Data and central banks in focus

November 4, 2013 — Mitul Kotecha

Risk sentiment remains positive although there will be a test of the market’s optimism this week, with a heavy slate of data releases and central bank policy meetings on tap. A Japanese holiday today may start the week off on a quieter note but central bank decisions by the European Central Bank (Thu), Bank of England (Thu), RBA (Tue) and speeches by various Fed speakers will help stir things up.

While none of the central banks are expected to alter policy settings this week there will be plenty of attention on the ECB to see whether they open the door to further policy easing in the wake of softer data including CPI inflation last week. The rout in the EUR over recent days has reflected the expectation of a shift in ECB stance, with the currency likely to continue to edge lower as the meeting approaches.

On the data front, US numbers have looked somewhat perkier, including the ISM manufacturing survey at the end of last week which beat expectations, helping US 10 year Treasury yields to edge back above 2.6%. This in turn has boosted the USD and will likely help to keep the currency supported in the short term.

However, there will be some caution ahead of Friday’s October employment report, which is likely to look decidedly weaker. The expect the impact of the government shutdown to manifest itself in particular in the unemployment rate, which is set to increase to move higher. Aside from the jobs data, US Q3 GDP and October Michigan confidence are on tap.

In Europe, the European Commission will release its Autumn economic forecasts, with deficit forecasts for peripheral countries a particular focus.

In Australia a slate of releases including retail sales, which revealed a much stronger than expected 0.8% monthly increase in September are on tap. The sales data provides more support to the view that the RBA will be disinclined to ease policy further although the relative strength of the AUD will still give the central bank some cause for concern. September trade data and October jobs data are also scheduled for release this week. AUD will find some support from the sales data this morning but will face headwinds from a generally firmer USD.

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Fed leaves the dollar in positive mood, euro at risk ahead of ECB

October 31, 2013 — Mitul Kotecha

The Fed FOMC unsurprisingly left policy settings unchanged but the statement was perceived as less dovish, leaving a sour taste for risk assets. Crucially the statement did not validate market expectations that the Fed would hold off from tapering (reduction of Treasury and MBS purchases) until March next year, leaving the option of an earlier tapering on the table.

The bottom line is that the decision to taper will be highly data dependent, but the impact on markets was to leave the USD firmer and equity markets lower. The reaction is consistent with our view that a lot of dovishness was already priced into the market and that the risk / reward is for a more constructive USD environment.

Improvements in economic data, albeit from a weak level and a contracting balance sheet, have provided the EUR with support over past months. However, gains will not last and we suspect the EUR will be a casualty of relatively better US growth, Fed tapering and higher US yields over coming months. EUR has lost momentum this week and looks vulnerable to further slippage ahead of next week’s ECB meeting.

Soft inflation data out of Spain and German states yesterday highlights the room for the ECB to sound more dovish next week. Although firmer than expected October Eurozone confidence surveys limited some of the downdraft on the EUR overnight and highlighted further evidence of recovery, it is likely to do little to prevent further pressure on the EUR.

A couple of stronger than expected data releases helped the NOK to strengthen both against the USD and EUR. The August unemployment rate came in lower than expected (at 3.5%) while retail sales beat expectations in September (+0.7%). The NOK has been the only G10 currency to strengthen against the USD during October and after previous underperformance against the EUR, NOK looks set to make further gains against the latter.

One hurdle may be the announcement of Norway’s daily foreign exchange purchases for the coming month. Over September and October FX purchases were NOK 100 million per day and there is little reason to expect any change in November. Assuming that the October manufacturing PMI also registers some improvement tomorrow there is little to stand in the way of further NOK strength. We retain our long NOK/CHF trade idea.

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Awaiting the Fed

October 30, 2013 — Mitul Kotecha

Another positive day for US equities overnight reflected the ongoing gradual but steady improvement in risk sentiment. The USD also managed to shake off some of its malaise, rising against most major currencies although US Treasuries continued to flat line. Data in the US did little to change expectations for the Fed FOMC policy decision tonight; headline retail sales dropped (-0.1%) in September but core orders looked healthier (0.4%), while US consumer confidence slipped by more than expected in October (71.2) and US house prices rose (0.93%) in August.

Direction will be limited ahead of the Fed outcome where markets hope to garner some clues on the timing of the beginning of tapering. However, given that the consensus has clearly shifted to a March 2014 beginning of tapering it is difficult to see how the Fed could build on already dovish market expectations. Ahead of the Fed decision we will be able to assess further evidence on the state of the private sector jobs market, with October ADP jobs scheduled for release.

Given the risk / reward around today’s Fed meeting we remain constructive on the USD, with further albeit gradual recovery ahead. Indeed, it is encouraging that the EUR failed to hold onto gains even after ECB member Nowotny effectively gave the green light for further EUR strength when he noted that policy makers `have to live with` a strong EUR. EUR will continue to look a sell on rallies above 1.3800.

