Unloved US Dollar

July 16, 2010 — Mitul Kotecha

The USD index is now at its lowest level since May 3 and is showing little sign of turning around. The bulk of USD index weakness overnight came via the EUR and GBP, both of which rose sharply against the USD, with EUR/USD breaching its 90 day moving, hitting a high of 1.2955 and GBP/USD on its way to testing its 200 day moving average, reaching a high of 1.5472. Commodity currencies fared far less positively, perhaps feeling the after effects of the weaker Chinese data this week, with the NZD also dented by weaker than expected inflation data in Q2.

The USD was once again hit by US growth worries. To recap, the US data slate revealed a soft reading for PPI, whilst the July Empire manufacturing index dropped 14.5 points, a far bigger drop than forecast. The Philly Fed index also dropped further in July despite expectations of a small gain. In contrast, June industrial production edged higher, but manufacturing output actually fell. There was a bit of good news in the fact that weekly jobless claims fell more than forecast.

The releases extended the run of weak US data, keeping double-dip fears very much alive. The data have acted to validate the Fed’s cautious growth outlook expressed in the latest FOMC minutes but a double-dip is unlikely. Today’s releases include June CPI, May TIC securities flows, and July Michigan confidence. Another benign inflation report is expected. Consumer confidence is set to slip further against the background of soft data and volatility in equity markets whilst TICS data is forecast to reveal that long term securities flows declined in May compared to the $83 billion inflows registered in April.

The move in the EUR is a making a mockery out of forecasts including my own that had expected renewed downside. The relatively successful Spanish bond auction yesterday helped to ease eurozone sovereign debt concerns further, with a likely strong element of Asian participation. I have still not given up on my EUR negative view given the likelihood of a deteriorating economic outlook in the eurozone and outperfomance of the US economy, but over the short-term the EUR short squeeze may have further to go, with EUR/USD resistance seen at 1.3077.

Equity markets were saved from too much of a beating following the release of better than expected earnings from JP Morgan, a $550mn agreement between Goldman Sachs and the SEC to settle a regulatory case, and news from BP that it has temporarily stemmed the flow of oil from the leak from its Gulf well. Agreement on the US financial reform bill, passed by the Senate yesterday and likely to be signed into law by US President Obama next week, likely helped too.

The tone of the market is likely to be mixed today, with US growth concerns casting a shadow on risk trades. Earnings remain in focus and the big name releases today include BoA, GE and Citigroup but early direction could be negative following news after the US close that Google Inc. profits came in below analysts’ expectations. Data in the US today is unlikely to help sentiment given expectations of more weak outcomes, leaving the USD vulnerable to further selling pressure.

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Follow The Oracle

July 12, 2010 — Mitul Kotecha

Many investors are probably wishing they had the psychic abilities of Paul the octopus. The mollusc once again gave the correct prediction, by picking Spain to beat the Netherlands to become the winner of the World Cup. This ability would have been particularly useful for currency forecasters, many of which have been wrong footed by the move higher in EUR/USD over recent weeks.

Confidence appeared to return to markets over the past week helped by a string of rate hikes in Asia from India, South Korea and Malaysia, and firm data including yet another consensus beating jobs report in Australia. An upward revision to global growth forecasts by the International Monetary Fund (IMF) also helped, with the net result being an easing in double-dip growth concerns.

The good news culminated in a much stronger than forecast June trade surplus in China. However, China’s trade numbers will likely keep the pressure on for further CNY appreciation, and notably US Senators are still pushing ahead with legislation on China’s FX policy despite the US Treasury decision not to name China as a currency manipulator.

Political uncertainty on the rise again in Japan following the loss of control of the upper house of parliament by the ruling DPJ party. The JPY has taken a softer tone following the election and will likely remain under pressure. CFTC IMM speculative JPY positioning has increased but this has been met with significant selling interest by Japanese margin accounts who hold their biggest net long USD/JPY position since October 2009 according to Tokyo Financial Exchange (TFX) data.

