USD, AUD and GBP view

November 19, 2013 — Mitul Kotecha

The USD is struggling to make much headway, continuing to be capped in the wake of lower US Treasury yields following Fed Chairman nominee Yellen’s comments last week. There appears to be little clarity as markets continue to second guess the timing of Fed tapering while Fed officials appear to be giving conflicting signals. However, some clarification will be sought from Fed Chairman Bernanke’s comments later tonight. Meanwhile, the large increase in USD speculative positioning as revealed in the CFTC IMM data give further reason to be cautious on further USD appreciation in the short term. Alongside likely weaker data US releases including October retail sales over coming days, it suggests limited upside USD potential.

The AUD may take advantage of a pause in the USD’s appreciation trend, helped by the release of the November 5 RBA meeting minutes. The minutes confirmed that the central bank is in no hurry to ease policy rates further. Although they did note that the AUD remains uncomfortably high there was nothing new in such comments. It increasingly looks as though the RBA has reached the bottom of its easing cycle, something that will likely help to provide the AUD with some support over the coming months. In the near term AUD/USD will attempt to take a crack at resistance around 0.9421 although a speech by governor Stevens on Thursday will give further direction, and could hold risks to AUD especially if he attempts to talk the currency lower.

GBP has been relatively resilient in the wake of some positive UK economic data releases. Attention will turn to tomorrow’s Bank of England MPC minutes which will be scrutinized for clues to a possible change in the 7% unemployment rate threshold. Already it appears that the BoE is closer to hiking policy rates than previously thought as indicated in last week’s Quarterly Inflation Report. GBP/USD may benefit from some general USD consolidation although its gains will be restricted ahead of the MPC minutes. Near term support GBP/USD is seen around 1.6080, with risks of profit taking on recent GBP gains likely to restrict upside potential in the currency.

Posted in Australia, Bank of England, Federal Reserve. Tags: , , . Leave a Comment »

Gyrating expectations for Fed tapering

November 18, 2013 — Mitul Kotecha

Gyrating expectations for Fed tapering have left FX markets in somewhat of a limbo. Just as markets had shifted expectations for Fed tapering to next month or January 2014 Fed Chairman nominee Yellen managed to add a dovish spin on things by indicating strong support for ongoing Fed quantitative easing. The USD hasn’t been harmed too much as policy expectations in Japan and the Eurozone has also taken a more dovish slant leaving the EUR and JPY exposed to downside pressure. In contrast, GBP has benefitted from the Bank of England’s revisions to growth and employment expectations.

Yellen’s comments last week and some likely softer economic data releases this week including subdued CPI inflation, declines in retail sales and existing home sales, will likely cap US Treasury bond yields and the USD. Fed FOMC meeting minutes will have some bearing on market direction. Nonetheless, as noted above any pressure on the USD is set to be limited given the relatively dovish policy stances in other countries. Indeed, weak Eurozone and Japan Q3 GDP released last week have led to expectations of more monetary policy action from both the Eurozone Central Bank and Bank of Japan. Consequently EUR/USD will struggle to sustain any recovery above 1.3500 and USD/JPY will find a stronger footing above 100.

GBP/USD has retained a degree of composure but GBP bulls are better taking a long position against EUR where further GBP gains are likely given revelations in the BoE quarterly inflation report that the unemployment threshold will be hit sooner than expected, indicating higher policy rates earlier than forecast. Although the EUR may find some solace from better data this week in the form of flash manufacturing surveys and increases in the German ZEW investor confidence and IFO business confidence surveys any EUR upside will likely remain limited given expectations of further monetary easing by the ECB in the wake of very subdued inflation pressures.

Posted in Bank of Japan, ECB, Federal Reserve, UK. Tags: , , , . Leave a Comment »

USD and EUR contrasts

November 11, 2013 — Mitul Kotecha

Finally markets appear to be reacting rationally to economic data. There was always a risk that strong US data releases would prompt renewed Fed tapering fears and result in a sell off in risk assets as has been the case in the past. However, the reaction to Friday’s much stronger than expected US October jobs data (+204k + upward revisions to previous months) was what would be normally be expected. US equities rallied, US yields rose and the USD strengthened.

While the US data added further weight to the potential for Fed tapering in December or January it was also recognised as evidence of a growing economy, and one that barely flinched in the wake of the government shutdown. This week’s US data is unlikely to detract from this view, with the November Empire manufacturing survey and October manufacturing production likely to have shown further improvements. This should ensure that the USD remains firmly supported over coming days.

In Europe, the opposite is true. Faced with very low inflation (this is an issue across most major economies) the European Central Bank cut policy rates last week and looks set to intensify its dovish shift with other policy measures to reinforce its forward guidance. Consequently the EUR sold off sharply and is set remain under pressure.

