Euro treads water ahead of ECB decision

February 6, 2014 — Mitul Kotecha

EUR/USD has been treading water in a relatively tight range ahead of the European Central Bank meeting later today but the currency looks vulnerable to further slippage in the days ahead. Having dropped from its high around 1.3898 on 27 December the EUR has failed to sustain any bounce.

The ECB is unlikely to offer any support to the currency especially given that there is a small chance that they may even trim policy rates at today’s meeting. If the Bank does not cut rates today, the ECB is set to open the door to a cut in March, something that would undermine the EUR further.

Either way, the EUR is losing support and our quantitative models highlight the potential for further downside moves in the currency. Other measures such as short term interest rate differentials also highlight risks to EUR.

EUR/USD is set to edge lower to technical support around 1.3477 in the near term.

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Risk assets under growing pressure

January 27, 2014 — Mitul Kotecha

The growing turmoil in emerging markets is inflicting damage on risk assets across the board and no let up is expected in the near term. Even the rally in US Treasuries has failed to provide any relief to risk assets given the weight of negative sentient. Whether triggered by concerns about a slowing in Chinese growth, Argentina’s letting go of its currency support, and/or political tensions elsewhere such as in Thailand and Ukraine or a combination of all of these, the picture looks increasingly volatile.

Additionally, earnings and valuation concerns are acting to restrain equity markets. Finally, lurking in the background as another weight on asset markets is Fed tapering, with a further USD 10 billion reduction in asset purchases expected to be announced by the Fed this week (Wednesday). The combination of the above spells more bad news in the days ahead, with risk assets set to remain under pressure this week.

Amid the growing gloom in global markets there are still some key data releases and events that will garner some attention this week. In the US as noted the Fed FOMC meeting is the main event, but December new home sales today, January consumer confidence tomorrow and Q4 GDP on Thursday will also be important. However, the former two releases are set to record declines implying a mixed slate of US releases this week.

In Europe, coming off the back of some encouraging flash purchasing managers’ indices the January German IFO business climate index will record its third consecutive gain, while Spanish GDP is set to record its second consecutive quarterly gain. A slight rebound in January inflation is unlikely to stand in the way of a further reinforcement of forward guidance by the European Central Bank.

In Japan Trade data reported today revealed an 18th straight month of deficit while inflation data will reveal that the Bank of Japan still has a lot of work to do to reach its 2% inflation target implying that there will be some discomfort with the recent rebound in the JPY. Finally, expect no change from the RBNZ at its policy meeting on Wednesday, which will leave the NZD under further pressure.

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JPY and EUR find support

January 24, 2014 — Mitul Kotecha

Rising risk aversion is supporting the JPY but the currency may also be finding some support from the misplaced view that the Bank of Japan may not need to be any more aggressive in its policy stance to reach its 2% inflation target, with Japan’s finance minister noting that deflationary conditions have almost ended. Such talk looks premature.

Japan still has a long way to go to reach and sustain inflation at its target. The risk is that without any structural reforms (jobs market, manufacturing sector, immigration) deflation and slower growth could quite easily take hold again. In any case, the Bank of Japan is likely to embark on more aggressive policy in the months ahead in order to achieve the 2% target. In the near term USD/JPY looks supported around 102.50.

The EUR found some additional support from a strengthening in manufacturing confidence in the region, which highlighted that economic recovery continues to take shape. Fitch’s affirmation of Germany’s credit ratings at AAA has also helped sentiment towards the currency.

In the near term much of the same tone is likely although the relatively stronger US economic performance and tapering expectations will mean the USD will not fall too far. EUR/USD will face technical resistance around its 2014 high at 1.3776.

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On track for a positive end to the year

December 23, 2013 — Mitul Kotecha

A solid revision higher to US Q3 GDP at the end of last week sets up a positive tone for risk assets into year end even as they digest the imminent onset of Fed tapering. The data revealed a revision higher to a 4.1% QoQ annualised pace of growth and if anything lent credence to the Fed’s decision to begin tapering. The GDP data will be followed by a series of positive data releases in the US this week including November personal income and spending and a likely upward revision to December Michigan consumer confidence both on tap today.

