Plenty of data and events before winding down

December 2, 2013 — Mitul Kotecha

Although markets already appear to be in wind down mode ahead of the year end holidays there is plenty of data and events over coming days that could change the complexity of market activity. To begin the week news that that China’s official November purchasing managers’ index remained at an 18 month high will bode well for markets, especially in Asia.

Elsewhere it is still too early to gauge how well the four day spending over the US Thanksgiving holiday fared for US retailers although initial indications suggest that spending will be down on last year. Over coming days there will be plenty of evidence to finalise opinions about what the Federal Reserve will do at its December 17-18 FOMC meeting. US data releases this week include the November ISM manufacturing survey, home sales, Fed’s Beige, US Q3 GDP revision and the November jobs report.

Ahead of the Fed meeting other central banks will be in focus this week including the European Central Bank, the Bank of England and the Reserve Bank of Australia. No change in policy is expected from any of them leaving all the attention on the US jobs report. This ought to ensure that the asset allocation shift from bonds to equities will leave equities around record highs while core bond yields continue to edge higher.

The USD has failed to benefit versus EUR despite higher US yields but has made gains against the JPY and many commodity and EM currencies. I look for the USD to move higher over coming weeks. Overall risk appetite is likely to remain supported into year end although much will depend on the plethora of data releases and central bank meetings this week.

EUR is looking increasing stretched around current levels, especially given the likelihood that the ECB will sound relatively dovish this week, with staff growth forecasts likely to be revised lower and inflation forecasts remaining below target. The strength of the EUR is clearly acting as a counterweight to efforts to ease policy but efforts to sell the currency continue to face renewed buying interest. Technical resistance around EUR/USD 1.3627 ought to provide a short term cap.

GBP has made somewhat better progress against the EUR and there appears to be little to stop its upward progress at present. Meanwhile USD/JPY remains under upward pressure, with last week’s inflation data highlighting that there has been some progress on ending deflation although the likelihood of more Bank of Japan easing in the months ahead suggests that further JPY downside is in store.

Aside from the JPY last month’s biggest underperformers in Asia were the IDR and THB. There is little sign of this pattern changing. Indeed, in terms of Asian FX relative value in terms of North versus South East Asia continues to pay dividends. Both Indonesia and Thailand registered outflows of equity capital last month compounding the pressure on the currencies.

THB has taken another leg lower in the wake of escalating protests over the weekend and looks set to test its 6 September USD/THB high at 32.480. As noted by the BoT governor the protests are affecting the economic outlook. In Indonesia questions about the external balance remain a weight on the currency An expected widening in the October deficit and higher November inflation will not help the IDR today.

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Gyrating expectations for Fed tapering

November 18, 2013 — Mitul Kotecha

Gyrating expectations for Fed tapering have left FX markets in somewhat of a limbo. Just as markets had shifted expectations for Fed tapering to next month or January 2014 Fed Chairman nominee Yellen managed to add a dovish spin on things by indicating strong support for ongoing Fed quantitative easing. The USD hasn’t been harmed too much as policy expectations in Japan and the Eurozone has also taken a more dovish slant leaving the EUR and JPY exposed to downside pressure. In contrast, GBP has benefitted from the Bank of England’s revisions to growth and employment expectations.

Yellen’s comments last week and some likely softer economic data releases this week including subdued CPI inflation, declines in retail sales and existing home sales, will likely cap US Treasury bond yields and the USD. Fed FOMC meeting minutes will have some bearing on market direction. Nonetheless, as noted above any pressure on the USD is set to be limited given the relatively dovish policy stances in other countries. Indeed, weak Eurozone and Japan Q3 GDP released last week have led to expectations of more monetary policy action from both the Eurozone Central Bank and Bank of Japan. Consequently EUR/USD will struggle to sustain any recovery above 1.3500 and USD/JPY will find a stronger footing above 100.

GBP/USD has retained a degree of composure but GBP bulls are better taking a long position against EUR where further GBP gains are likely given revelations in the BoE quarterly inflation report that the unemployment threshold will be hit sooner than expected, indicating higher policy rates earlier than forecast. Although the EUR may find some solace from better data this week in the form of flash manufacturing surveys and increases in the German ZEW investor confidence and IFO business confidence surveys any EUR upside will likely remain limited given expectations of further monetary easing by the ECB in the wake of very subdued inflation pressures.

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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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USD and EUR contrasts

November 11, 2013 — Mitul Kotecha

Finally markets appear to be reacting rationally to economic data. There was always a risk that strong US data releases would prompt renewed Fed tapering fears and result in a sell off in risk assets as has been the case in the past. However, the reaction to Friday’s much stronger than expected US October jobs data (+204k + upward revisions to previous months) was what would be normally be expected. US equities rallied, US yields rose and the USD strengthened.

While the US data added further weight to the potential for Fed tapering in December or January it was also recognised as evidence of a growing economy, and one that barely flinched in the wake of the government shutdown. This week’s US data is unlikely to detract from this view, with the November Empire manufacturing survey and October manufacturing production likely to have shown further improvements. This should ensure that the USD remains firmly supported over coming days.

In Europe, the opposite is true. Faced with very low inflation (this is an issue across most major economies) the European Central Bank cut policy rates last week and looks set to intensify its dovish shift with other policy measures to reinforce its forward guidance. Consequently the EUR sold off sharply and is set remain under pressure.

This week’s Eurozone data releases will add more weight to the argument for further policy actions, with Eurozone GDP set to barely expand in Q3 while inflation likely to be confirmed at 0.7% YoY in October. Meanwhile industrial production is set to have declined in September (-0.4%). Given the contrasts in data releases and in policy stance, EUR/USD is set to decline further, with initial support seen around 1.3295.

In the UK, there will be attention on the Bank of England’s Quarterly Inflation Report, with jobs data and retail sales also on tap. Faced with mounting evidence of firming growth, the BoE will likely have to revise its assumptions upwards. Consequently this bodes well for GBP and while gains against the USD are likely to be limited, EUR/GBP is set for a further downward correction, with a break 0.8300 on the cards shortly.

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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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