Greece throws a spanner in the works

November 2, 2011 — Mitul Kotecha

Having already retraced around 50% of its losses from its high around 4 April to its low on 27 October the USD index is on a firm footing and looks set to extend gains. The USD is benefitting both from the EUR’s woes and receding expectations of more US quantitative easing in the wake of less negative US data releases.

Whether the USD is able to build on its gains will depend on the outcome of the Fed FOMC meeting, accompanying statement and press conference today. While there have been some noises from Fed officials about the prospects of more QE, the Fed is likely to keep policy settings unchanged, leaving the USD on the front foot.

Greece has thrown a spanner in the works by calling a national referendum on the European deal. The fact that this referendum may not take place until January will bring about a prolonged period of uncertainty and further downside risks for the EUR against the USD and on the crosses. As a result of the increased uncertainty from the referendum, growing doubts about various aspects of last week’s agreement as well as hesitation from emerging market investors to buy into any European investment vehicle, peripheral bond spreads blew out further, and the EUR dropped.

The immediate focus will be on emergency talks today between European leaders in Cannes where Greek Prime Minister Papandreou has been summoned at a time when his grip on power appears to be slipping ahead of a government confidence vote on Friday. EUR/USD looks set to slip to support around 1.3525.

The Swiss National Bank’s floor under EUR/CHF has held up well since it was implemented in early September. How well it can be sustained going forward is questionable especially given that risk aversion is intensifying once again. A weaker than forecast reading for the Swiss October manufacturing PMI yesterday falling further below the 50 boom / bust reading to 46.9 highlights the growing economic risks and consequent pressure to prevent the CHF from strengthening further. However, now that Japan has shown its teeth in the form of FX intervention the CHF may find itself once again as the target of safe haven flows.

Technical indicators revealed that GBP was overbought and its correction lower was well overdue. However, GBP looks in better shape than the EUR even in the wake of some mixed UK data yesterday. On a positive note, UK Q3 GDP surprised on the upside in line with our expectations coming in at 0.5% QoQ. However, the forward looking PMI manufacturing index dropped more than expected in October, down to 47.4 suggesting that UK economic momentum is waning quickly.

EUR/GBP looks set to test its 12 September low around 0.8259 but GBP/USD remains vulnerable to a further pull back against a resurgent USD. Overall, GBP’s resilience despite the implementation of more quantitative easing by the Bank of England has been impressive and I expect it to continue to benefit from its semi safe haven status

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

EUR falls, JPY retraces after intervention

November 1, 2011 — Mitul Kotecha

Risk aversion has come back in full force, with various concerns weighing on markets. Once again attention is firmly fixed on the eurozone and worryingly last week’s European Union (EU) rescue agreement has failed to prevent a further widening in eurozone peripheral bond spreads. This will come as a blow to eurozone officials as the agreement was aimed to prevent exactly this.

A lack of detail in the plans announced last week has come back to haunt markets. Moreover, given the event risk of the RBA, ECB and Fed central bank meetings this week plus the US October jobs report at the end of the week, nerves will likely remain frayed over coming days. Overall, the tone will likely be on of selling risk assets on rallies over the short term.

The EUR has unwound a significant part of its gains from last week as various doubts about the eurozone rescue package have surfaced. The measures announced by EU officials have failed to prevent a jump in Italian and Spanish bond yields. News that MF Global has filed for bankruptcy while the Greek Prime Minister has called for a referendum on the EU’s debt deal dealt markets a blow overnight.

As it was doubts had been creeping in due to the lack of detail in the rescue package including but not limited to the lack of specifics on the leveraging of the EFSF bailout fund. The pattern appears to have followed the reaction to previous EU announcements to stem the crisis, namely short lived euphoria followed by a sell off in risk assets. The EUR is likely to struggle further over the near term, with the current pull back likely to extend to around the 21 October low of 1.3705.

Japanese officials had blamed the strength of the JPY on speculative flows and have threatened more FX intervention following yesterday’s Judging by the price action this morning the threat has been followed up by action. In order for USD/JPY to sustain a move higher it will require both a widening in yield differentials and easing risk aversion. Neither are guaranteed to happen any time soon as was evident overnight with risk aversion rising. US data has improved but it is insufficient to provoke a sharp back up in US bond yields.

Consequently in the coming weeks USD/JPY topside momentum will be limited. A break above USD/JPY’s 200 day moving average level of 79.89 could prove decisive in terms of JPY long capitulation and once above this level USD/JPY will target the 11 July high of 80.83. However, this will require further intervention otherwise the underlying trend in JPY will continue to remain positive.

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

European agreement at last

October 27, 2011 — Mitul Kotecha

Following a drawn out period of discussions European officials have finally agreed on a haircut or debt write off of around 50% of Greek debt versus 21% agreed in July. In addition the EFSF bailout fund will be leveraged up to about EUR 1.4 trillion, with the new EFSF scheduled to be in place next month. The haircut for Greek debt is aimed at ensuring that Greece’s debt to GDP ratio drops to 120% by 2012.

The reaction of markets was initially favourable with EUR/USD breaching 1.40 and risk / high beta currencies bouncing. I doubt that the upward momentum in EUR can be sustained, however, with plenty of questions on the mechanics of the deal, especially about leveraging the EFSF fund, remaining. I suspect that the EUR may have already priced in some of the good news.

Data releases, especially in the US are offering markets more positive news. Following on from firm readings for US durable goods orders and new home sales, today’s US Q3 GDP expected to reveal an acceleration in growth to a 2.5% annual rate, will help to alleviate recession fears to some extent. The USD may benefit if the data reduces expectations of further Fed quantitative easing especially given the recent comments from some Fed officials indicating that the door is open to more QE.

