Central banks in focus

September 5, 2013 — Mitul Kotecha

All the action will come from central banks today, with the Bank of Japan, European Central Bank, Bank of England, Riksbank and in Malaysia Bank Negara set to deliver policy decisions today. None are likely to alter policy settings but accompanying press statements will be under scrutiny. The policy decisions take place against the background of relatively calmer market conditions ahead of the August US jobs report at the end of the week and vote by the US Congress on limited military actions against Syria.

Among the several central banks deliberating on policy today the ECB will be among the most closely watched. Although no policy change is expected EUR direction will be determined the tone of the press conference. Modest upward revisions to staff growth forecasts will bode well for the EUR. Additionally in the wake of recent better data it is possible that the ECB shifts the balance of risks upwards to “broadly balanced” which could also help to stem the EUR’s recent decline. However, the ECB is unlikely to want to give markets the impression that it is turning more hawkish, with “forward guidance” set to be repeated.

While the BoE is highly unlikely to deliver any surprises today GBP is finding ongoing support from relatively positive data surprises including a series of purchasing managers’ indices released this week. Although the BoE will attempt to limit the rise in gilt yields via the use of forward guidance markets will find it difficult to ignore the better data. Given that positioning in GBP is generally short the currency is likely to remain supported both against the EUR and USD.

The BoJ is not likely to act on policy at its meeting today given that recent economic data both on the growth and inflation front are moving in line with expectations. However, there are still plenty of risks that higher inflation will not be sustained, implying potential fore more aggressive policy action in the months ahead. This, combined with relatively higher US bond yields relative to JGBs, will maintain upside pressure on USD/JPY over the coming weeks and months. In the near term USD/JPY may struggle around the 100 level but this is likely to prove to be a temporary barrier.

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Lots of events / data to chew on

September 2, 2013 — Mitul Kotecha

US Labor Day holidays should keep trading relatively subdued over the course of today. Even the prospects of a military strike in Syria have paused following the decision by US President Obama to gain approval from Congress. Given that Congress does not return from summer recess until September 9 any action is not going to be quick. Consequently risk appetite may improve in the near term. Additionally Asian markets will benefit from a rise in China’s manufacturing confidence in August to a 16 month high. ,

Markets will have plenty of data and events to chew over as the week progresses. Overall US data will maintain its less impressive trend, with a drop in the August US ISM manufacturing confidence survey expected, while the July trade deficit is set to widen and non farm payrolls are likely to come in at a softer pace of around 160k. Negative US data surprises will likely see a further bullish retracement in US Treasuries and in turn a loss of upward momentum for the USD.

Elsewhere the four key major central bank decisions on tap this week will likely prove to be non-events, with the Bank of Japan, European Central Bank, Bank of England and Reserve Bank of Australia set to keep policy rates unchanged. The BoJ is likely to take comfort from the improvements in domestic data and rising inflation reducing any pressure for any further easing in the near term. The ECB will likely repeat its forward guidance and reveal updated staff forecasts.

On the data front final Eurozone PMI manufacturing survey readings, July German industrial activity and UK manufacturing PMI will garner attention. Some likely improvement in risk appetite will likely see a further spread narrowing for Eurozone peripheral bonds while the EUR will find some support. In Australia aside from the RBA, retail sales and the federal election this weekend will be in focus. Improving risk appetite will be constructive for the AUD.

In Asia attention will remain on the INR and IDR this week, with both currencies gaining some ground in the wake of USD swap measures with oil companies in India and a policy rate hike in Indonesia. Stability may prove temporary but a slightly firmer tone to risk appetite at the start of this week may give more room for upside in these currencies in the short term. Further out, it is difficult to see any sustained reversal given the prospects for higher US yields, more capital outflows and domestic fundamental fragilities.

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USD edges higher

August 29, 2013 — Mitul Kotecha

There appears to be some prevarication over possible military strikes on Syria resulting in less angst in markets over an imminent strike. Consequently risk appetite edged higher overnight while US Treasury yields also rose. Potential military strikes have also led to firming oil prices. Pressure on vulnerable emerging market assets has continued unabated however, with tapering worries and domestic vulnerabilities resulting in ongoing capital outflows.

In Asia the INR and IDR remain under considerable pressure. However, INR forwards recovered somewhat overnight and the spot rate strengthened in the wake of the introduction of a forex swap window for Indian oil firms. The measure will help to alleviate some of the demand/supply pressures for USDs but is however, unlikely to arrest the decline in the INR for long. In Indonesia the central bank may increase policy rates by 50bps today which ought to help the IDR in the short term.

The USD gained a little ground as US yields rose. The USD may benefit as markets fret about possible military action against Syria resulting in an attendant rise in risk aversion. Nonetheless, a series of negative data surprises over recent days contrasting with positive surprises in Europe leaves the USD rather vulnerable against major currencies. In contrast the USD is set to continue to remain firm against many emerging market currencies given the ongoing outflow of capital in the wake of higher US yields and tapering fears.

AUD’s tentative recovery in early August has proven to be an abject failure. Like many other high beta currencies AUD has suffered as risk aversion has intensified recently. Additionally speculation of further policy easing has also dampened the AUD. Consequently speculative sentiment remains weak. In reality, further rate cuts may depend on whether the AUD can rally following an over 15% fall since April. Any failure for the AUD to gain ground may stay the hand of the RBA. Although it has found some support today, further downside pressure is likely with a breach of the 5 August low at 0.8848 expected.

