Euro grinding lower as officials talk about Greek exit

May 14, 2012 — Mitul Kotecha

The week begins in sour mood although notably Asian market pressure was limited even in the face of ongoing Eurozone tensions. China’s cut in its RRR over the weekend helped to limit the damage to markets but there are still plenty of negatives to chew on. Notably European officials are openly discussing and even preparing for the possibility of a Greek exit from the euro, an outcome that has grown in probability as fresh elections loom in Greece.

FX markets have finally awoken from their stupor, with a spike in volatility and moves out of long worn ranges registered. The USD has extended its upward trajectory that began in this cycle on 27th April. The rally looks strong and sustainable but is built largely on the fact that the USD looks less ugly than some other currencies rather than on positive US economic developments.

Admittedly US recovery is taking shape but the data is not sufficiently strong to erase expectations of further Fed quantitative easing, a factor that will limit the ability of the USD to capitalise on weakness elsewhere. Data over coming days will not help to provide much clarity on the issues, with April retail sales likely to be soft and the Fed FOMC minutes unlikely to deliver much new information. Even so, risk aversion is intensifying, providing the USD with firm support, suggesting that the USD will continue to edge higher over coming days.

The EUR in particular has sustained a drop below the psychologically important 1.30 level, spelling more downside risks. Greek politics and the potential for fresh elections remain at the forefront of attention. A small amount of relief on upcoming Greek bond redemptions following the EU’s deliverance of EUR 4.2 billion funds will not be sufficient to offset political worries.

EUR will also find direction from the Eurogroup meeting of finance ministers meeting today who aside from Greek issues will also discuss the Spanish banking sector. Meanwhile, a meeting between French President and Hollande and Germany’s Chancellor Merkel will have the potential to move markets but the chances of a breakthrough on any fresh deal is limited.

Data releases will confirm Eurozone recession while the May German ZEW investor confidence survey is set to record a decline. All of this will not bode well for the EUR, with the currency set to grind lower over coming sessions. EUR/USD 1.2852 will be a crucial support level, a break of which will see EUR slide much further.

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Risk currencies under pressure

May 9, 2012 — Mitul Kotecha

Risk aversion continues to edge higher. This spells more bad news for risk/high beta currencies including many highly correlated currencies such as AUD, NZD and emerging market currencies.

Greece’s travails have come back to haunt markets and the inability to form a government puts at risk the whole bailout programme and possibly Greece’s ability to stay within the Eurozone. A failure to form a government will mean fresh elections in mid June and a delay in aid disbursements.

EUR/USD began the European session below the 1.30 level but I’m not convinced its heading much lower in the short term. The fact that the market is highly short (looking at the CFTC IMM data) means that positioning has already become very negative. Moreover, as in past months, there is plenty of inherent demand for EUR below this level. The better option is to play EUR weakness on the crosses.

UK economic news was soft overnight with the BRC retail sales survey plunging by 3.3%. GBP has acted as a semi safe haven against the background of the current Eurozone malaise but the data highlights that the job of the Bank of England is not particularly clear cut. No action is expected at tomorrow’s policy meeting leaving GBP reasonably well supported.

Safe haven currencies remain favoured, leaving the likes of the USD, JPY and CHF well supported. My quant models point to more short term downside for USD/JPY with a further decline below 80 remaining in place. One other currency that looks relatively attractive is the CAD. Relatively favourable fundamentals highlight the potential for CAD outperformance on the crosses

AUD downside remains intact and a drop below parity with the USD looms. A relatively austere budget after Prime Minister Gillard dropped a corporate tax cut has opened the door to potentially bigger easing from the RBA. While a lot of easing is already priced in the market will react by pricing in more cuts. Moreover, with a likely soft jobs report expected tomorrow and AUD’s susceptibility to risk aversion it all spells more weakness for AUD.

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US dollar tracking Treasury yields

May 2, 2012 — Mitul Kotecha

Despite the firmer tone to risk appetite the USD index moved higher tracking the move in US Treasury yields. Indeed, the USD’s reaction was actually opposite to what would be expected given the rally in risk assets but its move clearly reflects the growing influence of yields.

The surprisingly robust April ISM manufacturing survey following the disappointing Chicago PMI for the same month highlights that recovery is not straightforward, suggesting that USD gains will also not be straightforward.

March factory orders are on tap today but the bigger focus will be on the April ADP jobs report, which will give important clues to Friday’s payrolls data. Expectations centre on a 170k outcome for the ADP report, a smaller increase than the 209k registered in March. In the meantime I expect the USD to hold its gains.

