Asian Currency Differentiation

January 25, 2011 — Mitul Kotecha

Asian currencies have started the year in mixed form, but it would be wrong to generalize the performance of Asian currencies as weak. There have been marginal gains recorded year to date vs. USD in the KRW, TWD, MYR and SGD, reflecting strong capital equity inflows. This contrasts with losses in the IDR, INR, PHP and THB versus USD. Compared to the beginning of 2010 equity capital flows have been far weaker overall, with India, Indonesia, Philippines and Thailand, recording outflows, matching the performance of their currencies.

Clearly investors are discriminating more at the turn of 2011. For example Taiwan has recorded solid equity inflows over recent weeks (over $2 billion year-to-date), matching the strength of inflows registered at the beginning of 2010. It appears that Taiwan stocks have started the year as the Asian favorite, helped by growing expectations of further door opening to mainland investment and tourism. Korean equities have also registered inflows helping to support the KRW, which looks to be good buy over the short term above 1120.

This contrast with outflows registered in other Asian equity markets. A major concern responsible for some of the weakness in capital flows to Asia is the threat of inflation. For example, the selling of stocks in India appears to be closely related to inflation concerns and the hawkish rhetoric of the Reserve Bank of India, which is continuing its tightening path this year. Similarly, the PHP may be vulnerable over the short term following a failed T-bill auction on Monday. Inflation worries have clearly led to a push for higher yields but the bids were labeled as “unreasonable” by the government.

Over coming weeks, further EUR strength will likely give Asian currencies more support as the USD succumbs to further pressure. Continued strengthening in the CNY will also support other Asian currencies given that the CNY fixing has reached its highest level since the July 2005 revaluation.

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Temporary Euro Relief

January 12, 2011 — Mitul Kotecha

Eurozone peripheral country travails continue to garner most market attention. There was at least a semblance of improvement on this front as peripheral bond spreads with German bunds narrowed on Tuesday but this was largely due to European Central Bank (ECB) bond buying than any improvement in sentiment. The fact that German bund yields also rose helped to narrow bund-peripheral spreads further.

A clearer test of sentiment will be today’s debt sales by Portugal followed by actions by Spain and Italy tomorrow. ECB buying of Portuguese bonds has given some relief to other debt, with Spanish and Italian debt spreads narrowing too. Even Greece managed to sell short term debt (EUR 1.95 bn of 26 week T-bills) but at a higher cost than the previous sale.

Perhaps a stronger boost to sentiment will come from the news that European Union (EU) governments are discussing an increase in the EUR 440 billion bailout fund in recognition of the fact that the fund may prove too small to cope if the crisis spreads to Spain. However, don’t expect a decision anytime soon, with next week’s meeting of EU finance ministers unlikely to agree to such a move. Support (or lack) of from Germany may prove to be a sticking point against the background of domestic political pressure.

Other options being considered include the possibility of the EFSF (European Financial Stability Facility) purchasing bonds in the secondary market and lowering interest rates on EFSF bailout loans. News that Japan will buy 20% of EFSF bonds this month as well as recent supportive comments from China suggest that an increase in the size of the EFSF may be easily funded by such investors. The EUR will gain some support against the background of such speculation but its upside may be restrained around its 200-day moving average at EUR/USD 1.3071.

In the US the economic news was not so positive for a change as the National Federation of Independent Business (NFIB) small business optimism survey came in weaker than expected in December, an outcome that will come as a blow given that it suggests some stuttering in the recovery process as well as hiring.

There is only secondary data scheduled today, with most attention on the Fed’s Beige Book later tonight. The survey of Federal Reserve districts will likely reveal a broad based but moderate improvement in economic conditions with the exception of housing activity. A speech by the Fed’s Fisher on Monetary policy will also be in focus. Like the Fed’s Plosser overnight he may highlight some caution about the impact of Fed quantitative easing (QE).

The AUD is increasingly feeling the impact of the flooding in Queensland Australia as the extent of economic damage is revealed. Reserve Bank of Australia (RBA) board member McKibbin estimated that it could knock off at least 1% from economic growth. This may prove too negative and although the flooding will result in a significantly negative impact on growth in Q1 rebuilding and reconstruction will mean that overall growth for 2011 will not be as significantly impacted. Nonetheless, a paring back in RBA policy tightening expectations will see the AUD come under further pressure, with a move down to around AUD/USD 0.9634 on the cards over the short-term.