GBP underwent some volatility in the wake of BoE governor Carney’s speech. Initial weakness was bought into as shorts were covered however, leaving the currency back where it started. Carney’s speech was interpreted as dovish, with the governor noting that the BoE was read to loosen policy if higher market rates impacted the economy. Nonetheless, there was little immediate implication for policy. Overall GBP is likely to be constrained around resistance at 1.5590, with gains limited ahead of the BoE policy meeting next week.

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USD softens on Bernanke, GBP firm, AUD oversold

July 18, 2013 — Mitul Kotecha

Fed Chairman Bernanke did not deliver anything particular new in his testimony yesterday but still managed to provide further reassurance to markets. The Fed chief noted that asset purchases are not on a preset course while highlighting that ‘tapering’ will only occur if economic data warrants it. His concerns about high unemployment and very low inflation emphasized the Fed’s commitment to easy policy settings.

Assisted by a weaker than expected housing starts report bonds liked what they heard, with 10 year Treasury yields dropping below 2.5% while equities rallied and the USD softened. Gold struggled however, failing again to break above USD 1300 and settling back into its USD 1270-1300 range.

Overall, Bernanke’s comments remain consistent with tapering beginning later this year, most likely in September. He will repeat the testimony to the Senate Banking Committee today but markets will look for further clues in the Q&A session.

The positive tone will likely creep into Asian trading today in the absence of other key market drivers, with the USD likely to be restrained against both major and Asian currencies although Asian currencies may struggle given the IMF’s more cautious comments on Chinese growth in which they highlighted the growing downside risks to their growth forecast.

GBP/USD has registered a solid recovery since its recent low just above 1.48. Helped by a hawkish surprise in the Bank of England MPC minutes in which the vote was 9-0 to maintain current monetary settings as new governor Carney managed to unite the MPC view, GBP looks well supported in the days ahead.

What’s surprising is the lack of GBP progress against the EUR especially given the relative outperformance of UK economic data recently and prospects of strengthening momentum into H2 13. Given the potential for alternative monetary policy instruments in the months ahead some caution on GBP may be warranted.

Nonetheless, as GBP is positioned short versus both EUR and USD, its downside looks limited and if anything it will register gains versus EUR. Today’s retail sales may be a risk, but any set back to GBP is likely to prove temporary.

A lot of bad news is already priced into the AUD and sentiment has become overly bearish even if Australia’s government and central bank would prefer to see further currency weakness. There is a risk of an AUD rally in the event of better economic news given that market positioning has become extremely short (close to the all-time low).

A combination of improving risk appetite, renewed search for carry, stabilization in commodity prices and reasonably strong growth in China will eventually help to spur the AUD higher. Clearly there are risks to AUD as the transition process to Fed tapering and higher US yields takes effect but assuming that US yields move gradually as opposed to rapidly higher it is unlikely to stand in the way of an AUD recovery.

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US dollar buoyed by higher yields, Asian currencies hit

July 8, 2013 — Mitul Kotecha

Efforts by the European Central Bank and Bank of England to disassociate themselves from Fed policy actions were overwhelmed by the US June jobs report which revealed a bigger than consensus 195k increase in payrolls and upward revisions to previous months. The data reinforced expectations that the Federal Reserve would begin tapering in September while the data also pushed US yields sharply higher (close to 23 basis points increase in US 10 year yields following the data) and fuelling further USD strength.

In fairness attempts by the ECB and BoE to introduce ‘forward guidance” may eventually garner some success but US yields will continue to dictate market direction, at least until the markets successfully transition to the reality of Fed tapering, which could take several weeks. During the interim expect transitional volatility to continue, with risk assets globally remaining under pressure.

Further detail on Fed policy will be looked for from within the minutes of the June FOMC meeting to be released on Wednesday although it is unlikely that there will be any real divergence from the message delivered by Fed Chairman Bernanke and a host of other Fed officials over recent weeks. Consequently the USD is likely to retain a broadly firm tone as it reacts to the sharp move higher in US yields at the end of last week.

The Bank of Japan will likely be emboldened in its ultra easy monetary policy stance following last week’s ECB and BoE announcements although no further policy action is likely at this week’s meeting as attention shifts to Japan’s Upper House elections on 21 July. The JPY in particular will remain susceptible to USD strength and widening yield differentials, with potential to test USD/JPY resistance around 102.45 this week.

European attention will centre on Greece and Portugal as the former will be the focus of discussions at the Eurogroup / Ecofin meetings today and tomorrow, with officials set to deliberate Greece’s bailout. Attempts in Portugal to resolve political differences between the main coalition parties appears to have garnered some success in a deal which could stave off fresh elections. None of this will help the EUR which is set to remain under pressure as it edges towards support levels at 1.2744 versus USD.

USD strength will also continue to be exhibited versus Asian currencies this week. Equity fund outflows continue to damage regional currencies lower. Since the end of May Asia has recorded around USD 15.4 billion in equity outflows. Total inflows this year have dropped to only around USD 3.6 billion. A renewed fall in the JPY will added pressure to more JPY sensitive currencies such as TWD and KRW but the overwhelming influence is higher US yields and capital outflows which will continue to have particularly negative impact on currencies with external funding needs, especially the INR and IDR.

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