In Japan attention was firmly fixed on the Bank of Japan policy meeting and the prospects for FX intervention to weaken the JPY. In the event the BoJ kept its overnight rate unchanged at 0.1% as expected and expanded its credit program by JPY 5 trillion and asset purchase fund to JPY 20 trillion.

The measures are aimed to easing deflation pressure but the real focus in the FX market is whether there is any attempt to the weaken the JPY. I am currently in Tokyo and here there is plenty of nervousness about possible FX intervention being imminent. Speculation of such intervention will likely help to prevent USD/JPY sustaining a drop below the 75.00 over coming days.

Posted in Currencies, Economics, Economy, Europe, eurozone, Financial crisis, Fiscal/Budget, France, FX, Germany, Greece, Interest rates, Italy, Japan, Monetary Policy. Tags: , , , , , , , , , , , , . Leave a Comment »

USD, EUR and JPY Outlook This Week

October 24, 2011 — Mitul Kotecha

The USD lost more ground last week extending its drop from the early October. Interestingly its latest drop has occurred despite an uptick in risk aversion suggesting other factors are at work. Mixed US data and earnings have not given the USD much direction with a downbeat Beige Book counterbalanced by a firmer Philly Fed manufacturing survey and housing starts.

The data have not been sufficiently weak to fuel expectations of more Fed quantitative easing but some Fed officials including Yellen, Tarullo, Evans and Rosengren in indicating that further QE could be considered. The USD has therefore been somewhat undermined but will take its cue from data releases and events in Europe this week.

This data slate will be mixed but on balance will not support more Fed QE. In particular, Q3 Real GDP is expected to come in sharply higher than in Q2, with a 2.5% annual rate expected to be revealed. Other indicators will be less positive, with October consumer confidence set to slip further and remain at a recessionary level, while September durable goods orders will decline by around 1%.

Despite an expected increase in new home sales in September the overall picture of the US housing market will remain very weak. Overall, the USD may find some respite from the GDP report but the data will be seen as backward looking, with the jury still out on the issue of more quantitative easing.

The EUR struggled to make any headway last week amid a barrage of rumors about the outcome of Sunday’s EU Summit. In the event the summit failed to deliver concrete details although there appeared to be some progress in key areas. Attention will now turn to Wednesday’s summit but once again the risk of disappointment is high. EUR/USD will only extend gains if markets are satisfied at the result but this is by no means guaranteed.

Data releases will not be supportive for the EUR this week, with a further deterioration in ‘flash’ eurozone purchasing managers indices (PMIs) and European Commission confidence surveys expected in October but hopes of a concrete resolution at Wednesday’s EU Summit will keep the EUR/USD supported early in the week although it will find strong resistance around 1.3915.

The sensitivity of the JPY to risk aversion has actually fallen over the last three months while the influence of bond yield differentials also appears to have slipped. The fact that USD/JPY continues to remain in a very tight range with little inclination to break in either direction despite gyrations in risk and yield differentials almost appears if the currency pair has been pegged.
Obviously this is not the case but a break out of the current range does not look imminent.

Speculative JPY positioning has dropped over recent weeks while equity and bond flows have overall been negative but this has not been reflected in JPY weakness resulting in increased frustration by Japanese officials. We continue to look for the JPY to weaken over coming months but much will depend on a widening in US / Japan yield differentials and easing risk appetite as both will regain their hold on the currency. In the meantime, the currency will continue to offer little to get excited about.

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

Euro slides as Greek worries intensify

September 12, 2011 — Mitul Kotecha

The USD ended last week on high a note having overcome speeches by Fed Chairman Bernanke and President Obama. Bernanke’s lack of detail on potential further Fed stimulus offered the USD a lifeline as there was no mention of QE3 but nervousness may mount ahead of the September 21 FOMC meeting.

This week’s data releases (including retail sales, inflation, industrial production and regional manufacturing surveys may offer some direction to the USD and it is likely that the data over coming days will look less negative than in past weeks, giving the USD some support. Having broken above its 200 day moving average around 76.1986 for the first time in a year the USD index is set to begin the week in positive mode and will likely extend its gains over coming days.

In sharp contrast, EUR/USD crumbled at the end of last week dropping through its 200 day moving average despite positive news from Germany (rejection of bills in the constitutional court) and Italy (passage of austerity measures). The European Central Bank (ECB) did not help the EUR’s cause however, with the change in its stance to a more balanced assessment of risks from its more hawkish stance previously.

However, the real damage occurred as speculation of a Greek default intensified and ECB hawk Stark resigned from the ECB council, highlighting the divisions within the governing board. This week attention will remain on Greece as negotiations between the Troika (ECB, EU and IMF) and Greek officials resume.

Ahead of the talks Greece approved a further EUR 2 billion in austerity measures over the weekend but nonetheless, despite denials by Greek officials speculation of a debt default will continue to hammer the EUR lower. Near term technical support is seen around 1.3525 for EUR/USD.

GBP found some relief last week following the decision by the Bank of England to leave policy unchanged though it is unlikely to be able to make much if any headway against the USD over coming sessions as expectations of further UK quantitative easing may simply have been pushed back to the November meeting.

Inflation data this week will give further clues to policy but once again there is likely to be no sign of any easing in inflation pressure, limiting the room for maneuver for the BoE. Moreover, a weak outcome for UK retail sales in August will maintain the trend of soft UK data keeping up the pressure for more BoE action. As a result GBP will struggle against the USD but given that problems in Europe look even worse, GBP will likely extend gains against the EUR this week.

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