This week’s Eurozone data releases will add more weight to the argument for further policy actions, with Eurozone GDP set to barely expand in Q3 while inflation likely to be confirmed at 0.7% YoY in October. Meanwhile industrial production is set to have declined in September (-0.4%). Given the contrasts in data releases and in policy stance, EUR/USD is set to decline further, with initial support seen around 1.3295.

In the UK, there will be attention on the Bank of England’s Quarterly Inflation Report, with jobs data and retail sales also on tap. Faced with mounting evidence of firming growth, the BoE will likely have to revise its assumptions upwards. Consequently this bodes well for GBP and while gains against the USD are likely to be limited, EUR/GBP is set for a further downward correction, with a break 0.8300 on the cards shortly.

Posted in Bank of England, ECB, Federal Reserve, US. Tags: , , . Leave a Comment »

Risk appetite still supported

November 5, 2013 — Mitul Kotecha

Relatively subdued trading yesterday ended with stocks higher and US bond yields lower. Our risk barometer is currently around its lowest since February 2011, signifying still strong appetite for risky assets, as also reflected by the drop in the VIX “fear gauge”. After a sharp 30+% drop since early October the Baltic Dry Index has also turned higher while gold prices are holding in a relatively tight range around its 100 day moving average at USD 1320.

There are a few releases and events to give direction to markets, with the RBA policy meeting, European Commission autumn economic forecasts, and service sector confidence surveys from the UK and US, all on tap today. Overall, there will be little to dent the positive risk bias but caution will intensify ahead of the ECB Council meeting and US employment report towards the end of the week.

Following last week’s USD rally the currency is likely to consolidate its gains over the short term ahead of Friday’s US October employment report. A dip in US yields helped by a softer US factory orders report took some of the steam out of the USD as caution crept in. A series of Fed speakers overnight did little to clarify the picture regarding the timing of tapering and thus provided little direction for the USD.

Nonetheless, despite some near term consolidation the USD looks set to gain further over the coming weeks helped by the fact that the market had already squared a lot of long positions over past weeks. A renewed increase in US yields accompanied by better economic data will help the USD’s cause but much will depend on when there is greater clarity regarding the timing of tapering. Expectations of a March 2014 may yet prove off the mark, leaving the USD plenty of scope for further recovery.

AUD benefitted from the robust September retail sales report yesterday but faces another hurdle today in the form of the RBA policy meeting. Although AUD remain a loser year to date, the currency has registered impressive gains from the beginning of September, much to the chagrin of the RBA.

Although a policy rate cut is highly unlikely today (I believe the RBA is at the bottom of its easing cycle), Governor Stevens is set to warn that the strength of the currency could warrant further policy easing in the months ahead. However, such warnings may sound hollow given worries about house price inflation and recently firmer data. Given some likely restraint in the USD ahead of the US employment report, AUD/USD will find some any losses limited to support around 0.9430.

Posted in Australia, Federal Reserve, US. Tags: , , , . Leave a Comment »

Fed leaves the dollar in positive mood, euro at risk ahead of ECB

October 31, 2013 — Mitul Kotecha

The Fed FOMC unsurprisingly left policy settings unchanged but the statement was perceived as less dovish, leaving a sour taste for risk assets. Crucially the statement did not validate market expectations that the Fed would hold off from tapering (reduction of Treasury and MBS purchases) until March next year, leaving the option of an earlier tapering on the table.

The bottom line is that the decision to taper will be highly data dependent, but the impact on markets was to leave the USD firmer and equity markets lower. The reaction is consistent with our view that a lot of dovishness was already priced into the market and that the risk / reward is for a more constructive USD environment.

Improvements in economic data, albeit from a weak level and a contracting balance sheet, have provided the EUR with support over past months. However, gains will not last and we suspect the EUR will be a casualty of relatively better US growth, Fed tapering and higher US yields over coming months. EUR has lost momentum this week and looks vulnerable to further slippage ahead of next week’s ECB meeting.

Soft inflation data out of Spain and German states yesterday highlights the room for the ECB to sound more dovish next week. Although firmer than expected October Eurozone confidence surveys limited some of the downdraft on the EUR overnight and highlighted further evidence of recovery, it is likely to do little to prevent further pressure on the EUR.

A couple of stronger than expected data releases helped the NOK to strengthen both against the USD and EUR. The August unemployment rate came in lower than expected (at 3.5%) while retail sales beat expectations in September (+0.7%). The NOK has been the only G10 currency to strengthen against the USD during October and after previous underperformance against the EUR, NOK looks set to make further gains against the latter.

One hurdle may be the announcement of Norway’s daily foreign exchange purchases for the coming month. Over September and October FX purchases were NOK 100 million per day and there is little reason to expect any change in November. Assuming that the October manufacturing PMI also registers some improvement tomorrow there is little to stand in the way of further NOK strength. We retain our long NOK/CHF trade idea.

Posted in ECB, Federal Reserve, Norway. Tags: , , . Leave a Comment »
« Older posts
Newer posts »