JPY, EUR and GBP view

December 17, 2013 — Mitul Kotecha

It is highly unlikely that the Bank of Japan adjusts policy at its meeting later this week but further action next year remains likely. More importantly for USD/JPY will be the actions of the Fed this week and the subsequent move in US yields. US 10 year yields have struggled to sustain a move above 2.9% recently, reducing the yield advantage over JGBs and in turn pulling USD/JPY back from its highs.

It is only a matter of time before US yields resume their uptrend and in this respect the outlook remains for more USD/JPY upside. Nonetheless, I am cognisant of the large short (CFTC IMM) JPY position in the speculative market, which into year end suggests plenty of scope for position squaring and short USD covering.

The EUR is set to end the year on firm note but further upside looks limited and the risk / reward favours selling the currency from current levels. Although economic data reveals continued improvement as reflected in the flash Eurozone composite purchasing managers’ index yesterday, much in terms of recovery expectations is in the price.

While a strong basic balance (current account + FDI + portfolio flows) continues to underpin the EUR I do not expect this to persist. Nonetheless as many bears have found out the EUR is a difficult currency to sell and while EUR/USD is likely to increasingly struggle on its approach to 1.3800, any sell off will not be rapid unless the ECB belatedly adopts a more aggressive monetary policy stance.

Like the EUR, GBP is struggling to push higher, as profit takers emerge and a dose of reality sets in given the magnitude of its rally versus USD over recent months (around 10% since July). The rationale for GBP’s gains are clear; surprisingly good economic data and a reassessment of monetary policy implications. However, GBP bullishness has resulted in net long speculative positions reaching their highest since 15 January 2013.

Further GBP gains will require yet more positive economic surprises but this is unlikely to be delivered in the jobs data, inflation data and Bank of England MPC minutes over coming days. Consequently GBP/USD is unlikely to extend gains above 1.6300 in the near term.

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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.

Posted in Asian currencies, Australia, Bank of England, ECB, Economics. Leave a Comment »

Bad month for the US dollar, gold benefiting

October 24, 2013 — Mitul Kotecha

Any market rally predicated on poor economic news was always going to look tenuous at best and this appears to have been the case following the disappointing US jobs report this week. Concerns about a tightening in short term Chinese money market rates and about the magnitude of bad loans written off by Chinese banks in the first half of the year were sufficient to trigger a drop in risk assets yesterday, with losses failing to be recovered thereafter.

News in Europe was a little better, with the Spanish economy emerging from a two year recession. The positive data tone in Europe will be echoed today, with flash Eurozone purchasing managers’ indices (PMI) set to reveal relatively resilient manufacturing and service sector confidence readings. Cautious trading is likely in the near term, with Chinese PMI data set to give direction.

It’s been a bad month for the USD and the news keeps on it getting worse. This week’s disappointing US September jobs report and consequent paring back of Fed tapering expectations has renewed the status of the USD as a funding currency. At a time when risk aversion and implied FX volatility have dropped to multi year lows, attraction for yielding currencies is set to strengthen.

This does not bode well for the USD over the short term but the picture could change if US yields rise again over coming weeks. Indeed, one of the key reasons for the strengthening in EUR/USD over recent weeks has been a narrowing in the Treasury-Bund yield differential but I expect this to reverse as US yields rise. Much will depend on the data flow but as yet I am unwilling to throw the towel in for my medium term positive USD view.

USD/JPY has been pressured lower as the yield advantage between US 10 year Treasuries and JGBs has narrowed. The delay in Fed tapering expectations also means that the relative balance sheet positions of the Fed and BoJ will be less negative for the JPY over coming months than previously expected. Additionally capital outflows from Japan have yet to materialise; although there has been a net outflow of portfolio capital from Japan over recent weeks it is small relative to strong inflows over previous weeks.

Even the historically strong correlation between JPY and risk appetite has broken down recently as indicated by the absence of JPY selling pressure even as risk appetite has improved. Disappointment with the progress of reforms are also acting to limit JPY downside. As a result the prospects of a sharp rally in USD/JPY over coming weeks is receding.

Gold has been a key beneficiary of the weakness in the USD and lower US bond yields. Supporting its gains is seasonal demand around this time of the year especially from India although notably ETF demand has yet to pick up significantly. Despite its recent rally the upside potential for gold looks limited and USD 1350 looks like a major cap. In the near term gold is likely to gyrate around its 100 day moving average at 1324 but further out we expect a decline in prices to resume.

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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 »

Risk appetite continues to shrink

June 13, 2013 — Mitul Kotecha

Risk appetite continues to shrink as the ongoing nervousness over Fed tapering continues to provoke significant position adjustments across markets. Markets will have to wait for next week’s Fed FOMC meeting to find to find greater clarity over the timing and extent of Fed tapering although there will be some further input to the Fed decision from today’s US May retail sales release.

In the meantime US Treasury yields continue to move higher even as risk aversion also intensifies, revealing the extent of the shake out that is currently being felt in US bond markets. The USD which would usually be expected to rally on higher yields and elevated risk aversion, remains under pressure against most major currencies although it continues to run havoc against emerging market currencies.

USD/JPY’s decline is showing no sign of abating. The combination of elevated risk aversion and disappointment over recent policy announcements, in particular the lack of detail about Prime Minister Abe’s third arrow, has prompted ever more upside for the JPY. The impact of these factors is negating the impact of higher US Treasury yields, which would usually act to push USD/JPY higher.

As the rout in equity markets appears to be showing little sign of subsiding the JPY looks firmly supported in the near term, especially as the picture is unlikely to change ahead of next week’s FOMC meeting. Additionally, the options market looks to be expecting more JPY upside as reflected in risk reversal skews, with volatility overall continuing to look elevated.

The RBNZ policy decision overnight provided another blow to the NZD, with the central bank highlighting that economic growth is “uneven” and noting that the kiwi remains overvalued, acting as a burden on the tradables sector of the economy. Moreover, in the Q&A session governor Wheeler maintained the pressure on the currency, indicating once again the risks of FX intervention to weaken the NZD if needed.

After dropping by over 8% since its cyclical peak on early April the NZD looks set to remain under pressure in the short term amid elevated risk aversion although it was encouraging that the currency did not fall further following the RBNZ. Our valuation models show that the currency is oversold and if anything the selling pressure will abate over coming weeks.

Posted in Bank of Japan, Economics, Japan, New Zealand. Tags: , , , . Leave a Comment »
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