Greek Confusion, India Tightening

March 22, 2010 — Mitul Kotecha

It is highly interesting that markets could take fright from a rate hike in India but this appears to be what has happened. India’s surprise 25bps rate hike has provoked another bout of risk aversion whilst the lack of any concrete agreement on a framework for a Greek bail out dealt a further blow to confidence. FX tensions between the US and China have not helped, with China threatening retaliation to any US move to name the country as a currency manipulator in the mid April US Treasury report.

Should we really be worried by a rate hike in India or China? Whilst the India rate move reflects the fact that emerging market central banks are moving far more aggressively to raise rates than their G7 counterparts, global fears that India’s move will dampen recovery prospects are unfounded. Monetary tightening in India and China and other economies is taking place against the backdrop of economic strength not weakness.

As such the global impact on growth should be limited. Rising inflation pressure in Asia is reflection of the much quicker economic recovery, relatively low rates and undervalued currencies in the region. Not only will central banks in Asia have to raise interest rates but will also have to allow further currency appreciation.

There is still plenty of confusion about a bail out for Greece ahead of the 25-26th March EU summit. German Chancellor Merkel dampened expectations of a bailout by stating that it was not even on the agenda for the summit. In contrast, EU President Barroso has pushed EU members to agree on an explicit stand-by aid agreement for Greece as soon as possible.

There is also disagreement about whether there should be any IMF involvement, with Germany favouring some help from the Fund whilst France opposes it. Meanwhile, the Greek Prime Minister has reportedly given an ultimatum that should no aid plan be forthcoming at the EU summit, Greece will turn to the IMF for assistance.

All of this suggests more downside for EUR/USD, with a test of support around 1.3422 looming. In the event that the EU summit offers good news for Greece, EUR/USD sentiment could turn quickly so a degree of caution is warranted. Speculative sentiment for the EUR has improved according to the latest CFTC Commitment of Traders (IMM) data for the week to 16th March, with net short EUR positions at their lowest since the beginning of February. Nonetheless, the short covering seen over the past week could come to an abrupt end should there be no aid package for Greece.

The most volatile currency over the past week was GBP/USD and after hitting a high of around 1.5382 it has slid all the way back to around the 1.5000 level. Much of this was related to the gyrations in EUR/USD but GBP took on a life of its own towards the end of the week and has not been helped by comments by BoE MPC member Sentence who highlighted the risk of a “double-dip” recession in the UK.

GBP is highly undervalued and market positioning is close to a record low but a sustainable recovery looks unachievable at present. Attention this week will centre on the 2010 UK Budget announcement and markets will scrutinise the details of how the government plans to cut the burgeoning budget deficit. Failure to restore some credibility to the government’s plans will dent GBP sentiment further and lead to a sharper decline against both the EUR and USD.

Posted in Asia, central banks, China, Currencies, Economics, Economy, emerging markets, Europe, Financial crisis, Fiscal/Budget, FX, Germany, Greece, India, Interest rates, Monetary Policy, UK. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , . 1 Comment »

US/China Tensions Ratchet Higher

March 17, 2010 — Mitul Kotecha

FX policy tension is a theme that looks to be making a come back. The potential for CNY revaluation continues to be hotly debated, with international pressure on China intensifying. For its part China continues to resist such calls, but growing speculation that the US will label China a “currency manipulator” in the semi-annual US Treasury report on 15 April suggests that the issue will remain very much on the radar screen.

Tensions have ratcheted higher in the wake of a proposed bill by US senators targeting countries with “fundamentally misaligned currencies” and those needing “priority action”. Any country that is targeted would then have a year to correct its currency or face a case at the World Trade Organisation. If China is labelled as a currency manipulator it could also result in anti dumping regulations.

Much of the increase in tension may be attributable to politicking ahead of the November mid-term Congressional elections but it is clear that the issue is not going away quickly. Chinese Premier Wen’s strong comments over the past weekend denying any need for revaluation of the CNY suggests that the stakes will get even higher over coming months.

It is looking increasingly difficult for the US administration to ignore Congress’ calls for stronger action on FX. Moreover, US President Obama’s pledge to double US exports within 5-years will require some USD weakness, but the USD will need to weaken against Asian currencies led by China and not just against the usual culprits such as the EUR.

