Is Greece Ready To Leave The Euro?

May 28, 2012 — Mitul Kotecha

I was recently interviewed by Sital Ruparelia for his website dedicated to “Managing Careers In The Modern Economy“ on my view on Greece, its potential exit from the Euro and its maket and economic implications.

Sital is a regular guest on BBC Radio offering career advice and job search tips to listeners. Being a regular contributor and specialist for several leading on line resources including eFinancial Careers and Career Hub (voted number 1 blog by ‘HR World’), Sital’s career advice has also been featured in BusinessWeek online.

Please see below to read the article

Sital: Mitul, so why is the election and change of government in Greece such a big issue?

Mitul: It’s a big issue because the outcome will decide whether Greece renegotiates its bailout, defaults on its debt and/or stays within the Eurozone or not. Greece has suffered from austerity and some political parties have benefited from the backlash against austerity leading to growing expectations of an eventual exit from the euro.

Sital: And why have the markets been falling globally over the last week?

Click here to read the rest…

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Political pressures afflicts the euro

May 7, 2012 — Mitul Kotecha

I’m in Dubai today presenting at a client seminar so am a little late on my blog post today. There is definitely lots going on however and all the talk is about politics. The mood is decidedly downbeat following the elections in France and Greece over the weekend. Risk assets have tanked while the USD looks firm except versus JPY. The elections over the weekend clearly dealt a blow to advocates of austerity resulting in a major increase in policy uncertainty.

Following the weaker the forecast US jobs report at the end of last week data over coming days will be less influential on the USD. In general I expect the USD to edge higher, helped by a decidedly more nervous market tone and higher risk aversion. The main interest for FX markets on the data front will be the April NFIB Small Business Optimism survey, March trade data and May Michigan confidence at the end of the week.

Although not a particular driver for the USD, the dip in the NFIB survey in March provoked concerns about the pace of US recovery and potential downturn in growth. This has been echoed in other data, which in turn has kept the door open to more Fed action restraining the USD in the meantime.

The ECB failed to rattle the EUR’s cage following its policy meeting last week although the lack of a dovish tone did help the EUR to rally briefly. We believe the market reacted prematurely and if anything the ECB may be setting the scene for a rate cut in June. Weak data has helped to undermine the EUR and I expect little or no improvement over coming days. Given that Germany has also succumbed to some weakness, the March German industrial production report will be monitored with interest on Tuesday.

The main driver for the EUR over coming days will be politics rather than the ECB or economic data however, with markets digesting the outcomes of the second round of the French Presidential election and Greek elections as well as the poor result for Chancellor Merkel in German state elections. Against this background and facing a bearish technical picture EUR/USD will struggle to recover, with 1.3060 providing a new resistance level.

Posted in Economics, France, FX, US. Tags: , , , , . Leave a Comment »

USD pressured by drop in yield

March 26, 2012 — Mitul Kotecha

Risk sentiment starts the week in positive mode. Weekend reports that Germany will not stand in the way of allowing the (European Financial Stability Facility) EFSF and its successor the European Stability Mechanism (ESM) bailout funds to be combined to boost the ‘firewall’ against contagion in the Eurozone has helped to boost sentiment.

Market direction may be obscured by month end and quarter end window dressing this week and despite the likely positive start to the week there are still plenty of factors to dent risk appetite over coming days, not least of which is the gyrations in oil prices.

The USD has slipped over recent days in line with a pull back in US Treasury bond yields. Notably there has also been a pull back in speculative USD sentiment as recorded in the CFTC IMM data. The ‘risk on’ tone to market that appears to be developing today will likely result in renewed downside risks to the currency.

US economic data continues to outshine economic releases elsewhere although US housing data last week was notably mixed. It will be the turn of March consumer confidence and February durable goods orders to capture the market’s attention over coming days.

A slight decline in the former and a healthy increase in the latter are expected. However, it seems unlikely that either release will be particularly supportive for yields and in turn the USD, so it will require a further increase in risk aversion to push the USD higher over coming days.

EUR/USD appears to be settling into the middle of a 1.30-1.35 range. Direction has increasingly been led by economic factors rather than debt issues recently but the news on the former has not been particularly good.

The March German IFO today and EU Finance Ministers meeting will be the key events of the week while there will also be interest on Spain’s budget as well as Spanish and Italian debt auctions. The IFO will likely prove to be more positive for the EUR than the manufacturing surveys last week, with an uptrend in the data continuing.