As noted at the start of the week EUR/USD was poised to edge higher despite the bad economic news emerging from the region. EUR/USD has continued to strengthen over recent weeks despite the release of data showing Eurozone economic underperformance relative to the US. A case in point is the April Eurozone purchasing manager’s data to be released today, which will reveal further weakness, especially in peripheral countries.

Some easing in peripheral bond yields has helped to support sentiment for the EUR leading to further short covering in the currency but further gains are expected to be limited. EUR/USD now sits around the middle of its 1.30-1.35 range but further upside will be restricted ahead of the key US jobs data on Friday. EUR/USD resistance is seen around the 1.3385 level.

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Calm ahead of US payrolls and ECB meeting

April 30, 2012 — Mitul Kotecha

It’s non-farm payrolls week in the US, with currencies treading water until Friday when the report is released. Ahead of the data there are several other releases on tap which will give clues to the outcome of the April jobs report, including the ISM manufacturing survey and ADP jobs report. The USD has taken a softer tone as risk appetite improved and US bond yields dropped further.

Given the Fed kept open the door to more easing it will act as a restraint on the USD unless markets become convinced that there will no further Fed balance sheet expansion over coming months. In the meantime unless risk aversion spikes again the USD is set to find it difficult to sustain any gains.

It’s always the same story with the EUR, a tale of ongoing resistance to bad news. Weaker Eurozone confidence surveys as well as a downgrade to Spain’s credit ratings did little to weaken the EUR. The key event is the European Central Bank (ECB) meeting on Thursday but despite growing growth worries, a policy rate cut is unlikely as the ECB remains in wait-and-see mode.

Data releases will not be too damaging for the EUR, with monetary and credit aggregate set to rise and German retail sales set to rebound in March. The EUR looks poised to edge higher against this background in the short term, but will be constrained by uncertainty ahead of the US jobs report. Technical resistance to the upside will be found around the 1.3265 area.

The JPY barely flinched when the Bank of Japan announced an expansion of its asset purchase fund by JPY 10 trillion in its aim to reach a 1% inflation goal. Unfortunately for the BoJ the ongoing narrowing in the US Treasury yield premium over Japan JGB yields overwhelmed the negative impact of its action on the JPY.

Overall, my quantitative models continue to show USD/JPY lower over the short term, with a move below 80.00 on the cards. If as I expect, risk aversion also creeps higher, it will imply more short term upside JPY pressure. Trading will be relatively quiet, with no major data on the calendar due to Golden Week holidays in Japan.

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EUR resilience, AUD hit by soft inflation

April 24, 2012 — Mitul Kotecha

A distinctly downbeat tone to risk assets in the wake of disappointing manufacturing sentiment surveys in Europe and China and political uncertainties in Europe threatens to engulf markets today. There is very little on the data and events front that will change this as markets refocus to the outcome of the Fed FOMC meeting tomorrow. Consequently risk assets will remain under a degree of pressure in the short term unless the Fed delivers any fresh hints of more quantitative easing tomorrow.

A round of weaker than expected readings for Eurozone purchasing managers indices has led to a renewed wave of pessimism towards the Eurozone economy and selling in Eurozone assets. The collapse of the Dutch government over budget cuts and the results of the first round of French elections only added to the malaise. Once again however, the EUR remains resilient and has hardly flinched in the wake of bad news in the region.

I believe it is only a matter of time before the EUR succumbs to growing pressure, especially given a likely widening in its growth gap versus the US. Today’s bond auctions in Spain, Italy and Netherlands will be in focus but ought to provide little relief for the EUR, with the currency likely to edge towards 1.3057 support versus USD.

Australian Q1 CPI inflation data came in much softer than expected, with the trimmed mean CPI coming in at 0.3%, half the consensus expectation and well within the Reserve Bank of Australia’s target range. The data seals the case for the RBA to pull the trigger at its 4 May monetary policy meeting. The main imponderable is the magnitude of the rate cut. A 25bps cut had already been priced in but speculation of a 50bps move is likely to have grown.

Nonetheless, I believe the market is overly dovish, with a lot of easing already priced in (100bps in the current cycle). I don’t agree with market pricing, suggesting that eventually the AUD will recover as rate expectations correct. However, wariness ahead of the RBA meeting and deterioration in risk appetite will keep the AUD under restrained in the near term. AUD/USD support is seen around 1.0226, with a break below this leading to a test of 1.0145.

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