Ranges dominate ahead of payrolls

October 4, 2012 — Mitul Kotecha

Markets were given a boost as US recovery hopes strengthened in the wake of encouraging data out of the US, with both the ADP private sector jobs report and ISM non manufacturing index beating forecasts. Consequently the data will lead to some revision higher of expectations for September non farm payrolls to +135k.

The European Central Bank (ECB) meeting today will not be particularly noteworthy as it takes place just a month after the Outright Monetary Transactions (OMT) announcement. There is an outside chance of a policy rate cut but recent ECB comments suggest this is unlikely. The main question remains about the timing of OMT activation but the ball is firmly in Spain’s court on this issue. So far there is no indication of an imminent request for Spanish aid.

The bottom line is that the ECB meeting will have nowhere near the same impact on the EUR as the last meeting, with the currency set to remain tightly range bound ahead of Friday’s US payrolls data or until Spain decides to formally request a bailout. EUR/USD will find resistance around 1.2971 and support at 1.2804 in the short term.

GBP continues to look vulnerable both against the EUR and USD. Having dropped from its highs above 1.63 versus USD the downward trajectory looks well entrenched. My quantitative models corroborate this view, with the models pointing to EUR/GBP trading closer to 0.82. Weaker data including both the manufacturing and service sector September purchasing managers indices (PMIs) both of which missed forecasts are helping to undermine the currency.

The Bank of England (BoE) meeting outcome today will not have much of an impact on GBP given a likely unchanged decision but we continue to believe that the central bank will expand its balance sheet further in November, which in turn will act as another drag on the currency.

AUD has been dealt a major blow this week following the surprise rate cut from the Reserve Bank of Australia (RBA). Clearly external concerns are leaving open the prospects of further rate cuts which in turn are damaging sentiment for AUD. Even so, my correlation analysis shows that the AUD has lost some of its interest rate sensitivity, suggesting that it may not suffer too much further.

The currency’s recent drop from its mid September high around 1.0626 has shaken out plenty of long positions and we suspect that further downside in the currency will be more limited. We expect to see good support for AUD/USD around the 1.0165 level while AUD is also likely to see some stabilisation on the crosses including against the NZD.

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Lower range for the JPY, GBP vulnerable

September 27, 2012 — Mitul Kotecha

The announcement of the Spanish 2013 budget, German jobs data, and the release of European confidence measures mean that attention will remain focussed on the Eurozone today and the news is unlikely to be good. The request for a Spanish bailout moves ever closer and could eventually provide some relief but prevarication continues to weigh on sentiment.

US data releases will not provide much solace for markets either, with weak durable goods orders and a revision lower to US Q2 GDP expected to be revealed. All in all, another tough session for markets is in store.

Meanwhile, currencies against the USD continue to look vulnerable, with EUR/USD, AUD/USD, USD/CHF in particular, close to breaching their 200 day moving average levels. USD/JPY has closed below the 78.00 level throughout this week suggesting that the currency pair may be moving into a new lower range. So far, there is little sign of potential FX intervention by the Japanese authorities.

Interestingly USD/JPY has dropped despite a general rebound in the USD, suggesting that it is very difficult for the Japanese authorities to blame the move on a weaker USD this time. Nor is the JPY particularly sensitive to risk aversion at present. For a change the move in the JPY cannot be blamed on a narrowing in US versus Japanese bond yield differentials too as the sensitivity of USD/JPY to yield differentials has dropped to an insignificant level while the US yield advantage has actually widened.

Net securities inflows into Japan have been strong recently however, suggesting either or both repatriation into Japanese fiscal half year end or renewed foreign interest in Japanese portfolio assets are helping the JPY. USD/JPY is expected to run into bids around the 77.10 level.

EUR/GBP has tracked the move lower in EUR/USD, while GBP/USD appears to be showing some resilience despite a generally firmer USD. Renewed Eurozone tensions are helping GBP as investors once again look for relative save havens although many would question whether GBP can really be considered as a safe haven.

With little on the data front in the UK today (only the third reading of Q2 GDP) GBP will be left to follow the travails of the EUR. Notably my models show that EUR/GBP divergence from its short term fair value estimate is growing, implying that the drop in the currency pair is unlikely to persist, with GBP resilience likely to give way over coming sessions. My estimate for short term EUR/GBP fair value is 0.8143. This is corroborated by my GBP/USD quantitative model, which also shows downside risks.

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US dollar finding some support

September 25, 2012 — Mitul Kotecha

Global growth concerns are contributing to undermine commodity prices, with most commodities dropping overnight. Gold was the biggest loser. Risk measures continue to creep higher as a host of worries especially the lack of traction in the Eurozone towards a Spanish agreement on a bailout and inability of Greece to agree on deficit cuts, afflicted markets.

The near term outlook is likely to remain one of caution until some progress in the Eurozone is in evidence. However, growth concerns suggest any improvement in sentiment will be tenuous at best.

On a more positive note, there at least appears to be some movement in the US towards finding a solution towards avoiding the fiscal cliff from taking effect as a bipartisan group of senators have agreed to formulate a deficit reduction plan.