Moreover, hopes that Finance Ministers will bolster the ‘firewall’ to prevent other peripheral countries from repeating Greece’s debacle, will also likely keep the EUR supported. Overall, this implies EUR/USD will likely continue to creep higher over the week, with a test of technical resistance around 1.3356 eyed.

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FX outlook this week

February 19, 2012 — Mitul Kotecha

Direction in FX markets will largely hinge on developments at the beginning of the week in Europe but a US holiday (Presidents’ Day) will mean a subdued start. US data has continued to beat expectations as revealed by the recent gains in core retail sales, manufacturing surveys, jobless claims and industrial production. US recovery is taking shape and the USD is finally showing some signs of perking up on the news.

Rising US bond yields have provided the USD with some support although the impact has been muted by higher bond yields elsewhere. Nonetheless, despite ongoing speculation of more Fed quantitative easing the USD looks set to be on a slightly firmer footing over coming days. In a relatively light week of data releases housing data will be the major focus of attention.

Assuming approval for a second Greek bailout goes ahead (after much procrastination) the week will at least begin on a positive note for the EUR. Whether the EUR will extend gains will partly be determined by the release of flash February purchasing managers’ indices (PMI) and the German IFO business confidence survey. Our forecasts of weak service sector readings but firm manufacturing indices will be a mixed blessing for the EUR but overall data will remain consistent with mild recession.

Failure of EUR/USD to sustain a move below the psychologically important 1.30 level suggests a bit more resilience over coming days. Nonetheless, speculation of a Greek euro exit will not fade quickly and markets will likely gyrate between ‘risk on’ and ‘risk off’ depending on the latest comments from Greek or European officials. All in all, the EUR will continue to struggle to move higher.

For a change one of the bigger movers in currency markets over recent days has been the JPY. Its decline following more aggressive monetary policy action by the Bank of Japan has extended further. The move by the BoJ helped to suppress Japanese government bond yields (JGBs) allowing USD/JPY to move higher in line with relatively higher US yields. This week’s release of January trade data will support the case for more JPY weakness given the deteriorating trend.

The data will also strengthen the resolve of the Japanese authorities to intervene in FX markets should the JPY strengthen anew. Immediate focus will be whether USD/JPY can break through the psychologically important 80 level where JPY weakness will be met by plenty of exporters offloading USDs. I suspect the upside momentum in USD/JPY will fade over coming days unless US bond yields continue their ascent.

Posted in Economics, eurozone, FX, Japan, US. Tags: , , , , , . Leave a Comment »

EUR/JPY set to slip further

January 9, 2012 — Mitul Kotecha

The EUR looks set to plumb lower over coming weeks but how quickly will it fall given that market positioning is already at record low levels? The absence of official investors such as central banks who are normally strong buyers of EUR on dips, helped to pull the rug from under the EUR, resulting in a fairly sharp lunge lower. While it is easy to jump on the bandwagon expecting a further sharp fall this week, it may be worth taking some caution given the extent of short market positioning.

Admittedly officials in Europe are not too worried, and quite rightly so, given that the currency remains overvalued and still far too strong. Moreover, FX options market have also not reacted too much to the move, suggesting that for most, the decline in the EUR is not something to be too excited about. The underperformance of European data releases relative to the US over recent weeks adds further ammunition to those calling for a weaker EUR and assuming this divergence in data performance continues, the EUR will find it difficult to sustain much of a recovery.

Meanwhile the JPY continues to remain firm despite the generally firm USD tone this year. The JPY did give up some ground at the end of last week but shows little inclination to head back above the 78.0 level. Japanese official worries about JPY strength were evident in comments from Finance Minister Azumi who rolled out the usual mantra that they were watching FX market closely. He also expressed growing concerns about the drop in the EUR, highlighting concerns about the impact on Japanese exports as EUR/JPY drops to multi year lows.

Unfortunately for Japanese officials it appears that the EUR will get weaker and at least over the short term, the JPY stronger. EUR/JPY looks set to drop to its October 2000 low around 89.00 over coming weeks against the background of continued pressure in the Eurozone and elevated risk aversion.

Posted in Currencies, Economics, eurozone, FX. Tags: , , , , . Leave a Comment »
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