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Positive Data Run Continues

January 5, 2011 — Mitul Kotecha

The batch of data releases in Tuesday’s trading session was generally positive. Leading the way was a stronger than expected increase in the UK manufacturing purchasing managers index (PMI) for December at 58.3 which coming in at a 16-year high. The data gave a boost to GBP though GBP/USD is unlikely to gain much of a foothold above 1.5600.

In the US, factory orders surprisingly jumped 0.7% in November and whilst the data is second tier it does maintain the run of generally upbeat US data. Meanwhile eurozone inflation came in higher than forecast at 2.2% YoY, above the European Central Bank (ECB) target level for the first time in two years. The outcome is unlikely to trigger a response from the ECB especially given that core inflation remains well behaved. After hitting a post CPI release high of 1.3433 EUR/USD is likely to drift lower in the short term.

Separately the Fed FOMC minutes of the December 14 meeting revealed little to surprise. Of note, FOMC members highlighted that the improvement in economic conditions was insufficient to warrant any change to the asset purchase program. The bottom line for the Fed is that the dual mandate of maximum employment and price stability is still not in reach and therefore they will keep the pedal to the floor in terms of policy stimulus. Although a further round of quantitative easing seems unlikely the Fed is likely to stick it out in terms of the $600 billion in planned asset purchases whilst an actual rate hike is unlikely until well into 2012.

Commodity prices dropped sharply overnight with soft commodities and energy prices in particular leading the declines. Commodity currencies fell as a result, with the AUD also impacted by growing worries about the impact of the Queensland floods. Initial estimates suggest that total damage from the flooding could reach AUD 6 billion and as Queensland represents around 19% of Australian GDP, the impact on growth could be significant. Growth could drop by a sharp -0.8% YoY in Q1 GDP. This is based on the assumptions that 40% of all exports will experience a 30% reduction

Today’s data slate in the US will be crucial to provide the final clues to Friday’s December payrolls report. The ADP jobs report, ISM non-manufacturing survey and Challenger job cuts data are all scheduled for release. The run of positive US data will help the USD to trade on a firm footing over the short term but clearer direction will await the outcome of the December jobs report whilst the beginning of the Q4 earnings season next week will also be influential. The exception to USD strength will continue to be Asian currencies where more upside is likely, but I prefer to play this via short EUR/Asian FX than the USD.

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Edging Towards A Bailout

November 18, 2010 — Mitul Kotecha

A confluence of factors have come together to sour market sentiment although there appeared to be some relief, with a soft US inflation reading (core CPI now at 0.6% YoY) and plunge in US October housing starts reinforcing the view that the Fed will remain committed to carry out its full QE2 program, if not more.

However any market relief looks tenuous. Commodity prices remain weak, with the CRB commodities index down 7.4% in just over a week whilst the Baltic Dry Index (a pretty good forward indicator of activity and sentiment) continues to drop, down around 21% since its recent high on 27 October. Moreover, oil prices are also sharply lower. Increasingly the drop in risk assets is taking on the form of a rout and many who were looking for the rally to be sustained into year end are getting their fingers burnt.

Worries about eurozone peripheral countries debt problems remains the main cause of market angst, with plenty of attention on whether Ireland accepts a bailout rumoured to be up EUR 100 billion. Unfortunately Ireland’s reluctance to accept assistance has turned into a wider problem across the eurozone with debt in Portugal, Greece and also Spain suffering. An Irish bailout increasingly has the sense of inevitability about it. When it happens it may offer some short term relief to eurozone markets but Ireland will hardly be inspired by the fact that Greece’s bailout has had little sustainable impact on its debt markets.

Ireland remains the primary focus with discussions being enlarged to include the IMF a well as ECB and EU. What appears to be becoming clearer is that any agreement is likely to involve some form of bank restructuring, with the IMF likely to go over bank’s books during its visit. Irish banks have increasingly relied on ECB funding and a bailout would help reduce this reliance. Notably the UK which didn’t contribute to Greece’s aid package has said that it will back support for Ireland, a likely reaction to potential spillover to UK banks should the Irish situation spiral out of control. Any bailout will likely arrive quite quickly once agreed.

