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 »

Political events move into focus

February 18, 2013 — Mitul Kotecha

The start of the week will be relatively muted due to the US President’s Day holiday although Chinese markets will reopen following the New Year holidays giving a little more impetus to Asian markets.

The main event over the weekend was the G20 meeting. Ultimately it did not target Japanese FX policy, but instead the statement pledged not to “target our exchange rates for competitive purposes”. European Central Bank President Draghi may utter no more than this sentiment on the EUR exchange rate during his dialogue with the European Parliament today.

The lack of specificity will mean that the G20 statement will allow further unobstructed JPY weakness in the months ahead. In the near term markets will probe further downside in the JPY although we suspect that profit taking on long USD/JPY and EUR/JPY positions will restrict further downside potential. Expect plenty of resistance on any break above USD/JPY 94.00.

Attention will now turn to political events, in particular the looming elections in Italy (24th) and the formulation of a bailout for Cyprus in the wake of elections there. In the US the looming sequester may prompt some nervousness for markets over the coming days given the approaching deadline.

Data releases this week will be a little more encouraging following the recent plethora of data revealing a global softening in activity towards the end to 2012. In Europe gains in the German ZEW and IFO investor and business sentiment surveys will bode well for the region although the rest of the Eurozone will not look as upbeat as Germany. Despite the likely firmer German data expected over coming days EUR/USD is likely to remain restrained ahead of Italian elections, with strong resistance seen around 1.3462.

In the US there will likely be little new in the Fed’s FOMC minutes, with no new signal that the Fed is about to shift its policy stance despite a few nervous FOMC members. US Housing indicators will look a little softer but will not detract from the improving trend in housing activity currently underway. Meanwhile, relatively well behaved CPI and PPI inflation releases will pass reasonably quietly, provoking little nervousness in interest rate markets.

Finally in the UK the Bank of England MPC minutes will show a unanimous decision on policy settings. Unfortunately this will give little to help to GBP although it increasingly looks as though EUR/GBP is topping out even if GBP/USD looks vulnerable to further slippage.

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USD under pressure, except versus JPY

January 14, 2013 — Mitul Kotecha

Following another positive week for risk assets where equities in particular benefitted from substantial capital inflows this week is unlikely to look much different. A host of earnings, especially from financials will help dictate the equity market and in turn risk tone over coming days. There will also be plenty of focus on speeches by various Fed and European Central Bank (ECB) officials including Fed Chairman Bernanke today.

The week will start off in more subdued fashion however, with a Japanese holiday and little fresh news to digest over the weekend. Hope and faith in global economic recovery helped by data releases in the US and China in particular, have helped to calm markets while there is little angst as yet about the looming debt ceiling / spending cut negotiations in the US.

Despite the rush into equities, core bond yields appear to have hit a short term ceiling. Meanwhile, the USD is likely to maintain a weaker tone over the short term except versus JPY where the currency pair has broken through key technical barriers on the top side and is verging on a break of 90.00 helped by more comments over the weekend by Japanese Prime Minister Abe pushing for a 2% inflation target to be implemented.

Data releases this week will maintain the growth recovery story in the US while the Eurozone will continue to show a weaker trajectory. In the US there are plenty of releases to chew on including December retail sales, inflation, industrial production, manufacturing surveys, housing starts, Michigan confidence, and the Fed’s Beige Book. Overall, US releases will help paint a picture of steady and gradual recovery.

In contrast the Eurozone data slate is more limited and what there is (German GDP, Eurozone industrial production) will be less impressive supporting the view of Eurozone economic underperformance over coming months. Admittedly this has yet to affect the EUR which continue to benefit from peripheral bond yield compression and receding crisis fears although EUR/USD will likely run into resistance around 1.3385 which if broken will open the door for a test of 1.3486.

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