Nototny’s sanguine tone is not shared elsewhere as reflected in attempts by RBA Governor Stevens to talk down the AUD this week or by NZ’s central bank, noting that the strength of the NZD could give scope to delay interest rate hikes. GBP also seems to be failing to shake off the after effects of relative dovish comments by Bank of England MPC members over recent days. The overall winner appears to the USD especially as a lot of dovishness is already priced into the currency.

The USD is also set to take a firmer tone against Asian currencies over the short term. Asian currencies most sensitive to USD strength are SGD, MYR and PHP and these currencies will be most exposed in the short term to further downside risks. IDR also looks vulnerable given the continued outflows of equity portfolio capital from Indonesia over recent weeks (month to date outflows USD 175 million). KRW looks more stable although disappointing September industrial production data released this morning will put a firm cap on the currency.

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Bracing for the worst

September 30, 2013 — Mitul Kotecha

There was little progress over the weekend during discussions between US politicians attempting to agree on a budget deal and thus avoiding a partial government shutdown by the end of today. The US Senate is now set to reject a House of Representatives plan to delay President Obama’s Affordable Health Care Act while renewing funding for the government until December 15, leaving an ongoing stalemate in discussions.

Markets are bracing for the worst, with risk aversion rising, US equities and the USD falling. Meanwhile US Treasury yields remain capped having dropped sharply since early September. Political shenanigans in the US threaten to overshadow the US September jobs report at the end of the week. Nonetheless, the data will provide major clues to the timing of Fed tapering regardless of the budget/debt discussions.

It’s not just in the US where politics is fuelling market tensions. In Italy former Prime Minister Berlusconi withdrew his party’s support from the coalition government, leaving current Prime Minister Letta scrambling to form a new parliamentary majority in order to avoid snap elections. The impact will likely be felt on Italian and peripheral bond yields over coming days.

Meanwhile following elections in Germany last week coalition discussions to form a new government are ongoing although no deal is in sight yet and talks could go on for some time yet. Political uncertainties are unlikely to alter the European Central Bank’s (ECB) course this week, with an unchanged policy decision expected although benign inflation and weak credit growth will reinforce the need for an easing bias and forward guidance. Political issues are set to dominate markets over coming days, leaving risk aversion elevated and risk assets under generalised pressure.

The USD index lurched lower in the wake of the uncertainties in the US, extending its drop from early September. The near term prospects for the currency are bleak, with limited potential for any upside unless a budget deal is reached. Safe haven currencies in particular the JPY will be buoyed in this environment. The EUR will not fully be able to take advantage of USD weakness however, given the political tensions within the Eurozone.

In terms of high beta emerging market currencies including Asian currencies, any positive impact from the fact that US yields are capped, with 10 year treasury yields dropping sharply recently (higher US yields have been negative for EM currencies over past weeks so a drop will be positive for them) will be outweighed by rising risk aversion, leaving most Asian currencies vulnerable.

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Watch to watch this week

September 9, 2013 — Mitul Kotecha

While the world awaits US Congress’ vote on military action in Syria there is at least some distraction on the data front. Friday’s US August employment report contributed a further layer of uncertainty to the Fed tapering debate. Payrolls came in lower than forecast, with downward revisions to previous months. The unemployment rate dropped 7.3% but this was largely due to less people looking for jobs, something that the Fed will take into consideration.

It is doubtful that the jobs data will prevent tapering beginning at the September 17-18 FOMC meeting but it does support the view of a smaller (USD 10 billion) taper. In any case, data this week will if anything reinforce expectations that the Fed will commence tapering asset purchases this month, with a solid August retail sales reading forecast. Consequently the USD is set to maintain a firm tone into this week.

Eurozone markets may be dented by ongoing political issues, with Italian politics in particular legal action against former PM Berlusconi in focus. Meanwhile, worried that its forward guidance is having less impact than hoped for as core bond yields rise the Eurozone Central Bank sounded decidedly dovish at its policy meeting last week. The dovish cause will be supported by a contraction in Eurozone industrial production. As a result, the EUR will remain capped over the coming days.

Similarly the Bank of England has had little success in containing the rise in gilt yields with its forward guidance given the positive run of UK data releases over recent weeks and a likely firm UK September jobs report will make the job even more difficult. Outperformance of UK data continues to support relative GBP strength especially against EUR.

Elsewhere news that Japan has been awarded the rights to host the 2020 Olympics has boosted growth expectations and hit the JPY even as the debate over whether to increase the consumption tax grow. An upward revision to Japanese Q2 GDP releases this morning supports the view that the economy will be able to withstand the tax hike.

Meanwhile Australian markets will be buoyed by the election victory of Tony Abbott’s Liberal-National Coalition although notably it will have to deal with a host of minority parties to pass legislation through the Senate. AUD will likely see a post election boost in the short term.

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