JPY tracking yields, AUD looking good

March 14, 2013 — Mitul Kotecha

USD/JPY retraced lower as politicians grappled with the nominees for Bank of Japan board positions. The slight pull back in USD/JPY yesterday was attributed to the opposition of candidate Iwata for post of deputy governor and implications for less dovish monetary policy. The reality is that it’s not really politics driving USD/JPY but rather yield differentials (once again).

Indeed the pull back in USD/JPY is explained by the small drop in US yields over the last few days. The relationship suggests that the chances of a deeper pull back in USD/JPY are limited unless US Treasury yields drop sharply relative to JGBs. This looks unlikely but it will depend as much on US economic data as Japanese monetary policy measures. USD/JPY will see strong support around 94.77 on any pullback.

AUD has made an impressive recovery against both the USD and NZD over March and looks set to extend gains over coming weeks. The strong employment report in February which revealed a 71.5k increase in jobs has provided a further boost to the currency. The move in AUD is particularly impressive given the generally strong USD environment over recent weeks and highlights the declining influence of USD index gyrations on the AUD.

The risk / reward of holding AUD has definitely improved, with speculative positioning in the currency dropping to a relatively low level (well below the three month average) while our quantitative model also points to upside risks for AUD/USD. Technically AUD/USD looks well supported around 1.0202, with resistance at 1.0400 (6 Feb high) likely to be tested over coming sessions. AUD/NZD also looks primed for more gains especially given economic fears related the drought in New Zealand.

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Setting the cat among the pigeons

February 22, 2013 — Mitul Kotecha

The Fed’s FOMC minutes which raised the spectre of an earlier than anticipated tapering off of asset purchases have really set the cat amongst the pigeons, fuelling selling in equities, commodities and various currencies against the USD. The impact was reinforced overnight following relatively hawkish comments from the Fed’s Bullard and Fisher.

US Treasuries rallied however, as risk aversion crept back into the market following weaker data releases in the Eurozone (manufacturing and service sector purchasing managers indices) and in the US (February Philly Fed manufacturing survey and higher than forecast weekly jobless claims).

The German IFO business survey is the main event on the data calendar today, with a small gain expected. The second 3 year LTRO payback to be announced today and the Italian elections will also be in focus.

In the US attention will turn to a meeting between President Obama and Japanese Prime Minister Abe. Given the IMF’s tacit approval of Japanese policy it is unlikely that any criticism of Japanese FX policy will be forthcoming at the meeting.

Markets are set to trade cautiously around these events but the main theme will be the overriding impact of this week’s Fed minutes, which has really changed the dynamic in markets, especially for currencies, with the risk / reward of selling USDs now looking much less attractive.

USD is set to continue to trade with a firm tone and EUR in particular looks vulnerable. The continued fall out from Fed FOMC minutes, disappointing PMIs yesterday, Italian election uncertainty and likely lower than expected ECB LTRO repayments today suggests that EUR/USD will face more downside risks. Look for a test of support around 1.3140, which if broken will open the door for the psychologically important 1.30 level.

USD/JPY is likely to consolidate further awaiting the announcement of a new Bank of Japan governor, with JPY selling momentum continuing to abate. AUD was lifted by RBA governor Steven’s comments which did not indicate an urgency to cut policy rates further nor to intervene to lower the value of the currency. AUD/NZD continues to look constructive on the upside given the contrasting comments on the AUD and NZD from both central banks.

Please note my blog posts will be a bit sporadic over the next couple of weeks a I am will be traveling.

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Contrasting Fed and BoE stance

February 21, 2013 — Mitul Kotecha

A contrasting stance in the minutes of the Fed and Bank of England impacted FX markets. Firstly the Fed minutes revealed some unease among officials about maintaining current quantitative easing settings as the economic outlook improved. In contrast the BoE minutes revealed a more dovish than anticipated 6-3 vote in favour of further easing. Consequently GBP/USD dropped sharply while the USD made broad gains. It will take a move higher in US bond yields to reinforce USD strength and notably 10 year Treasury yields have yet to break the 2.0634 high reached on 14 February.

While the JPY is likely to continue to weaken over coming months I maintain the view that the bulk of its cyclical decline has already taken place, with the risks much more balanced. My models continue to show that the magnitude of JPY weakness is not justified by its usual drivers. Risks of a short term JPY correction higher notwithstanding I expect any further weakness to be much more gradual in the months ahead.

Consistent with my model output, the feeling on the ground in Japan is that the currency has indeed fallen too far, too quickly, while there is plenty of scepticism about the fact that so far there has actually been little in terms of actual policy measures to justify the drop in the JPY. In the meantime the new central bank governor will be scrutinised to determine whether he will be sufficiently aggressive to warrant the drop in the JPY. A decision may take place very soon. Whatever the decision USD/JPY looks set to struggle to break above 94.00 in the short term.