The USD index has rallied over recent days despite expectations for weakness in the wake of the Fed;s announcement of QE3. It almost appears to be a case of sell on rumour, buy on fact. Admittedly the USD usually does weaken following QE with the USD index falling during the full periods of both QE1 and QE2 (-4.6% and -2.9%, respectively).

The counter argument in support of a firmer USD which we believe is supported by the massive deterioration in USD positioning over recent weeks and over 5% drop in the USD since 24 July is that the market has already priced in a lot of QE expectations into the currency.

Another factor that will likely play positive for the USD is the fact that the Fed is not alone in expanding its balance sheet. Many central banks are vying to maintain very easy monetary policy. The implication of this is that there is a battle of the balance sheets in progress that does not necessarily involve the USD being the loser.

EUR/USD has fallen well off its recent highs around 1.3173, with sentiment for the currency souring due to inaction by the authorities in Spain on requesting a bailout and disagreements over how to proceed on various issues including banking supervision. The drop in the September German IFO business climate survey, the fifth in a row, did little to help the EUR, with the survey adding to Eurozone growth worries.

Increasingly it looks as though EUR short covering is running its course and while there may yet be a further bounce in the EUR should the ECB begin its bond purchase programme, the near term outlook is more fragile. Business and consumer confidence surveys in Germany and France today will echo the weakness of the IFO in contrast to a likely firming in September US consumer confidence, contributing to a weaker EUR. A test of support around 1.2848 looms

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Euro relief, but will it last?

September 8, 2012 — Mitul Kotecha

The European Central Bank (ECB) decision to embark on outright monetary transactions helped to provide a major lift to markets but did not spur the EUR onto major greater gains. The program of conditional albeit unlimited bond purchases was much anticipated and well received (except by the German Bundesbank) despite many of the details being leaked in advance. The lack of EUR reaction in part reflected this.

In fact, the EUR appeared to rally more in the wake of aggressive buying of EUR/CHF, which finally moved away from its 1.2000 floor, possibly with some official help. Markets will now await the decisions of Spain and Italy which would have to formally request aid for the bond buying plan to be put into action and perhaps there will be some hesitation on the part of the EUR to push higher.

Although there could be some nervousness ahead of the decision by the German constitutional court on the ESM permanent bailout fund and Dutch elections on 12 September the ECB’s move has provided a floor under risks assets over the short term. Given the EUR’s strong relationship with peripheral Eurozone bond yields, the implication is that the drop in the yields will provide some support for the EUR.

Before everyone becomes too excited it should be noted that there is still a long way to go before the Eurozone crisis will be resolved given the many structural and growth issues that need to be overcome. Nonetheless, the downside risks for the EUR are clearly diminishing, leaving the currency in better shape than it has been for a long while.

The fact that EUR/USD is back above its 100-day moving average is a positive signal. Moreover, despite some short covering the market is still very short EUR. However, we would be cautious about becoming overly bullish. Further gains in the EUR will be difficult to achieve given the constant drag on the currency due to relatively weaker growth and the simple fact that many of the underlying issues in the Eurozone remain unresolved.

Posted in ECB, Economics, eurozone, Germany. Tags: , , , , . Leave a Comment »

Euro capped ahead of ECB meeting

September 6, 2012 — Mitul Kotecha

Having failed to get above the 1.2650 barrier EUR/USD looks restrained going into today’s European Central Bank (ECB) meeting. Reports overnight of a great ‘plan’ to buy bonds up to 3 years in unlimited size in sterilised fashion, helped provide some support to the currency but further gains will be limited. The ECB has already let the cat out of the bag and FX markets are quite correct to go into the ECB meeting with a dose of caution.

How will the EUR react? Given that much of what the ECB will do today has already been leaked the scope for positive surprises is limited, suggesting any upside for EUR will be capped although comments on yield targets (if any), conditionality, and the seniority issue will be important.

Profit taking, lowered expectations over recent days and uncertainty ahead of the US jobs report tomorrow will limit the damage to the currency, however. A drop to support around 1.2431 is the most that can be expected in the short term.

Unlike a likely rate cut from the ECB the Bank of England (BoE) is set to stay pat having embarked on further asset purchases in July. Weaker growth and upside inflation risk do not make for an enviable concoction. Although I anticipate further asset purchases later in the year, further action today is unlikely. This will mean that EUR/GBP in particular will lack independent direction and continue to track moves in EUR/USD (very strong sensitivity over the last 3-months). Given the potential for some further short term slippage in EUR/USD, EUR/GBP will likely follow suit.

As for GBP/USD it will struggle to sustain a break above this week’s high of 1.5935 unless US payrolls data tomorrow disappoints. Long speculative positioning means that GBP is vulnerable to profit taking especially having strengthened by over 3% since the beginning of June. The 28 August low around 1.5754 will provide near term support.

Posted in Bank of England, ECB, eurozone, FX, UK. Tags: , , . Leave a Comment »
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