Green light for a break of USD/JPY 100

April 22, 2013 — Mitul Kotecha

Growth concerns came back to the fore in the wake of disappointing releases in the US and China as well as a downward revision to global growth forecasts by the International Monetary Fund. Data releases this week will not do much to allay growth fears. Although the advance reading of Q1 US GDP is likely to reveal a firm 3% QoQ annualised outcome the momentum in the US economy clearly tailed off towards the end of the quarter as more forward looking data releases attest to. The US and global economy is likely to pick up steam as the year progresses but admittedly recent data releases point to a similar pattern as recent years of firm Q1 activity followed by weakness later.

Meanwhile in Europe, purchasing managers’ indices and the German IFO business sentiment survey will show some further moderation, while credit conditions remain constrained indicating a downbeat outlook over the rest of the year. Consequently pressure for a policy rate cut from the European Central Bank is likely to intensify, with a cut likely by the end of this quarter. EUR/USD continues to trade above its 1.3001 technical support level but momentum is fading. Weaker economic data this week will likely undermine the EUR further.
gold
Following last week’s strong volatility in commodity and gold prices in particular some stability is likely over coming days, with gold retracing some of its losses and regaining the USD 1400 level. Equity markets finished the week in firmer mood after falls earlier in the week but the plethora of US Q1 earnings scheduled over coming days will help to determine whether the gains can be held. So far earnings have beaten expectations on balance, but notably expectations have been fairly low in the first place.

There was plenty of attention on currencies at the G20 meeting but the final outcome left the door open to further JPY weakness while the communiqué highlighted the “unintended negative side effects” for easier monetary policy. Although this was a veiled warning about potential build up of asset price bubbles as central banks ease policy, it is unlikely to sway the Bank of Japan from accelerating its balance sheet expansion. Aside from a probable breach of USD/JPY 100 there is unlikely to be much follow through from the G20 meeting this week.

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Cyprus deal reached but risk rally to fade

March 25, 2013 — Mitul Kotecha

A deal between Cyprus and the Troika has been reached “in principle”, an outcome that will be met with relief across markets, with the EUR and risk assets rallying. Most details have yet to emerge but it appears that only depositors above EUR 100k will be hit by a levy while the country’s second largest bank will be closed. However, the levy is likely to be fairly hefty.

The bailout deal will mean that the risks of Cyprus defaulting and leaving the Eurozone will have significantly diminished. Nonetheless, the deal will still involve a huge amount of work on Cyprus’ part to find the USD 5.8 billion needed to supplement the EUR 10 billion bailout and subsequently a lot of economic pain involved. The current risk rally is likely to fade quickly as markets begin to focus on the task at hand.

Elsewhere Italy begins the formal process of forming a government this week but the prospects of a quick resolution to the political impasse in the country looks very limited, with fresh elections still a very possible outcome. Reflecting the uncertainty both around Cyprus and Italy, economic sentiment gauges in Europe will likely decline in March.

Meanwhile in the US data releases will look more impressive, with Durable goods orders set to record an impressive gain in February and Q4 GDP likely to be revised sharply higher. Although consumer confidence and new home sales will slip, this will take place from healthy levels.

EUR/USD broke through 1.3000 following the Cyprus deal but will run into resistance around 1.3135 and we expect gains to fade in the short term as markets look past the headlines. Downside risks to EUR will remain in place due to relatively unfavourable data releases and ongoing political uncertainty in Italy.

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Cyprus vote awaited

March 19, 2013 — Mitul Kotecha

The big market mover overnight was the VIX ‘fear gauge’ spiking in the wake of increased risk aversion. Follow through looks limited, however. Markets look a bit calmer as the panic following the news of levy of bank deposits in Cyprus as part of a EUR 10 billion bailout for the country, eased. No sign of bank runs elsewhere in the Eurozone and the go ahead to make the deposit levy more progressive (ie a higher levy on bigger deposit holders) while maintaining the total amount at around EUR 5.8 billion, have helped to calm tensions.

Nonetheless, today’s delayed vote in Cyprus’ parliament to approve the levy could provoke more nervousness especially as the outcome is too close to call. Attention will therefore remain firmly fixed on developments in Cyprus, with economic data taking a back seat. The highlights on the data front include likely gains in the German March ZEW investor confidence survey and US February housing starts and building permits.

Currency movements look to be limited ahead of the Cyprus vote and then the Fed FOMC outcome tomorrow. The EUR remains the weakest link, with gains in the currency likely to be sold into although support around EUR/USD 1.2876 is likely to hold unless the Cyprus vote fails to endorse the deposit levy. If this is the case, expect further sharp pressure on the EUR and a much bigger drop in the currency and risk currencies in general. European and Cyprus officials would have to back to the table but in the meantime panic would ensue.

