Safe havens in demand

March 12, 2014 — Mitul Kotecha

Risk aversion increased further overnight, as reflected in the VIX “fear gauge and my Risk Aversion Barometer, both of which moved higher. Risk assets in general slipped, with US equities closing lower, while safe havens including JPY and gold were in demand.

Ukraine tensions have intensified, with diplomatic efforts yielding no success and Russia stating that it would recognise the results of the referendum in Crimea. Wheat prices are feeling the direct impact of these tensions, with prices rising to a 13 week high while in contrast copper prices continue to be hit by China growth worries.

The outlook today is not a positive one, with a negative follow through expected in the trading session. There is little on the data front of note, aside from Eurozone industrial production which is unlikely to be a market mover.

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Euro / dollar eyeing 1.40

March 10, 2014 — Mitul Kotecha

EURIMM

EUR has continued to push higher over recent weeks and looks well supported as inflows into European assets continues unabated. Although speculative EUR positioning continues to move higher above its 3-month average, suggesting that positioning is becoming a little more stretched, sentiment for the EUR remains firm. The ECB’s decision last week to refrain from any policy easing while not hinting at any easing in the pipeline, suggests that EUR/USD will remain a buy on dips on any decline to support around 1.3775. A test of strong psychological resistance around 1.4000 cannot be ruled out over coming sessions.

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The week ahead

March 10, 2014 — Mitul Kotecha

There are plenty of events to chew on over coming days including central bank decisions in Japan tomorrow and New Zealand on Wednesday. The Bank of Japan is unlikely to ease policy further so soon after its actions to boost loan growth while in contrast the RBNZ is set to begin its hiking cycle. On the data front US releases will still be weather impacted to some extent although February retail sales is likely to post a small gain. Moreover, Michigan confidence is set to rise, boosted by higher equity prices.

In Europe, attention will focus on industrial production releases in January, with French and Spanish IP data due to be released today. Overall production is likely to have expanded at a healthy clip of 0.4% MoM in the Eurozone as indicated by survey data. Finally, Australian jobs data is set to show some improvement on Thursday as the pace of deterioration in job market conditions slows.

In Asia the reverberations from the weaker Chinese data will likely impact sentiment across the region. Exports dropped by whopping 18.1% in February while imports rose more strongly than expected at 10.1% yielding a trade deficit of USD 22.99 billion. Central bank decisions in Korea and Thailand are on tap this week. Thailand is a close call, with risks of another policy rate cut but we expect the BoT to stay on hold. Currencies in Asia strengthened last week led by the IDR and INR. Gains this week will be morel limited, especially against the background of higher US yields.

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EUR eyeing ECB decision

March 6, 2014 — Mitul Kotecha

Will they or won’t they? Following the slightly higher than expected January CPI inflation reading and some improvement in economic data such as the Feb PMI manufacturing survey earlier this week expectations for policy easing by the ECB today have diminished. Consequently the EUR has been well supported above 1.3700 even in the face of growing conflict on its doorstep in Ukraine. The risk / reward today is therefore skewed to a bigger EUR (negative) reaction if the ECB does act to ease policy, a possibility that the market may not be giving sufficient credence too. For what it’s worth 3m interest rate futures and 2 year US – Eurozone yield differentials suggest that EUR/USD is overbought.

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US dollar restrained further

March 3, 2014 — Mitul Kotecha

The USD will continue to be restrained by poor weather conditions and lower US Treasury yields (around 2.6%), especially against the JPY which has also been supported by higher risk aversion and consequent safe haven demand. The USD index is at threat from dropping to its October 2013 lows around 78.998 (currently 79.828)

A similar story applies to the CHF, with USD/CHF hitting its lowest level since late 2011 around 0.8783. This pattern will not change in the short term, especially given the potential escalation in tensions in the Ukraine, keeping the CHF under upward pressure as safe haven inflows increase. EUR/CHF has dropped sharply as a result, with the resolve of the Swiss National Bank to support its line in the sand at 1.20 set to be tested shortly.

Risk currencies in contrast will likely come under growing short term pressure including AUD, NZD and many emerging market currencies. AUD/USD will likely trade with a heavy tone even though the RBA is unlikely to cut policy rates at its meeting tomorrow.

EUR benefitted from the upside surprise for Eurozone inflation but has run into resistance around 1.3800 versus USD. Speculative EUR positioning has continued to rise but the fact that CFTC IMM positioning has risen to above its 3 month average suggests that further EUR gains will be more limited.

Indeed although the USD continues to be restrained by weaker data and lower US yields, the potential for a dovish surprise from the ECB will limit the ability of the EUR to capitalise on USD weakness this week. Strong technical resistance for EUR/USD will be found around 1.3894 (2013 high).

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