Tomorrow, November durable goods orders and next week December Conference Board consumer confidence will also paint a picture of broadening improvement in economic conditions, providing further validation to Fed tapering. Against this background US yields should be well supported along with the USD. Into next year US economic outperformance will continue, leading to both higher US yields and a firmer USD.

A Japanese holiday (Emperor’s birthday) today will dampen market action although Japanese data releases over the rest of the week will highlight further progress on the economic front, with November inflation pushing higher and industrial output expanding at a healthy clip. USD/JPY retained a foot hold above 104 but the large extent of short JPY positioning highlights scope for profit taking. Even so, the rise in US Treasury yields suggest limited downside risks for USD/JPY.

There is on little on tap on the data front in the Eurozone allowing markets to digest the steps towards banking union announced last week. Consequently EUR/USD is set to remain rangebound around 1.3650-1.3750.

There may be more interest in events in China as money market conditions and confidence surveys garner interest. Tight money market conditions will weigh on regional sentiment. A likely decline in both the manufacturing and service sector purchasing managers’ indices will also act to dampen Asian currencies reinforcing the pressure already in place from a broadly stronger USD. News in Thailand that the opposition Democratic Party has decided to boycott the Feb 2 elections will add to political uncertainty and pile more pressure on the THB although the regional underperform remain the IDR.

Overall, a thinning in market conditions as both liquidity and market participants disappear for the holidays imply limited activity over coming days. The fact is that the end of the year will market a solid year for equities and a poorer year for bonds but at least the debate over Fed tapering timing has finally been put to the rest. More of the same is likely next year but notably the growth gap between developed and developing economies will narrow, which at a time of heightened competition for capital amid Fed tapering, suggests that capital flows will increasingly be steered towards developed economies.

Dear readers, this is my last post for 2013. Thank you for taking the time to read my blog posts. I wish all Econometer readers happy holidays, success, prosperity and good health in the year ahead.

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German election results help the euro

September 23, 2013 — Mitul Kotecha

St Louis Fed President Bullard put a dampener on the market’s euphoria in the wake of the Fed’s postponed ‘tapering’ announcement. He noted that the Fed’s decision was “borderline”, implying that the Fed was not far from pulling the trigger to the commencement of tapering. Going forward, the timing of tapering will be highly data dependent and obviously recent weaker data releases and possibly the political complications surrounding extending the debt ceiling and agreeing on a budget, played heavily on the Fed’s conscience. However, there are now plenty of questions about the Fed’s communication strategy. There will plenty of Fed speeches over coming days to provide more clarity although Janet Yellen, front runner to succeed Ben Bernanke as Fed Chairman, appears to be keeping conspicuously quiet.

A bounce in China’s September manufacturing confidence revealed this morning as well as a strong outcome in the German elections for Chancellor Merkel (see below) will nonetheless, help to settle some market nerves as the week commences. Merkel’s CDU/CSU party is set to win close to 42% of the vote, which amounts to a very strong mandate. Nonetheless, she will still fall short of an absolute majority while Merkel’s coalition partner the FDP failed to gain enough votes to pass the 5% threshold to win any parliamentary seats means that a new coalition government will need to be formed. The EUR has reacted well to the result, remaining above 1.3500 versus the USD and looks to set consolidate gains over the short term.

Aside from various Fed speakers there will be several data releases to digest over the week. In the US there will be September consumer confidence, August durable goods orders, new home sales, personal income and spending, and revised Q2 GDP data on tap. Overall US data will be reasonably good, with in particular GDP set to be revised higher. In Europe, aside from digesting the German election result there will be a host of business and manufacturing surveys including the German IFO business confidence survey. Consolidation or moderate improvement is expected to be revealed in these surveys, likely giving sufficient support for the EUR to maintain recent gains.

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