In the absence of the prodigious abilities of an “oracle octopus” data and events this week will continue to show slowing momentum in G3 country growth indicators but not enough to warrant renewed double-dip concerns. Direction will be largely driven by US Q2 earnings. S&P 500 company earnings are expected to have increased 27% from a year ago according to Thomson Reuters.

There are several data releases of interest in the US this week but the main release is the retail sales report for June which is likely to record another drop over the month. Data and events in Europe include the Eurogroup finance ministers meeting, with markets looking for further insight into bank stress tests across the region. Early indications are positive but the scope of the tests remains the main concern. The July German ZEW survey will garner some interest and is likely to show a further slight decline in economic sentiment.

EUR/USD gains looked increasingly stretched towards the end of last week, as it slipped back from a high of around 1.2722. Technical resistance around 1.2740 will prove to be tough level to crack over coming days, with a pullback to support around 1.2479 more likely. CFTC IMM data reveals that short covering in EUR has been particularly sharp in the last week, with net short positions cut by over half, highlighting that the scope for further short covering is becoming more limited.

Conversely aggregate net USD long positions have fallen by over half in the last week as USD sentiment has soured, with longs at close to a three-month low. The scope for a further reduction in USD positioning is less significant, suggesting that selling pressure may abate.

Posted in Asia, Australia, central banks, China, Commodities, Currencies, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Germany, IMF, Interest rates, Japan, Monetary Policy, Politics, Singapore, South Korea, Spain, US, US administration. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Q2 Economic Review: Double-Dip Recession or Prolonged Recovery?

July 7, 2010 — Mitul Kotecha

I was recently interviewed by Sital Ruparelia for his website dedicated to “Career & Talent Management Solutions“, on my views on my view on the Q2 Economic Review: Double-Dip Recession or Prolonged Recovery?

Sital is a regular guest on BBC Radio offering career advice and job search tips to listeners. Being a regular contributor and specialist for several leading on line resources including eFinancial Careers and Career Hub (voted number 1 blog by ‘HR World’), Sital’s career advice has also been featured in BusinessWeek online.

Please see below to read my article

Since we last discussed the economic outlook at the end of quarter 1, much has happened and unfortunately there has not been a great deal of positive news. I retained a cautiously optimistic outlook for economic recovery for the Q1 Economic Review: elections, recovery and underemployment discussion article, but highlighted that recovery would be a long and drawn-out process, with western economies underperforming Asian economies.

The obstacles to recovery discussed then continue to apply now, including consumers paying down debt, high unemployment, tight credit conditions and weak confidence.

Click here to read the rest…

Posted in Asia, China, Economics, Economy, emerging markets, Europe, eurozone, Fiscal/Budget, FX, Politics, UK, US, US administration. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

ECB, BoE and RBA in the spotlight

July 5, 2010 — Mitul Kotecha

Double-dip fears are the pervading influence on market psychology at present even as European sovereign concerns appear to be easing. Friday’s release of the June US jobs report did little to alleviate such concerns but the headline payrolls number was less negative than the indications provided by other jobs data.

Growth fears have in particular been centred on the US in the wake of a run of disappointing data, These new found concerns have somewhat tarnished the USD’s ability to benefit from safe haven buying as risk aversion increases, as reflected in the 4.5% drop in the USD index since its high on 7th June. The prospects for the USD do not look too much better this week, but the drop is more likely a correction rather than a renewed weakening trend.

Having navigated its way through the European Central Bank’s (ECB) 12-month liquidity payback, various debt auctions, and Germany’s presidential election last week the EUR may find itself with less obstruction in its path but will nonetheless, likely struggle to make much headway this week. EUR speculative positioning, as indicated by the CFTC IMM data, reveals that there has been little short covering over the last couple of weeks, suggesting speculative sentiment remains negative.

