Running into resistance

December 18, 2013 — Mitul Kotecha

Currency markets will remain range bound today although many currencies appear to be running into resistance in the wake of recent sharp moves. For instance, GBP/USD has run into a wall and lost momentum following the release of softer than forecast UK November CPI data yesterday. Unless the UK jobs report and MPC minutes today are particularly strong, GBP/USD will remain capped around 1.6300.

Similarly EUR/USD will find it difficult to make much further headway although a gain in the German IFO survey will keep the currency pair supported around 1.3730. USD/JPY’s upside is being undermined by lower US yields but firmer Japanese equities are helping to keep the currency pair supported.

AUD faced yet more jawboning by RBA Governor Stevens attempting to talk the currency lower. Given that such comments are nothing new markets are beginning to discount them, with AUD/USD likely to consolidate above 0.8900.

Asian currency direction will be limited ahead of the Fed outcome too although lower US yields will give some relief. Overall, it remains a case of South East Asian FX underperformance versus North East Asia outperformance.

The exception is the INR which has outperformed so far this month but will face an obstacle in terms of today’s RBI policy decision. 25 bps hikes in the repo and reverse repo rates are widely expected in the wake of higher inflation readings but the INR will also have one eye on the Fed FOMC given that it is the most sensitive Asian currency to US yield movements as outflows from India’s bonds continue. INR will continue to remain capped against this background.

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Asian currencies benefit from weaker US jobs data

October 23, 2013 — Mitul Kotecha

Weaker than forecast US September jobs data, delayed in the wake of the government shutdown, spurred risk appetite overnight pushing equities higher helped further by encouraging US Q3 earnings. The employment report revealed that jobs growth slowed to 148,000 while the unemployment rate declined slightly to 7.2%.

In contrast to the reaction in risk assets, 10 year US Treasury yields dropped to around 2.5% and the USD took another hit as the data was perceived to provide more concrete evidence that the Fed will only begin to slow its asset purchases next year, with many now looking for tapering to only begin in March 2014.

Unfortunately for the USD this effectively means its attraction as a funding currency may continue for longer than previously expected. Consequently gold prices rallied benefiting from both the drop in yields and weaker USD.

Data today (Bank of England MPC minutes, Bank of Canada rate decision, terms of the European Central Bank’s Asset Quality Review) will not be as important for markets but it is clear that fundamentals are taking a bigger grip on market direction after a period of being relegated to the sidelines in the wake of US political mayhem.

Asian currencies have benefitted from the drop in the USD overnight and the potential further delay in tapering to Mach next year. The main gainers of recent weeks are those that stand most to gain from delayed tapering (ie those with external funding requirements and that are most sensitive to US Treasury yields). In this respect the IDR, MYR and INR have been the best performing Asian currencies so far this month and look best placed to benefit in the short term from the consequences of the weaker US jobs report.

Against the backdrop of delayed tapering equity capital inflows to Asia have continued their steep recovery since the beginning of September, providing another layer of support to Asian FX. India, Korea and Taiwan have been major winners in this respect, with a surge in equity flows registered to these countries. However, the INR’s ability to benefit is partly negated by continued outflows from India’s bond markets.

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CNY influence on Asian FX continues to grow

October 31, 2012 — Mitul Kotecha

Asian currencies remain generally well supported both by a softer tone to the USD in general as well as a stronger Chinese currency, CNY. Since the USD/RMB high of 6.3964 on 25 July the RMB has appreciated by around 2.4% vs. USD. This equates to an annualized pace of appreciation of around 6.2%. The RMB is unlikely to continue to strengthen at such a rapid pace and could even be prone to a softer tone into year end.

Potential renewed weakness in the CNY could presage downside risks to Asian currencies. Also worth noting is the fact that equity portfolio capital inflows to Asian have slackened over recent weeks (Indonesia, Philippines and Taiwan registered outflows over October), a factor that could also pose risks to Asian currencies.

The influence of the RMB on Asian FX has continued to grow. Correlations or sensitivities between Asian currencies and the CNY remain are stronger than Asian FX sensitivities to USD movements. The implication is that USD index gyrations are having less influence on Asian currencies.

The most correlated currencies with the CNY are KRW, SGD and TWD although all Asian currencies with the exception of the INR register statistically significant correlations with the movements of USD/CNY. Notably our quantitative models show that the KRW, SGD and TWD are overbought relative to their short term fair value estimates.

While the USD is still influential in driving some Asian currencies several currencies including KRW, CNY and IDR do not possess a statistically significant sensitivity to the USD over the past 3-months. Should the CNY undergo renewed weakness it will mean that the currencies noted above namely KRW, SGD and TWD will be the most vulnerable to weakness given their high sensitivity to CNY.

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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.

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Draghi shakes things up

July 27, 2012 — Mitul Kotecha

European Central Bank President Draghi shook things up overnight providing a major backstop for risk assets. Draghi effectively noted that the ECB “is going to do whatever is necessary to preserve the EUR”. The aggressiveness of his comments left no doubt that the ECB chief means business.

Whether this translates into renewed bond buying by the central bank is debatable but this is what the market is now hoping for at next week’s ECB policy meeting. Anything less would provoke disappointment.

At the least Draghi has helped to put a floor under the EUR ahead of the policy meeting. After dropping to a low around 1.2117 the currency bounced sharply but its gains were exhibited mainly against the USD rather than on the crosses. Further short covering could see EUR/USD move up to around the 1.2350 resistance level but much further gains are expected to be limited.

The biggest beneficiaries of Draghi’s comments were equity volatility which dropped sharply and Spanish stocks, which rallied by over 6% yesterday. Gold also rallied in the hope of central bank action next week. In terms of Asian currencies, those most sensitive to risk gyrations including KRW, MYR, INR and IDR will be the biggest beneficiaries.

Attention today will turn to data releases including July German inflation data and Q2 US GDP. A weak US GDP may put a bit of a dampener on sentiment especially as it will highlight the sharp slowing in growth over the quarter.

Nonetheless, markets are likely to move into consolidation mode ahead of next week’s ECB and Fed meetings, with risk assets generally supported by expectations / hopes of policy actions by both or either central bank. One index which remains on a downward trajectory is the Baltic Dry Index, which dropped further overnight, highlighting the growing risks to the global economy.

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