Highlights this week

December 10, 2012 — Mitul Kotecha

Better than expected Chinese data over the weekend, speculation that Greece is close to reaching its debt buyback target and even some signs of progress in reaching a resolution to avert the fiscal cliff set up risk assets for a generally positive start to the week. Talks between the administration and senior Republicans will continue this week but it appears that some senior Republicans are willing to give up their objections to tax hikes on the very wealthy.

The November US jobs report released at the end of last week which revealed a 146k increase in payrolls and a drop in the unemployment rate to 7.7% is likely to have little influence at the turn of the week. The report was met with a muted reaction. While on the face of it the data was better than expected, downward revisions to past months and a surprising lack of impact from Hurricane Sandy left markets somewhat perplexed.

However, not everything is rosy. Last week’s sharp downward growth revisions to Eurozone growth by the European Central Bank (ECB), a plunge in US consumer sentiment and comments from Italian Prime Minister Monti that he intends to resign will cast a shadow over markets, restraining any upside.

Although activity will likely continue to thin as holidays approach there is still plenty too chew on this week. In the US the Fed is set to continue purchasing USD 85 billion of longer dated securities following the end of Operation Twist but this should come as little surprise to the market and therefore will yield little reaction. There will be some encouraging news on the consumer as retail sales bounce back in November.

Across the pond the European Council meeting beginning on Thursday will be in focus, with banking union and bank recapitalisation among the topics up for discussion. Given the hint of monetary easing by the ECB markets will scrutinise upcoming data for the timing but a likely increase in the German ZEW investor confidence survey in December and stabilisation in the Eurozone composite purchasing manager’s index will not prove compelling enough to warrant an imminent rate cut.

Elsewhere in Japan the upcoming elections will mark the highlight of the calendar over the weekend although the weaker than expected Q3 GDP reading this morning (-0.9% QoQ) and expected deterioration in the Tankan survey later in the week will maintain the pressure for more aggressive policy action and a weaker JPY.

EUR took a hit from the ECB’s dovish stance last week and will not take too kindly to the news of Monti’s intended resignation after the fiscal 2013 budget in Italy. EUR/USD 1.2880 still marks a solid support level for the currency.

USD/JPY continues to probe higher but extreme short market positioning will likely limit the ability of the currency pair to push higher. On the topside 83.15 will market strong resistance for the currency pair.

AUD and NZD look generally well supported, with Chinese data over the weekend giving further support although for AUD/USD 1.0519 will continue to act a tough technical barrier to crack.

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Sell into the USD/JPY rally, EUR bottoming out, GBP vulnerable

November 19, 2012 — Mitul Kotecha

Following a week when risk measures continued to worsen there may not be much respite over coming days. The usual suspects will continue to direct sentiment including US fiscal cliff discussions, Greece’s next loan tranche and debt sustainability, the timing of any possible Spanish bailout request, and the conflict between Israel and Hamas in the Gaza strip. Added to this list are worries about economic growth.

Data releases this week are expected to be soft in general, with US existing home sales set to slip in October, weak readings for Eurozone flash purchasing managers’ indices and an eight consecutive drop in the German IFO business climate survey in November. Trading conditions will likely thin over coming days as the US Thanksgiving holiday on Thursday approaches.

Events over coming days will at least give further clues on the monetary policy front, with Fed Chairman Bernanke scheduled to give a speech at the Economics Club of New York, an event which may shed some light on Fed policy once Operation Twist ends. In the UK Bank of England minutes will also be scrutinised for clues on more QE, with a likely split decision set to be revealed. GBP continues to suffer from a bad combination of weak activity and higher inflation, leaving the currency vulnerable to further selling, especially against EUR.

Additionally, the Bank of Japan will decide on policy although a pause is expected this week given that easing measures were only announced at the last meeting at the end of October. The general election on December 16 may also complicate BoJ policy. USD/JPY’s upside potential looks limited from current levels and a lack of action from the BoJ tomorrow will likely undermine the current pair further. USD/JPY will find strong resistance around 81.78.

In Europe policy decisions will focus on developments in Greece, with the next loan tranche for the country to be decided and discussions on the 2014-2015 EU budget set to take place. The loan Greek aid discussions tomorrow ought to lead to an agreement to distribute EUR 31.5 billion in aid to Greece. The decision may help the EUR to edge higher, although EUR/USD will need to break above its 200 day moving average around 1.2807 before it can register more concrete signs of recovery.

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Reality Check

September 24, 2012 — Mitul Kotecha

Markets face a reality check going into this week. The euphoria emanating from recent Fed, ECB and BoJ actions is fading quickly. The reality of weak growth and underlying structural tensions is coming back to haunt markets, suggesting much more limited upside for risk assets over coming weeks.

While there are some positive indications that the growth outlook may not have much further to deteriorate, such as the bounce in the Baltic Dry Index, scepticism about the ability of central banks to reflate economies is growing. In this respect, its worth highlighting that the rally in gold prices failed to extent much further last week although in part this may be due to an options expiry tomorrow.