There is little sign of this happening anytime soon as Asian central banks continue to intervene to prevent their currencies from strengthening. Nonetheless despite China’s insistence that it does not believe the CNY is undervalued China is likely to be edging closer to an eventual revaluation in the CNY sometime in Q2 2010 as it combined a stronger currency with higher interest rates and tighter lending to curb inflation. A stronger CNY will also spur other Asian central banks to allow stronger currencies.

A deterioration in the China/US relationship could have potentially significant FX implications. The latest US Treasury TIC report this week showed that China reduced its holdings of US Treasuries for the third straight month in January. Should China feel that it needs to retaliate against a more aggressive US trade or FX stance it could reduce its holdings of US Treasuries further.

Posted in Asia, Bond markets, central banks, China, Currencies, Economics, Economy, emerging markets, FX, Interest rates, Monetary Policy, Politics, US, US administration. Tags: , , , , , , , , , , , , , . 3 Comments »

What To Watch This Week

March 13, 2010 — Mitul Kotecha

A “crisis over” mode is being adopted across markets as worries about Greece wane and economic data provides support to recovery hopes, whilst importantly allaying fears of a “double-dip”. Equities, bonds and currencies are reacting accordingly; equities are close to year highs, bond yields have risen and spreads have narrowed, whilst the USD and JPY are weaker, and conversely risk currencies are stronger. Even EUR/USD pushed higher on its way to 1.3800 as a number of stops were cleared and shorts were squeezed.

The coming weeks will be important to determine whether there is any staying power in the upward move in risk assets. A lot of the February data in the US will likely be obscured by bad weather however, including industrial production figures this week, leaving markets with little to go on. In Europe, the key release is the March German ZEW investor confidence survey, and better news in Greece, will likely prevent a sharper decline in confidence.

After both the Swish National Bank (SNB) and Reserve Bank of New Zealand (RBNZ) unsurprisingly left policy unchanged last week this week sees the turn of the US Federal Reserve and Bank of Japan (BoJ). Neither central bank is likely to shift policy but the Fed statement will be looked upon for guidance on the timing of rate hikes. The comment in the FOMC statement that the Fed Funds rate is expected to remain low for an “extended period” is set to be retained, even if some FOMC members are itching to remove it soon.

The BoJ meeting will be particularly interesting. I have just returned from a week long trip in Japan and on the ground there is plenty of speculation that the BoJ will take extra action to combat deflation and weaken the JPY. Additionally comments by Japan’s Prime Minister and Deputy PM have highlighted the potential for action to weaken the JPY although the usual market hesitation to sell JPY into fiscal year end and repatriation talk may mean a weaker JPY path is not straightforward.

Greece will not move too far from the spotlight, with EU officials likely to give the official stamp of approval on Greece’s deficit cutting measures and plenty of discussion at the Eurogroup Finance Minister’s meeting and Ecofin meeting early in the week. Moreover, weekend press reports suggest that a bailout up to EUR 25 billion is close to being agreed. Other topics of conversation will include the possible formation of a European Monetary Fund, though this looks like it will be a non-starter given the many objections to it.

Overall, risk appetite is set to continue its upward trajectory, likely keeping the USD on the back foot. Some deterioration in USD sentiment was reflected in the fact that net long aggregate USD speculation positioning has turned negative again according to the latest CFTC Commitment of Traders (IMM) report. Much in terms of FX direction will depend on what the FOMC says rather than does tomorrow.

EUR/USD may take a crack at resistance around 1.3840 on improving Greek news but it is difficult to see much upside from current levels. The one to watch will be the JPY, especially if the BoJ embarks on aggressive actions at this week’s meeting, leaving USD/JPY plenty of scope to test resistance around 92.16.

Posted in Bond markets, central banks, Currencies, Economics, Economy, equity markets, Europe, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Germany, Greece, Interest rates, Japan, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

GBP bulls brave or crazy?

March 10, 2010 — Mitul Kotecha

The UK Pound’s (GBP) performance over recent months has been dismal. The currency has failed to show any real sign of recovery, having fallen to and below the psychologically important level of 1.50 against the USD. A number of factors including fiscal/debt concerns, political worries, and uncertainties about whether the Bank of England will step up asset purchases, have accumulated to turn even the most ardent GBP bulls into bears.