Markets will be very data-dependent in terms of determining AUD direction in the weeks ahead. A further batch of soft data will reinforce expectations of further RBA rate cuts and undermine the AUD further. I do not expect this to occur, with some stabilisation in economic data likely, an outcome which ought to restrain AUD bears. My quantitative model suggests that AUD/USD is now looking relatively cheap, with the regression estimate at around 1.07.

AUD’s drop against NZD has been particularly sharp. I do not believe the drop is justified and yesterday’s jump in AUD/NZD based in large part on comments by RBNZ governor Wheeler warning about FX intervention to weaken the kiwi in my view marks a shift in the fortunes of the currency pair. Such comments should not be surprising given the failure of the G20 to chastise Japan on its FX stance. Expect more FX jawboning in the weeks ahead from other central banks.

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

Risk assets pull back as caution prevails

February 5, 2013 — Mitul Kotecha

Risk assets faltered especially in Europe in the wake of renewed political tensions in Italy and Spain. Election uncertainty in the former as former Prime Minister Berlusconi gathers growing support and government corruption allegations in the latter hit equity markets and peripheral bonds.

Consequently the EUR gave back some of its recent gains, with the currency not helped by comments by the French finance minister warning about its strength. EUR/USD downside will be limited to support around 1.3461 in the near term.

Weaker Spanish jobs data did little to help sentiment while service sector confidence indices in the Eurozone today will also provoke further concerns revealing both continued contraction for most countries and divergence in the bigger economies, namely Germany and France. Caution will prevail in the near term as markets begin to question the veracity of the rally in risk assets registered over recent weeks.

AUD has had a fairly erratic start to the year rallying to break 1.06 against the USD but failing to hold gains over recent weeks. The currency has looked a little more stable into February but is still showing little sign of rallying despite the recently firmer risk tone, weaker USD index and firmer Chinese data, all of which would have been supportive for AUD in the past.

Technically AUD/USD looks vulnerable according to the relative strength index (RSI). Moreover, speculative positioning is around the 3 month average suggesting little impetus either way.

The RBA decision today to hold the cash rate unchanged but keep open the door to further rate cuts will inflict more short term pain on AUD but given that the market had already priced in a further rate cut in the cycle any decline in AUD will be limited. A break below the 100 day moving average around 1.0415 will result in a test of support around 1.0381.

Although the AUD is faltering its drop pales into insignificance compared to the sharp decline in JPY over recent weeks. Obviously the drop in the JPY has caused some panic across other currencies, especially in Asia (KRW, TWD, MYR), but this has done little to sway JPY bears. I have some hesitancy in calling the JPY much lower especially as a lot appear to be is in the price (in terms of aggressive policy actions) but technical indicators for both USD/JPY and EUR/JPY remain bullish despite the pull back overnight.

The intensifying hunt for yield means that the JPY will remain on the back foot over coming months but in the short term JPY may find some support from a renewed rise in risk aversion as political tensions in Europe heat up as well as some caution that the risk rally looks overdone. However, speculative positioning is unlikely to get in the way of further JPY declines given that positioning is around the 3-month average and still well above the all time lows reached in June 2007.

Posted in Australia, Italy, Spain. Tags: , , , , . Leave a Comment »

JPY retracement, AUD restrained

January 8, 2013 — Mitul Kotecha

Equity markets looked more restrained overnight as the sharp rally so far this year stalled ahead of the US Q4 earnings season which kicks off with Alcoa earnings after the close today. The looming budget battle in the US has also prompted some hesitancy to buy risk assets.

Direction will remain limited given the notable absence of first tier data releases today, with only Eurozone economic sentiment gauges, German factory orders, US small business confidence and consumer credit on tap. The bulk of releases are due in the later part of the week including rate decisions from the ECB and BoE.

For a currency that spent most of last year trapped in a relatively tight the JPY has lost an incredible amount of ground (12.7%) versus USD since the beginning of October 2012. The historically strong relationship between bond yield differentials and USD/JPY has broken down (albeit temporarily in my view), and cannot be used to explain the jump in USD/JPY.

Expectations of more aggressive monetary policy action have pushed USD/JPY higher especially as Prime Minister Abe continues to highlight his desire for a 2% inflation target. Nonetheless, as wires report today there may be no deadline for achieving this target a factor which may help USD/JPY to push lower in the short term. USD/JPY is likely to find some support around 86.54 (Jan 2 low). Speculative positioning in JPY has become increasingly short but notably is a long way from the all time low, suggesting scope remains for an eventual increase in JPY shorts.

AUD/USD has made an impressive recovery from its lows around 1.0344 at the end of last year. Risk appetite and the USD index both register a limited and insignificant correlation with AUD/USD suggesting that the currency will not be influenced by either over coming weeks. Yield differentials however, remain important and the widening of Australia 2 year yield differentials with Treasuries has provided important support for AUD.

Further upside in the currency will require Australian yields to move higher and this may in turn depend on the outcome of November retail sales data tomorrow but 2 year yields have hit trend line resistance suggesting that the AUD will struggle to move higher from current levels. AUD/USD 1.0585 will offer strong resistance, while my quantitative model suggests AUD/USD short term fair value around 1.0557.

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