Renewed tensions are creeping back into the market psyche, especially with regard to Europe. Procrastination from Spain about a formal bailout threatens to weigh on markets in the days ahead as some officials suggest that the EUR 100 billion received for Spanish banks will be sufficient for the country to avoid needing further aid. Bank stress test results, a Moody’s review on Spanish ratings and the country’s 2013 budget will all be scrutinised over coming days.

Meanwhile, disagreement between Germany and France over the timing of introducing banking union and supervision is accentuating tensions in the region. Greece remains in the limelight too, as the government continued to find further budget cuts in order to receive the next tranche of loans. The only good news appeared to come from a German press report that the ESM permanent bailout fund’s firepower will be leveraged up to EUR 2 trillion.

The EUR has lost momentum following its initial surge higher and looks constrained on any move above 1.3000. While EUR short positions have continued to be pared back according to IMM data the scope for short covering is becoming more limited. Developments in Spain and Greece will provide further guidance for the currency, but any upside in EUR/USD will be limited to resistance around 1.3180. It seems more likely that having failed to sustain gains, the EUR will continue to drift lower.

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US dollar Fed debasement begins

September 17, 2012 — Mitul Kotecha

Unsurprisingly risk appetite improved sharply in the wake of European Central Bank (ECB) and Federal Reserve actions as well as the many other events that have passed without incident. Indeed, the long list of events including German constitutional court decision on the ESM bailout fund, and Dutch elections, did not result in any obstruction to sentiment. Instead markets have been left to digest the impact of monetary policy actions.

The Fed did not disappoint in this respect and the $40 billion per month of Mortgage Backed Securities (MBS) purchases will and already has gone a long way to spurring risk assets, combined with the impact of the ECB bond buying programme. Although there are still plenty of doubts, especially as both Spain and Italy have yet to request a formal bailout, which would enable the ECB’s bond purchases to actually begin, the market tone will be ‘risk on’ over the short term. Indeed, our risk aversion barometer has shifted decisively into risk loving territory.

Data and events this week are unlikely to change this perspective although the risk of profit taking has grown given the pace and magnitude of recent moves. Although Eurozone flash purchasing managers indices (PMI) are likely to remain in contraction territory, the German ZEW investor confidence survey is set to bounce as it reacts to recent events. US housing market data will also look encouraging revealing further signs of recovery, although US manufacturing surveys in the form of the Philly Fed and Empire surveys for September will remain weak.

There will be plenty of scrutiny on the Bank of Japan which will be under a lot pressure for more aggressive policy action to reach the 1% inflation goal, especially following the steps taken by the Fed and ECB. Nonetheless, further easing by the BoJ looks unlikely this week. Meanwhile, in the UK softer inflation data and weaker retail sales will keep the door open to further Bank of England quantitative easing.

The USD will remain on the back foot in the wake of more Fed QE, but the USD index will find some support around the beginning of May low around 78.603. Notably USD short positioning has already increased sharply over recent weeks, suggesting that at least some of the Fed’s QE is in the price. Conversely EUR short positions have been cut sharply and while the momentum in EUR/USD is still to the upside, it will face resistance around the 1.3180. As long as there is not a sharp correction higher in peripheral bond yields, the EUR should remain supported.

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JPY firmer ahead of Fed decision

September 12, 2012 — Mitul Kotecha

The USD has come under growing pressure ahead of tommorow’s Fed FOMC decision. While by no means a done deal the majority of market participants are looking for the Fed to embark on a fresh round of quantitative easing or QE3. The Fed is also expected to shift its guidance to maintaining highly accommodative monetary policy into 2015 from 2014. There is a non-negligible risk of no action at the FOMC meeting which if correct will result in market disappointment, with an attendant sell off in risks assets.

Heading into the Fed meeting, comments by Republican House speaker Boehner that he was ‘not confident’ about reaching a deal with President Obama on avoiding the fiscal cliff as well as renewed warnings by Moodys ratings on the US AAA credit ratings, dealt the USD a further blow. It seems unlikely that the USD will be able to make much of a recovery if the Fed pulls the trigger for more QE. However, it should be noted that with so much in the price, should the Fed not deliver on expectations, the USD may actually bounce.

One currency that has felt the consequences of a weaker USD has been the JPY, which finally broke through the 78.00 level against the USD yesterday. A stronger JPY was greeted with plenty of disquiet in Japan (I’m in Tokyo this week) at a time when economic indicators are turning south. The fact that both the European Central Bank and the Fed are outpacing the Bank of Japan in terms of balance sheet expansion means that any JPY weakness is likely to be limited, with further upside risks to the currency prevailing.

Much will depend on the impact on US Treasury yields from Fed QE. Currently Japanese investors are disinclined to pour money overseas at a time when the yield advantage of US Treasuries or German bunds versus Japanese JGBs is limited. If US yields remain low, the prospects for further JPY weakness will also be limited while the pressure on the Japanese authorities to act to meet their 1% inflation goal and weaken the JPY will grow.

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