Ratings Concerns Hit Euro

December 9, 2009 — Mitul Kotecha

Post payrolls euphoria has faded quickly this week. Fed Chairman Bernanke’s cautious comments about growth had weighed on US markets earlier but it is now eurozone concerns that have come to the forefront. Markets were faced with a further reality check following a sharp drop in German industrial production and news that S&P put Greece on watch for a downgrade, with Fitch going a step further and downgrading Greece’s ratings to BBB+ with a negative outlook.

Greece with a budget deficit of 12.7% of GDP was picked on by the ratings agencies but sovereign debt / fiscal concerns apply to several countries across the eurozone. Indeed, since the recent Dubai shock, which continues to weigh on markets following a report today about an accelerated payment clause on $2 billion debt issued by the Emirates utilities provider, concerns have moved quickly to the health of government balance sheets. The potential for more European ratings cuts will keep sentiment towards eurozone markets cautious.

The UK should not be ignored in this respect and attention will turn to the UK pre-budget report though it’s difficult to see what Chancellor Darling can say that will help GBP. Other economic news has been disappointing with Australia registering a bigger than expected trade deficit in October and Japan recording a sharp downward revision to Q3 GDP, all of which will act to contribute to the “risk off” tone to markets today.

Although the direct brunt of the ratings downgrade was felt on Greek bonds the EUR has come under strong selling pressure registering a further sharp move lower from the 1.5141 high printed last week. Capitulation at the failure to break above recent highs led to some selling and this was exacerbated by the negative data and ratings news. EUR/USD is likely to have further to go on the downside but sovereign interest and bargain hunting will likely prevent a more severe decline. EUR/USD technical support is seen around 1.4623.

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Renewed caution

December 8, 2009 — Mitul Kotecha

Risk appetite is struggling to make any headway, with equities losing ground overnight. The positive impact on markets and adjustment to growth expectations following the US jobs report has given way to renewed concerns. Caution increased as Fed Chairman Bernanke introduced a dose of reality to markets talking about “formidable headwinds” to growth. As a result, bonds gained some lost ground and markets pared back expectations of interest rate hikes, leaving the USD vulnerable.

Eurozone risk factors continue to dampen market enthusiasm too, with ECB President Trichet warning of further bank writedowns and S&P downgrading the outlook for Greece and Portugal. The release of German factory orders data revealing a sharp 2.1% fall in October fed into concerns and played against strengthening recovery hopes in the region. EUR/USD failed to close below 1.4820 suggesting some alleviation of downside pressure. FX markets are likely eye stocks for further direction, with various EUR negative specific factors set to limit the upside.

The delayed release of additional stimulus measures in Japan will be the main focus of attention in Japanese markets assuming that an agreement is reached within the coalition. In the meantime markets will digest news that the current account surplus narrowed in October but was still up 51.4% from a year earlier. Additionally loan growth continued to slow, for the 11th straight month in November, adding further evidence that the injections of liquidity into banks are not finding their way into the economy.

GBP has come under growing pressure over recent days and bulls will be disappointed by the BRC retail sales data. The 1.8% YoY rise in like-for-like sales according will come as another disappointment for GBP. The gain was the slowest since August and below forecasts and as noted by the BRC looks even weaker when considering that the year ago figure was very weak. The sales data may fuel concerns about the recovery in consumer spending, especially going into the all important Christmas season. Attention will turn to the release of November Halifax house price data and October industrial production data later today and the pre-budget report tomorrow. GBP/USD looks likely to track EUR/USD for now and looks supported above 1.6390.

Although the USD has slipped as markets pare back expectations of rate hikes, the currency appears to be in a win-win situation and will likely see limited downside as risk aversion creeps back. Lingering concerns about Dubai as well as short covering towards year as well as other factors pushing risk aversion higher will likely see the USD retaining some support into the end of the week ahead of the US retail sales and Michigan confidence data

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Jobs data and the dollar carry trade

December 8, 2009 — Mitul Kotecha

To see my latest article in the Financial Times View Of The Day section click on the link below

Jobs data and the dollar carry trade

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Post US Jobs Data FX Outlook

December 5, 2009 — Mitul Kotecha

The massive upside surprise to US payrolls could prove to be a significant indicator for the USDs fortunes in the months ahead.  To summarize, payrolls dropped by 11k, much less than expected. Net revisions totaled +148k, the workweek rose and the unemployment rate fell to 10%, also better than forecast and likely a surprise to the US administration who hinted at a rise in the unemployment rate.

Equity and bond market reaction was as would be expected; equities rallied and bonds sold off.  Gold prices dropped sharply too.  However, and this is what was most interesting, the dollar strengthened. Why is this odd? Well, over the past 9 months any news that would have been perceived as positive for risk appetite was associated with dollar weakness.  This reaction clearly did not take place following the jobs data. 