The RBA minutes released this morning maintained that the door remains open for further policy rate cuts although they did note that the economy is responding to previous cuts with the impact having further to run. There is little in the minutes to suggest further easing is imminent. The RBA minutes are unlikely to dent the AUD which remains resilient having managed to remain well supported even despite the Cyprus panic. AUD/USD is likely to consolidate around current levels just below 1.0400 before embarking on further gains over coming weeks.

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No surprises likely from ECB and BoE

February 7, 2013 — Mitul Kotecha

Markets appear to be entering into a more nervous period following several weeks of upside for risk assets. While risk appetite measures remain elevated equity markets appear to be running out of momentum in the short term.

A combination of European political concerns as elections approach in Italy, corruption allegations in Spain, currency frictions, the continued impasse in the US over impending spending cuts or simply a market that has overtaken reality, it appears that a pause in the rally in risk assets is on the cards.

A test of sentiment towards Spain will take the form of a Spanish bond auction today while central bank policy decisions in the Eurozone and UK will garner most attention today although no big surprises are expected as both central banks are set to keep policy on hold.

Anyone expecting the European Central Bank to echo the views on some European politicians by taking a stand against the strength of the EUR will be sorely disappointed. While clearly uncomfortable from a growth perspective the rise in EUR will be rationalised as a reflection of better market sentiment towards Eurozone assets. In fact the ECB could be a cause of EUR strength with its shrinking balance sheet playing a role in supporting EUR especially as it contrasts with the Fed’s balance sheet expansion.

Further ECB balance sheet contraction in the months ahead as LTRO payments are made could put into jeopardy my forecast of a lower EUR/USD (1.25 by end 2013). In the past the ECB has verbally intervened by warning on the strong volatility of the EUR but this is unlikely to happen anytime soon as 3 month EUR/USD implied volatility is still close to multi month lows. In any case the market may already be self correcting, with EUR appearing to lose some steam over recent days. Near term consolidation is likely around the ECB meeting.

The Bank of England in contrast to the ECB may be welcoming the moves in GBP over recent weeks given the stimulus provided to the UK economy from a weaker pound. An unchanged BoE policy decision today will have minimal impact on GBP, with more attention on the testimony of incoming governor Carney, especially given his recent comments about tying monetary policy to economic growth during “exceptional times”. The comments had already dealt a blow to GBP but unless Carney elaborates further I do not expect GBP to be hit much more.

Even so, GBP/USD risks remain to the downside given ongoing concerns about a credit ratings downgrade and a negative technical picture. Taking a short EUR/GBP position may offer some better prospects for those wishing to enter GBP long positions as the upside momentum in the currency pair appears to be flagging although I suggest waiting for more concrete signals of a turnaround before entering into such a position.

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Currency frictions

January 28, 2013 — Mitul Kotecha

I would like to apologise for the lack of posts over the last couple of weeks. I have been on a client roadshow presenting our macro and markets outlook for 2013 to clients across Asia. Having returned the mood of the markets is clearly bullish as risk assets rally globally. Recovery hopes are intensifying as tail risk is diminishing while central banks continue to keep their monetary levers fully open.

A heavy slate of US data releases this week will keep markets busy but overall I see little to dent the positive tone to risk assets over coming sessions. The main events this week include the US January jobs report (forecast +160k) and Fed FOMC meeting (no change likely) while consumer and manufacturing confidence, Q4 GDP and December durable goods orders are also on tap.

In the Eurozone attention will focus less on data but more on Eurozone banks’ balance sheets, with further capital inflows likely to be revealed, marking another positive development following last week’s strong payback of LTRO funds. Elsewhere, industrial production in Japan is likely to reveal a healthy gain while an interest rate decision in New Zealand (no change likely) will prove to be a non event.

As fiscal and monetary stimulus measures are largely becoming exhausted or at least delivering diminishing returns the next policy push appears to be coming from the currency front. The issue of ‘currency war’ is once again doing the rounds in the wake of Japan’s more aggressive stance on the JPY leading to growing friction in currency markets.

In contrast the easing of Eurozone peripheral strains have boosted the EUR, in turn resulting in a sharp and politically sensitive move higher in EUR/JPY. Central banks globally are once again resisting unwanted gains in their currencies, a particular problem in emerging markets as yield and risk searching capital flows pick up. Expect the friction over currencies to gather more steam over the coming weeks and months.

In the near term likely positive news in the form of large capital inflows into Eurozone peripheral banks and sovereign bond markets will keep the EUR buoyed. The USD in contrast will be restrained as US politicians engage in battle over the looming budget debate and spending cuts despite the move to extend the debt ceiling until May.

GBP has slid further and was not helped by the bigger than expected drop in Q4 GDP revealed last week which in turn suggests growing prospects of a ‘triple dip’ recession. The lack of room on the fiscal front implies prospects for more aggressive Bank of England monetary policy especially under the helm of a new governor and in turn even greater GBP weakness.

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