USD firm versus EUR but not against JPY

January 20, 2014 — Mitul Kotecha

Finally back in the office after two weeks of traveling and it appear that the upside momentum for equity markets has definitely waned. Concerns about the pace of growth, earnings and valuations finally appear to have caught up with stocks. Meanwhile US Treasury yields have remained under downward pressure since the release of the disappointing US December jobs report despite some encouraging data since. In Asia China’s GDP release for Q4 reveaked some loss of momentum, with growth decelerating to 1.8% QoQ. Nonetheless, the annual pace of growth looked reasonably healthy at 7.7%, suggesting a limited reaction in markets today.

A US holiday today will likely keep a cap on market activity today but there will be plenty of Q4 earnings reports over coming days to give further direction. In terms of policy decisions the Bank of Japan and Bank of Canada will likely keep policy unchanged following their policy decisions this week. The BoC is faced with inflation well below target while the BoJ continues to battle to push inflation towards its 2% target. Both central banks will maintain easy policy.

On the data front there is very little of note in the US to focus on, with the main release the December existing home sales report on Thursday where a rebound of 1% is expected. European data releases may prove to be more interesting, with the release of flash purchasing managers indices on tap. Further gradual gains are likely to be registered in January although there will be attention on France which has lagged other countries.

Ratings decisions by Moody’s and Fitch on Germany and France, respectively, will also garner some attention. Rumours of a German downgrade are likely to prove unfounded. In the UK the Bank of England MPC minutes will be is likely to reveal an unchanged outcome of voting to keep policy unchanged although the BoE is likely to adjust its guidance soon reflecting the quicker than anticipated fall in the unemployment rate.

The USD looks well placed to extend last week’s gains, especially against the EUR, with a drop below 1.3500 on the cards. Disinflation pressures and relatively soft growth highlight the potential for easier monetary policy. A variety of options for the ECB are on the cards but the EUR will struggle to make headway given expectations of more ECB action. Additionally the EUR appears to be benefiting less from reserves recycling flows, especially given that Asian central bank reserves accumulation has likely to have slowed. The deterioration in speculative positioning reflects the deterioration in sentiment for the currency.

In contrast USD/JPY will struggle too push higher given the drop in US Treasury yields. Additionally weaker Japanese stocks will not help given the correlation between the Nikkei and JPY. The Bank of Japan meeting this week will not give much support for a further move higher in USD/JPY given expectations of an unchanged outcome. Some consolidation around 104.00 is likely over the short term, with upside limited to technical resistance around 104.92.

I fly off to Mumbai tonight for the last leg of our Asia roadshow presentation series. Hopefully my next post can shed some light on the recent stability of the Indian rupee.

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Caution continues

January 7, 2014 — Mitul Kotecha

The cautious tone in risk assets was maintained at the turn of this week as equity markets slipped further overnight in the US and recorded mixed performances in Asia. While the rise in risk aversion is unlikely to reflect a major change in market sentiment, it does highlight that risk assets will not repeat the one sided moves recorded in Q4 last year over coming months. US equity valuations for example look far richer compared to historical valuations while earnings expectations are softer, suggesting that equity momentum may not be as robust.

Ahead of the key data and events this week including European Central Bank and Bank of England policy decisions and the US employment report, caution is likely to prevail. Highlights today include flash December Eurozone CPI inflation data, which is likely to show inflation pressures remaining subdued, German December employment data and the US November trade balance.

Disappointing US non manufacturing confidence data released yesterday (53.0 for the ISM non manufacturing survey against expectations of 54.7) has taken the wind out of the USD’s sails although most major currencies look set to gyrate in relatively tight ranges over the near term. JPY will find some support from a generally softer risk tone that has filtered through markets and may struggle to retake the 105 level.

Meanwhile EUR/USD has failed to hold onto recent gains, with sentiment turning less positive as indicated by the latest CFTC IMM data on speculative positioning. Likely soft Eurozone inflation data to be released today will likely undermine the currency further. However, given that it is unlikely that the ECB will sound any more dovish at this Thursday’s policy meeting the downside for the EUR is set to be limited, with technical support around 1.3525.

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Cautious start to the year

January 2, 2014 — Mitul Kotecha

Happy New Year!

2013 ended with a solid performance by US equities and further pressure on US Treasuries helped by a bigger than expected increase in US December consumer confidence. The S&P 500 ended close to 30% higher over the year while 10 year Treasury yields rose above 3%, registering an overall rise of around 108 basis points over 2013. In contrast commodity prices dropped sharply, with the CRB index recording a sharp drop and ending 5% lower over the year. Meanwhile the USD index ended the year close to where it began although this performance belies some significant volatility over the year, with losses against the EUR and gains against the JPY.

The first trading day of 2014 begins on a more cautious note as a disappointing reading for the December Chinese purchasing managers’ index (51.0 versus 51.2 consensus forecast) will cast a shadow over markets today. Indeed, the data alongside weaker commodity prices will weigh on AUD. Japanese markets will be closed over the rest of the week, while many market participants will not return until next week, suggesting limited activity. Nonetheless, as far as the JPY is concerned the currency is set to remain on the back foot versus USD given the ongoing widening in real yield differentials between the US and Japan.