It’s worth noting that going into the payrolls data markets were very short USDs as reflected in the CFTC Commitment of Traders IMM data which revealed the biggest aggregate net short USD position since 25 March 2008. The bounce in the USD could have reflected a strong degree of short covering especially against the JPY where net long JPY positions had jumped to close to its all time high.  Going into year end expect to see more position adjustment, perhaps indicating a return of the JPY funded carry trade is back on the cards.

The dollar’s reaction to the payrolls data was reminiscent of its pre-crisis relationship of buying dollars in anticipation of a more aggressive path for US interest rates and indeed markets brought forward expectations of higher rates following the data.  It is probably too early to believe that the dollar’s movements are once again a function of interest rate differentials but it is a taste of things to come. In any case, markets will be able to garner further clues from a speech by Fed Chairman Bernanke today.

The post payrolls dollar reaction could have also reflected the fact that EUR/USD failed to break above the 1.5145 high over the week resulting in a capitulation of stale long positions, especially as the move towards reducing liquidity provision by the ECB also failed to push the EUR higher. If the S&P 500 stays above 1100 EUR/USD could retrace higher for the most part a broad 1.48-1.51 range is likely to dominate over the week.  Nonetheless, a break below 1.4820 could provoke an accelerated stop loss fuelled drop in EUR/USD.  ECB President Trichet speaks today and may reiterate that the ECB’s measures to begin scaling back its liquidity provision should not be taken as a step towards monetary tightening.

USD/JPY proved interesting last week pushing higher in the wake of strong rhetoric by the Japanese authorities threatening intervention to prevent JPY strength. The BoJ’s attempt to provide more liquidity to banks also helped on the margin to weaker the JPY but the impact of the move is likely to prove limited. Nonetheless, exporters and Japanese officials may be more relaxed this week, if USD/JPY can hold above 90.00.  However, a likely sharp revision lower to Japanese Q3 GDP tomorrow will help maintain calls for a weaker JPY.

Posted in Bond markets, central banks, Currencies, Economics, Economy, equity markets, Europe, FX, Interest rates, Japan, Monetary Policy, US, US administration. Tags: , , , , , , , , , , , , , , , , , , , , , . 1 Comment »

Caution ahead of US payrolls

December 4, 2009 — Mitul Kotecha

The weaker than forecast November US ISM non-manufacturing, a negative UK press report about the problems in Dubai and caution ahead of the US jobs report have dampened risk appetite overnight though there is expected to be little action until the release of the US jobs report today, with some USD short covering likely ahead of the release.  The jobs data could add to disappoint, with data this week including the ADP jobs report, and the employment components of the ISM surveys consistent with a worse than consensus (-125k) reading.  

It was encouraging however, that jobless claims revealed a further decline (457k) to its lowest since November 2008 indicating further improvement in the jobs market, though the data will have little bearing on today’s payrolls data which as noted above will likely disappoint expectations.  A below consensus may fuel some increase in risk aversion and a slightly firmer USD though markets are most likely to settle into ranges in the near term. 

The JPY may make up some lost ground against the background of weaker equity performance.  Amidst the confusing messages on the JPY over recent weeks officials appear to be giving stronger hints at intervention, leaving the currency on the back foot over recent days.  The drop in the JPY may prove temporary however, if official rhetoric is not followed up by action; USD/JPY is likely to struggle to break through resistance around 88.60.  

Following the BoJ’s disappointing JPY P10 trillion operation announced this week attention turns to the announcement of new government stimulus measures which were reportedly expected today.  This may also prove disappointing however, as there appears to be disagreement between coalition partners on the size and composition of stimulus.  Finance Minister Hatoyama was expected to announce additional spending of up to JPY 4 trillion.  

There was no surprise that the ECB left the refi rate unchanged at 1% yesterday but some surprise in the steps to withdraw provision.  The ECB announced that the interest rate on the December 12-month tender will be indexed to the refi rate and that the full allotment at most of the ECB’s refinancing operations is extended until 13 April 2010 only. As much as ECB President Trichet tried to play down the perception that the steps were a signal of a tighter policy markets are unlikely to interpret it this way. 

Despite the shift in the ECB’s stance EUR/USD pared gains after reaching a high around 1.5141 but failed to test resistance at 1.5150 which is likely to provide strong resistance in the days ahead, reflecting the fact that markets had priced in a hawkish shift by the ECB already.   Going forward, if the market perceives the ECB as prematurely shifting towards a more hawkish stance against the EUR could suffer rather than find any support from such actions

Posted in central banks, Economics, Economy, equity markets, FX, Interest rates, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , , , . Leave a Comment »
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