with latest comments from the RBA’s Ridout indicating a preference for AUD/USD 0.80 to be reached compared to 0.85 stated by Governor Stevens previously.

Concerns about slowing growth in China have added to the pressure on the currency. Indeed, worries about the impact of weaker Chinese growth on Australia’s economy have grown given the strong trading links between the two countries.

Such concerns have resulted in a drop in AUD speculative positioning (CFTC IMM) to its lowest since September 2013 and not far from its all time low. It’s easy to be bearish on the AUD but I suspect that negative sentiment for the currency is looking overdone.

Admittedly in an environment of elevated risk aversion it is difficult for AUD/USD to rebound as indicated by the risk reversal skew but I do not expect the pressure on the currency to be sustained.

AUD/USD near term support seen around 0.8633. Resistannce seen around 0.8825.

USD/JPY biased higher within a tight range

After hitting a low around 101.77 yesterday USD/JPY rebounded. USD/JPY short term range is seen at 101.62-103.58. Bias for more short term USD/JPY upside. The bounce in US 10 year Treasury yields overnight will give the USD some support versus JPY.

A combination of a sharp decline in US Treasury yields (narrowing the yield differential with Japan) and elevated risk aversion (my risk barometer has breached its upper band) had pushed the JPY higher.

The close to 30 bps drop in US 10 year yields since the start of the year looks excessive however, and assuming the Fed continues to taper at tomorrow’s FOMC meeting I see little reason for US bond yields to drop much further, suggesting more limited scope for JPY upside versus USD from current levels.

The only caveat is risk aversion. Given that emerging market tensions are unlikely to ease quickly there will be scope for sharp bouts of safe haven JPY buying as risk aversion intensifies.

Watch me on Financial Times Video – Emerging market jitters rattle investors

To watch me discussing the emerging markets sell off with the Financial Times please click on the link below.

Emerging market jitters rattle investors

Markets remain skittish as caution prevails

There has been a slight easing in tensions overnight as reflected in the small decline in my risk barometer and the VIX ‘fear gauge’. However, markets remain skittish and the mood is somewhat cautious as the focus remains on emerging market travails.

Additionally a sharp fall in Apple shares in after hours trading may also dampen equity markets today. Although specific country specific factors may have provoked the current bout of pressure contagion has spread quickly, reminiscent of the onset of previous crises.

The current bout of pressure may yet be contained but there is still some way to go before market stress is alleviated. Consequently correlations between asset classes have strengthened, in particular for currencies. Indeed most emerging market currencies have depreciated especially those of the “fragile 5”.

Overnight US yields rose while US and European equities continued to sell off and gold prices dipped following recent gains. The USD index held gained slightly following the rise in US yields.

Aside from emerging markets attention will focus on the US, with President Obama’s State of the Union address, December durable goods orders and January consumer confidence on tap most attention will quickly shift to tomorrow’s Fed FOMC policy decision. UK Q4 GDP will also garner some attention.

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