Meanwhile EUR/USD looks like it will struggle to make much headway over the short term, with only the final reading of the December Eurozone PMI due for release today. The data will likely confirm a relatively healthy looking reading of 52.7, its highest reading since May 2011 but will unlikely provoke much of a market reaction. Instead markets will look ahead to the European Central Bank meeting next week. Recent ECB comments suggest little chance of another rate cut anytime soon despite a very subdued inflationary backdrop. Against this background any EUR slippage in the short term is likely to be limited although further out the relatively inferior Eurozone growth outlook compared to the US, highlights plenty of scope for downside EUR pressure.

Asian currencies will also look somewhat subdued in the wake of China’s softer PMI reading. Additionally a bigger than expected decline in Singapore Q4 GDP release (-2.7% QoQ annualised) will also not bode well although the drop in GDP will be seen as temporary, with official estimates still pointing to growth around 2-4% for 2014. In contrast robust export data from South Korea will be positive for the KRW in line with our view that the currency will be one of 2014’s outperformers along with the TWD and CNH. Elsewhere the THB continues to be hamstrung by political concerns, which are showing little sign of easing ahead of planned elections February 2.

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Firm US data not helping the dollar

December 9, 2013 — Mitul Kotecha

The US November employment report released at the end of last week helped to reinforce expectations that the Fed will begin tapering soon, possibly as early as the FOMC meeting in mid December. Non-farm payrolls rose by 203k while the unemployment rate dropped to 7%. Job gains have averaged around 180k per month over the last 6 months. The jobs data followed on from several other firm US data releases over the week highlighting strengthening signs of recovery.

Equities reacted well, rising as fears over tapering were outweighed by concrete signs of recovery. Meanwhile bond yields rose over the week although they slipped on Friday. Attention will turn to next week’s Fed FOMC meeting while this week’s data flow will be more limited. The main event will be the November US retail sales report where a moderate gain in sales is expected in terms sales outside of autos, providing the final clues to the Fed’s decision next week.

Elsewhere markets are still reeling from the ECB’s less dovish than expected statement last week as reflected in the subsequent strength of the EUR. Data this week in the Eurozone will be encouraging, with Eurozone industrial production set to rebound. This will be echoed in the UK, with hard data reflecting the strength in manufacturing surveys.

In Japan this morning’s data slate was disappointing, with Q3 revised lower and the current account registering a deficit for the second straight month in October although the JPY impact will be limited. Finally, the RNBZ is will hold a policy rate meeting this week although no change is expected from the central bank as recent mortgage restrictions will have reduced the need to tighten policy. Nonetheless, as reflected by the latest NZ housing data loan to value mortgage restrictions have yet to have a significant impact.

The USD failed to benefit from the solid data in the US last week undermined by some slippage in US yields, with the reaction indicative of a market that is becoming increasingly accustomed to the idea of an imminent Fed tapering. The USD index appears to be struggling into year end, with the EUR taking advantage of the USD’s inability to push higher especially given that the ECB did not appear to be in any hurry to add more monetary accommodation last week.

Conversely USD/JPY looks set to continue to edge higher as sentiment for JPY continues to deteriorate; latest IMM positioning data shows that net JPY positions have hit their lowest since July 2007. The next key technical resistance level is around 103.74. Firm trade data in China over the weekend helped to bolster AUD and NZD although the latter is benefitting the most, boosted overnight by strong house price data in November. Consequently AUD/NZD continues top plumb new depths.

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Rising risk aversion

December 5, 2013 — Mitul Kotecha

The US ADP November jobs report and October new home sales both beat expectations yesterday piling on the pressure on US Treasuries and adding further weight to support those looking for the Fed to taper at the December 17-18 FOMC meeting. Consequently non farm payrolls expectation will likely be revised higher from the current consensus of around 180k. In contrast the ISM non manufacturing index came in below consensus, with the jobs component slipping. US equities ended marginally lower while the USD held its ground. However, risk measures such as the VIX “fear gauge” moved higher. Rising risk aversion may reflect expectations of imminent tapering and some angst ahead of US budget talks.

US November payrolls data to be released tomorrow will be crucial to provide more decisive clues to the timing of Fed tapering. Attention ahead of the jobs report will turn to the European Central Bank policy decision where no action is expected although some downward revisions to staff forecasts are likely. We continue to expect a more aggressive ECB stance into 2014. The Bank of England and Norges Bank will also decide on policy rates but no change is expected in both cases. In the US an upward revision to Q3 US GDP is expected to around 3.1% QoQ annualised while jobless claims will also be in focus. Market nervousness is likely to continue today although activity is likely to be limited ahead of the US payrolls data tomorrow.

The USD should be supported due to higher US Treasury yields although USD/JPY has lost some ground in the wake of higher risk aversion. The large short JPY market position may also be limiting the JPY’s downside for now. EUR/USD is trading shy of its recent highs above 1.36 and could be vulnerable to a dovish ECB statement today as well as to growth forecast downgrades by the ECB. AUD continues to remain under pressure having traded just below 0.90 overnight in the wake of disappointing GDP data yesterday and is likely to remain vulnerable to further slippage. CAD was further undermined by a relatively dovish Bank of Canada statement following the decision overnight to leave policy rates unchanged.

Given that US Treasury yields have risen by around 33bps since the end of October it is worth looking at which currencies are most sensitive to rising yields. In Asia the most correlated currencies with 10 year US Treasury yields over the last 3 months and therefore most vulnerable currencies are the SGD, THB, and MYR. The least sensitive have been CNY, IDR and KRW. Playing long KRW / short SGD appears to be a good way of playing an environment of rising US yields, especially given that yields are set to continue to rise over the coming months.

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