Nonetheless, the rebound in EUR/USD has been impressive since its low around 1.1876 about a month ago and not just against the USD, with EUR making up ground on various crosses too including CHF and GBP. Easing sovereign concerns will have helped but there are plenty of downside risks ahead as austerity measures begin to bite and growth divergence becomes more apparent.

The ECB council meeting on Thursday is unlikely to give much direction for the EUR, with the meeting likely to pass with an unchanged rate decision and no change in economic assessment. There will be more attention on whether EUR/USD can maintain a toe hold above the psychologically important 1.2500 level, which I suspect may prove tough to hold this week.

The Reserve Bank of Australia (RBA) also announces its rate decision (Tuesday) and will likely pause in tightening cycle. Recent data have remained positive, especially with regard to the labour market. The RBA will wait for the Q2 CPI data on July 28th before deciding on the next policy move, with jobs data on Thursday also likely to provide further clues. AUD/USD may struggle in the current environment where growth worries are prevalent, and the currency is likely to find it tough going over the coming weeks.

Finally, the Bank of England (BoE) meets this week too but like the ECB and RBA no change is likely. Although we will have to wait a couple of weeks for the minutes of the meeting it seems highly unlikely that MPC members will vote for a hike aside from Sentance who has espoused a more hawkish stance. Notably GBP speculative short positions have been scaled back over recent weeks as sentiment for the currency turns less negative but GBP gains against the USD will be more limited this week, with renewed GBP upside against the EUR more likely.

Posted in Australia, central banks, Currencies, Economics, Economy, Europe, eurozone, Fiscal/Budget, FX, Interest rates, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Double-dip fears pressure USD

July 2, 2010 — Mitul Kotecha

Markets have found it hard to decide whether to sell the USD due to weaker economic data or buy it on higher risk aversion, but the moves overnight were clear; the USD sold off sharply in the wake of a run of soft data releases. Four separate US releases came in below consensus yesterday, with the June ISM, jobless claims, pending home sales and domestic vehicle sales, all disappointed to varying degrees, especially pending home sales, which dropped an astonishing 30% in June.

The news could have been much worse today, with the release of the US June jobs report. Following the 13k increase in the June ADP employment count the consensus forecast for nonfarm payrolls looked way too optimistic; consensus expectations were for a 130k drop in payrolls according to Bloomberg, with estimates ranging from 0 to -250k. In the event payrolls dropped by 125k and the unemployment dropped to 9.5%, an outcome that was not as bad as feared.

It was not just the US ISM that slipped, but a host of global purchasing managers indices (PMIs) weakened in June including China and India, supporting the view that economic activity will lose momentum in H2 2010. Before we all get too carried away it is worth noting that most manufacturing surveys are coming off a high level.

Nonetheless, for once it wasn’t European concerns that sparked an increase in risk aversion as eurozone banks borrowed less than feared from the ECB, and the Spanish bond tender passed off relatively well, factors that helped EUR/USD jump above 1.25000. Although I remain bearish on the prospects for the EUR over coming months, there may be some further near term upside, with EUR/USD 1.2675, the next resistance level in focus.

As a consequence of US double-dip fears, risk aversion remains at a high level, with US bond yields and commodity prices dropping sharply, leaving commodity currencies sharply lower. In the current environment the USD is likely to be sold on rallies.

On the commodity currency front, AUD/USD may find some relief from the news of a compromise on a proposed mining tax, but the weight of risk aversion will limit any rebound, with my preference to play AUD upside versus NZD. The main concession from Australian Prime Minister Gillard reduce was to reduce the tax to 30% for iron and coal, whilst retaining the 40% tax for oil and gas projects. The agreement likely increases the chance of an election in Australia in the next couple of months as Gillard capitalises on a popularity bounce. Fresh elections could be another factor that limits AUD upside over coming weeks.

Posted in Asia, Australia, Bond markets, central banks, China, Commodities, Currencies, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Fiscal/Budget, FX, India, Spain, US. Tags: , , , , , , , , , , , , , , , , , , . 3 Comments »
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