Although accepting a bailout may give Ireland some breathing room its and other peripheral county problems will be far from over. Uncertainties about the cost of recapitalising Ireland’s bank will remain whilst there remains no guarantee that the country’s budget on December 7 (or earlier if speculation proves correct) will be passed. Should Ireland agree to a bailout if may provide the EUR will some temporary relief but FX markets are likely to battle between attention on Fed QE2 and renewed concerns about the eurozone periphery, suggesting some volatile price action in the days and weeks ahead.

Reports of food price controls of and other measures to limit hot money inflows into China as well as prospects for further Chinese monetary tightening, are attacking sentiment from another angle. China’s markets have been hit hard over against the background of such worries, with the Shanghai Composite down around 10% over the past week whilst the impact is also being felt in many China sensitive markets across Asia as well as Australia. For instance the Hang Seng index is down around 7% since its 8 November high.

Posted in Asia, bank rescue, Bond markets, central banks, China, Commodities, Currencies, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Greece, IMF, Ireland, Monetary Policy, Singapore, South Korea, Spain, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . 1 Comment »

Euro pressure mounts

November 12, 2010 — Mitul Kotecha

The effects of eurozone peripheral bond concerns are cascading through eurozone markets and hitting risk appetite in the process. The EUR is a clear casualty having dropped further against the USD and versus other currencies. EUR/Asian FX remains a sell in the current environment. Contagion outside Greece, Portugal and Ireland had been limited but Italy and Spain have also seen a growing impact on their bond markets. Having broke below support around 1.3734, EUR/USD will target 1.3508 support.

Speculation that Ireland will be forced to follow Greece in seeking international financial support has intensified. Although Ireland has sufficient funds to last until next spring, yields on its debt are already higher than Greek debt before it received funds a few months back. Attention is firmly fixed on the country’s budget on 7 December and the prospects of an agreement between the government and opposition in its austerity plans.

Not helping is the fact that the Irish government has a very slim majority. Even if the budget is passed there is no guarantee that sentiment will improve given the negative impact of even deeper fiscal tightening announced last week will have on economic growth. Moreover, Germany’s insistence that the cost of any Greek style bailout should be borne mostly by private investors has only added to market tension. Even the European Central Bank is unlikely to provide much support, with ECB member Stark suggesting that ECB bond purchases will remain limited.

This leaves eurozone markets in a precarious state and the EUR continues to look heavy as further downside opens up. Moreover, the problems in peripheral Europe are beginning to have a broader impact on risk appetite, with equity markets slipping, although some of this was related to a weaker sales forecast from Cisco in the US. Nonetheless, spreading risk aversion could also dampen sentiment for Asian currencies, which is why selling EUR/Asian FX looks a better bet than selling USD/Asian FX over the short term.

In contrast sentiment for the US is undergoing an improvement. Data releases over recent weeks have generally beaten forecasts and there is even growing speculation that the Fed’s calibrated asset purchases may end up being smaller than planned. Such speculation has boosted the USD but it is premature to suggest that the Fed is on the verge of scaling back asset purchases even as the program of purchases gets going. Although there are clearly some FOMC members who are opposed to significant asset purchases the probability that the Fed remains set to carry out its full $600 billion of planned purchases.

Attention today will focus squarely on day 2 of the G20 meeting and any resolution to disputes over trade imbalances and currencies. Unfortunately none is likely to be forthcoming. Despite a reported 80 minute meeting between US and Chinese leaders little agreement was reached, with plenty of finger pointing remaining in place. It appears that the mantra of moving towards “market-determined exchange rates” and efforts at “reducing excessive imbalances” as agreed at the G20 meeting of finance ministers and central bankers will be as far as any agreement reaches. As a result markets will be left with very little to chew on.

Posted in Asia, central banks, China, Currencies, Economics, Economy, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Germany, Greece, Interest rates, Ireland, Monetary Policy, Portugal, Spain, US, US administration. Tags: , , , , , , , , , , , , , , , , , , , , , , , , . 1 Comment »
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