The outcome of the upcoming UK general election widely expected on May 6, remains a major weight on GBP sentiment. Until the outcome is clear or unless one or other party develops a clear lead in the polls, it is difficult o see GBP sustain any durable recovery. In the near term GBP/USD is vulnerable to a test of its 2010 low around 1.4780 and then towards 1.44. The risk to this is that the market is very short GBP which could result in a sharp bounce in GBP in the wake of any good news. However, a rally in GBP will only result in fresh sellers.

Ahead of the elections will be the budget and this will be closely scrutinized for steps to reduce the size of the burgeoning fiscal deficit. Whichever party comes into power will need to convince markets that a credible and timely plan exists to reduce the size of the deficit and prevent a sovereign ratings downgrade. If not, GBP could see itself under much more pressure. In this respect it’s worth noting the Fitch ratings warning that the UK sovereign credit profile has deteriorated.

It’s not all bad for GBP, however. By some measures it’s now the most undervalued major currency, opening up the possibility of a sharper bounce back over the medium term. Moreover, UK debt markets are already trading as if a ratings downgrade has taken place, whilst arguably GBP has also priced in a lot of negative news already, as reflected in the very negative speculative positioning in the currency.

The economic news is also not as bad as the headlines might suggest and although recent housing data has been a bit mixed, both consumer spending and the housing market have held up reasonably well. Bearing all this in mind GBP is set to recover over the medium term, but it would be very brave to buy the currency any time soon, at least until UK elections are out of the way.

Posted in Bond markets, central banks, Currencies, Economics, Economy, Financial crisis, Fiscal/Budget, FX, Interest rates, Monetary Policy, Politics, UK. Tags: , , , , , , , , , , , , , . 1 Comment »

The Ball Is In the EU’s Court

March 4, 2010 — Mitul Kotecha

A run of data and events have continued this week’s theme of improving risk appetite. Greece lived up to expectations, with the government announcing a EUR 4.8 billion package of austerity measures amounting to around 2% of GDP. The US ADP jobs data was in line with expectations, with employment dropping by 20k in February, whilst ISM non-manufacturing index delivered an upside surprise to 53.0 in February, contrasting with a weaker eurozone Purchasing Managers Index (PMI).

Greece now believes it has lived up to its part of the bargain and the ball is now in the court of EU countries. However the issue of aid from the EU remains highly sensitive with little sign of any aid forthcoming from EU partners. Moreover, Germany dealt a blow to Greek hopes by stating that financial aid would not be discussed when the Greek Prime Minister visits tomorrow. Failure to provide such assistance could see Greece turn to the IMF. The key test will be the roll over of around EUR 22 billion of debt in April/May.

Markets have reacted positively to recent events, with Greek debt rallying and the EUR strengthening to a high of 1.3727 overnight amidst reports that regulators are investigating hedge fund trades shorting the EUR. The 17 February high of 1.3789 will provide strong resistance to further EUR/USD upside but the currency looks vulnerable to selling on rallies above its 20-day moving average around 1.3631. The EUR will be driven by news about any aid to Greece rather than data whilst the medium term outlook remains bearish.

In the US the steady but gradual recovery in the economy is continuing to take shape. The Fed’s Beige Book revealed that economic activity “continued to expand” but severe snowstorms restrained activity in several districts. Overall, the report revealed little new information following so soon after Fed Chairman Bernanke’s testimony. Today’s US releases are second tier, with a likely upward revision to Q4 non-farm productivity to around 6.5% and a 1.5% increase in January factory orders.

As has been the case recently the weekly jobless claims data will garner more attention than usual given that it has recently signaled deterioration in job conditions. One factor that could have distorted the claims as well as the payrolls data is harsh weather conditions in parts of the US. Indeed, this has led us to cuts in forecasts for February non-farm payrolls scheduled to be released tomorrow, with the real consensus likely to be much weaker than the -65k shown in the Bloomberg survey.

There are four central bank decisions of interest today no change is likely from all of them. Indonesia and Malaysia are both edging towards raising interest rates but are likely to wait until Q2 2010 before hiking. There will be no surprises if the Bank of England (BoE) and European Central Bank (ECB) leave policy unchanged too, but there will be particular interest in the ECB’s announcement on changes in liquidity provision and the BoE’s signals on the potential for further expansion in quantitative easing. A dovish signal from the BoE will deliver GBP a blow, leaving GBP/USD vulnerable to a drop back below 1.50.

Posted in central banks, Currencies, Economics, Economy, Europe, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Germany, Greece, Interest rates, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , , , . Leave a Comment »
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