JPY, AUD and Asian FX

November 12, 2013 — Mitul Kotecha

Risk appetite remains relatively well supported, with US and Asian equities edging higher and the VIX ‘fear gauge’ moving lower. There is a lack of first tier data releases today, with only German and UK CPI inflation data on tap as well as the US NFIB small business optimism index. Attention will instead centre on various Fed and ECB speakers for further policy clues.

Indeed, markets will look for any hints of reinforced forward guidance by ECB speakers and further insight into the timing of tapering from Fed officials. ECB speakers include Angeloni, Weidmann, Nowotny and Asmussen while Kocherlakota and Lockhart are scheduled to speak from the Fed. There will also be plenty of interest in speeches by the Fed’s Yellen and Bernanke on Thursday.

The JPY appears to be finally succumbing to the pressure of a generally firmer USD and higher US yields although the currency has yet to break out of its recent ranges and correlations suggest that the JPY has not been as sensitive as other currencies to either factor. I remain bearish on the JPY.

While the JPY has not been as sensitive as other currencies to yield lately it has still faced some pressure and will continue to do so if we are correct in our view that US yields will push even higher against Japanese JGBs. Firmer US data has helped to shift expectations of Fed tapering to around December or January. In contrast the BoJ is showing no sign of pulling back from its balance sheet expansion and in our view could even extend asset purchases next year in order to sustain its inflation around its 2% inflation target. This remains a recipe for more USD/JPY upside.

Having rallied by around 9% since its end August low AUD has been unable to hold onto gains. Fortunately for AUD the recent rise in Australian bond yields has acted to mitigate against some of the potential pressure from rising US bond yields; since the USD began its recent rally around 28 October Australia’s yield advantage has narrowed by only 3 basis points. However, the strengthening in the USD has wreaked havoc on many currencies and the AUD has not escaped.

While AUD may face headwinds from a firmer USD, Australia’s relative yield attraction will give it some scope for recovery into year end. Indeed, if yield appetite continues to strengthen in an environment of improving risk appetite and low volatility AUD should prove to be a key beneficiary. In the near term AUD/USD will find some technical support around 0.9280.

Asian currencies have gained a little respite from general USD strength but remain vulnerable to a stronger USD over the coming weeks. Deficit currencies have renewed their position as the biggest underperformers over recent weeks, with the IDR and INR under most pressure followed by MYR. The least vulnerable to USD strength and higher US yields are North East Asian currencies especially TWD and KRW.

Reflecting renewed tapering fears most Asian countries have experienced renewed equity portfolio outflows month to date. The RMB continues to buck the trend although its relative strength may reflect the timing of China’s 3rd plenum which ends today.

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EUR firmer, AUD weaker, Asian currencies helped by softer USD

November 7, 2013 — Mitul Kotecha

Central banks will set the tone ahead of tomorrow’s US October employment report. Both the European Central Bank and Bank of England are scheduled to deliver policy decisions. Neither is expected to change policy settings although there is an expectation that the ECB will open the door to a December ease in the wake of very soft inflation data. ECB President Draghi may hint at such a move in the press conference Q&A session. In Asia Bank Negara Malaysia is also unlikely to move on policy rates today.

However, sources quoted overnight highlighted that the ECB would not ease policy this month and could be too divided to do so in December, pointing to a potentially less dovish outcome than many expect. The EUR rallied following the news story hitting a high of around 1.3549 versus the USD and the currency is likely to remain supported in the short term just below the 1.3500 level especially given the risks to today’s ECB meeting.

There is even less likelihood of easing by the BoE given recently firmer data and the upcoming Quarterly Inflation Report next week. Additionally, there are risks for above consensus readings for both German industrial production data and US Q3 advance GDP today. All in all, there appears to be little on tap to dent the enthusiasm for risk assets although there will be hesitancy to take directional trades ahead of the US jobs data tomorrow.

AUD took a hit this morning in the wake of disappointing jobs data. Employment rose a paltry 1.1k, with full time jobs falling 27.9k. The outcome would have been worse was it not for the 28.9k increase in part time jobs. The unemployment rate was 5.7% in October but the participation rate dropped to 64.8% while the September unemployment rate was revised higher. The data provoked AUD selling and may also result in a return of RBA rate cut talk. AUD/USD will however, find some strong technical support around its 1 November low at 0.921.

Asian currencies may take advantage of a slightly softer USD tone in the wake of capped US Treasury yields. THB may find some relief from political tensions following the news that Senate is likely to reject the Amnesty Bill. The PHP may be sidelined as a super typhoon approaches. The INR has maintained a weaker trajectory, with limited equity inflows so far this month, suggesting that some caution may be reappearing towards Indian assets. IDR has been an underperformer but despite some slowing in GDP in Q3 news that Indonesia will allow more foreign investment may help to stabilise the currency.

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Risk appetite still supported

November 5, 2013 — Mitul Kotecha

Relatively subdued trading yesterday ended with stocks higher and US bond yields lower. Our risk barometer is currently around its lowest since February 2011, signifying still strong appetite for risky assets, as also reflected by the drop in the VIX “fear gauge”. After a sharp 30+% drop since early October the Baltic Dry Index has also turned higher while gold prices are holding in a relatively tight range around its 100 day moving average at USD 1320.

There are a few releases and events to give direction to markets, with the RBA policy meeting, European Commission autumn economic forecasts, and service sector confidence surveys from the UK and US, all on tap today. Overall, there will be little to dent the positive risk bias but caution will intensify ahead of the ECB Council meeting and US employment report towards the end of the week.

Following last week’s USD rally the currency is likely to consolidate its gains over the short term ahead of Friday’s US October employment report. A dip in US yields helped by a softer US factory orders report took some of the steam out of the USD as caution crept in. A series of Fed speakers overnight did little to clarify the picture regarding the timing of tapering and thus provided little direction for the USD.

Nonetheless, despite some near term consolidation the USD looks set to gain further over the coming weeks helped by the fact that the market had already squared a lot of long positions over past weeks. A renewed increase in US yields accompanied by better economic data will help the USD’s cause but much will depend on when there is greater clarity regarding the timing of tapering. Expectations of a March 2014 may yet prove off the mark, leaving the USD plenty of scope for further recovery.

AUD benefitted from the robust September retail sales report yesterday but faces another hurdle today in the form of the RBA policy meeting. Although AUD remain a loser year to date, the currency has registered impressive gains from the beginning of September, much to the chagrin of the RBA.

Although a policy rate cut is highly unlikely today (I believe the RBA is at the bottom of its easing cycle), Governor Stevens is set to warn that the strength of the currency could warrant further policy easing in the months ahead. However, such warnings may sound hollow given worries about house price inflation and recently firmer data. Given some likely restraint in the USD ahead of the US employment report, AUD/USD will find some any losses limited to support around 0.9430.

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US dollar stable, yen primed for weakness, Aussie dollar slips

October 29, 2013 — Mitul Kotecha

The USD index looks to have settled at a relatively weak level around 79.00 aided by the stabilisation of US Treasury yields (10 year around 2.5%). Upside for the USD will be restricted given a likely run of softer economic releases this week including September retail sales, and October consumer confidence today.

The data may help to support expectations that Fed tapering may not take place until March / April next year although the Fed FOMC decision later this week will hopefully give more clues on this front. In any case the USD may already have priced in softer data and delayed tapering expectations, suggesting that the risk / reward will increasingly turn more USD positive over the coming weeks.

USD/JPY looks set to move higher over coming weeks breaking out of its recent range. Relatively higher US Treasury yields versus Japanese JGBs yields, improving risk appetite and improving technicals (USD/JPY remaining above its 200 day moving average) will be supportive for renewed upside in the currency pair.

While the Bank of Japan is unlikely to act this week on policy the risks of further action will only increase over the coming months as it becomes apparent that reaching and sticking to its 2% inflation target will not be possible given current settings. In turn, the JPY is set for further downward pressure.

Does the slippage in AUD over recent days presage a strengthening in the USD? AUD and USD (index) have registered a strong negative correlation over the past three months, with the former benefitting from weakness in the latter. Over recent days the USD appears to have stabilised while AUD has lost steam, with pressure intensifying in the wake of comments by RBA Governor Stevens who attempted to talk the currency down.

I doubt the AUD will fall much from current levels but the absence of key domestic data (only private sector credit growth and building approvals on tap this week) will focus attention on external factors, namely the Fed FOMC outcome and in particular Chinese manufacturing confidence at the end of the week.

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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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