JPY, SEK and GBP view

August 30, 2012 — Mitul Kotecha

USD/JPY remains stuck within a tight range having reversed its recent break higher towards the 80.00 level, once again settling back below 79.00. Once again the main determinant of the exchange rate appears to be yield differentials and notably the JPY has had a very low sensitivity to gyrations in risk over recent months.

For JPY bears it it’s worth noting that US 2-year bond yields have began to edge higher this week, suggesting some upward pressure on USD/JPY. The speculative market remains net long JPY suggesting scope for a drop in JPY speculative appetite too, but any upside is set to be gradual, with a technical hurdle at around 79.37 likely to be tough level to break above.

EUR/SEK has edged higher over recent days following its dramatic multi month drop. Why has the currency pair turned now? One of the key factors appears to be an increased sensitivity to risk which is playing negatively now that risk aversion is rising again. Indeed my risk barometer has been moving higher since around the middle of the month, in turn dragging SEK lower.

My quantitative model estimate based on interest rate differentials, relative equity performance and risk aversion, suggests that the SEK has further to weaken especially against the EUR. Based on the results of the model I suggest playing for such a move, targeting 8.7252, with a stop loss at 8.1616.

Another currency for which I am bearish on versus EUR is GBP. Although the move higher in EUR/GBP has been a slow grind, I continue to see value in this trade. Indeed, my models show that there is still much upside potential left for EUR/GBP based on the current levels of yield differentials and risk aversion.

As for cable (GBP/USD) it appears to be stuck to the coattails of EUR/USD but I expect it to lag any move higher in EUR/USD going forward. Moreover, if as I expect EUR/USD loses momentum into next week, this will leave GBP/USD rather exposed to downside risks.

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Plenty of event risk

July 3, 2012 — Mitul Kotecha

In the wake of the EU Summit at the end of last week sentiment has stabilised, with risk indicators such as the VIX ‘fear gauge’ reflecting a firmer tone to risk appetite. Although a few stumbling blocks have arisen such as the objections by both Finland and Holland to bond purchases by the ESM bailout fund they may not be sufficient to derail the project. The euphoria is likely to fade in the days ahead but the US Independence day holiday tomorrow may keep trading somewhat subdued.

There are plenty of events this week including central bank decisions by the RBA (Australia), Riksbank (Sweden), ECB (Eurozone) and BoE (UK), to provoke some excitement. A likely rate cut from the ECB and an extension of asset purchases by the BoE will give markets plenty to chew on. Finally, at the end of the week the US June jobs report will also be closely watched. We forecast a 100k increase in payrolls but will look for clues from tomorrow’s ADP jobs report.

The disappointing US June ISM manufacturing survey released yesterday highlighted that growth risks will remain a key weight on the market dampening any improvement in risk appetite over coming weeks. Moreover, weaker growth in Europe will make it more difficult to achieve budget targets, while adding to pressure to ease bailout terms. Undoubtedly the European summit was a step in the right direction but with plenty of details still needing to be thrashed out and growth concerns intensifying it would be highly optimistic to expect a fully fledged ‘risk on’ to ensue.

Notably the EUR has given back some of its gains after failing to break above 1.2700 against the USD. Further downside is likely but the EU Summit outcome has meant that the risk of a sharp drop lower has receded. Although there is likely to have been some short covering following the summit outcome EUR short positions remain significant, a factor that may also limit downside in the currency. EUR/USD will find some short term support around 1.2553 but will likely edge down to around 1.2500 over coming sessions.

Posted in Australia, eurozone, Sweden, US. Tags: , , , , . Leave a Comment »

Spain moves to the epicentre

May 30, 2012 — Mitul Kotecha

Risk appetite has continued to firm but caution prevails. Rumours overnight of a Eurozone bank rescue fund (later denied) helped sentiment, but the ECB’s rejection of plans to recapitalise Bankia in Spain via an injection of EUR 19 billion of sovereign bonds and a downgrade of Spain’s credit ratings, once again brought a dose of reality back to markets. Additionally a Xinhau news agency report that China has no plans to introduce a major stimulus package will also dampen sentiment. Against this background it is difficult to see any rally in risk being sustained.

Admittedly equity valuations look more compelling, with the price / earnings ratio on the S&P 500 below its long term average, but that does not mean that now is the time to buy stocks or risk assets in general. The USD remains the winner on the FX front and will continue to edge higher over coming days and weeks, with the currency interestingly verging on a close above its 100 month moving average.

Once again the EUR has failed to hold onto gains, with the currency making lower highs and lows, dropping below 1.2500 overnight. Even a firmer tone to equity markets and slightly better risk appetite has failed to provide any support to EUR as Greece passes the baton to Spain as the new epicentre of market attention. A new poll showing increased support for pro bailout parties in Greece has helped to alleviate Greece concerns slightly there.

Today’s data slate in Europe will come as little relief to the EUR. A further deterioration in economic confidence surveys in May will only serve to highlight the growing growth disparity between the Eurozone and US although the surprisingly large drop in May US consumer confidence was hardly encouraging. The data will leave the EUR vulnerable to further slippage and follow through below 1.2500, with a test of technical support around 1.2300 on the cards.

Like most other currencies the sensitivity of USD/SEK to risk aversion has increased over recent weeks. According to my calculations it has been one of the most highly correlated currency pairs with Risk Aversion over the past 3-months. This has been reflected in the drop in SEK against the USD which accelerated during May. However, USD/SEK has stabilised lately while EUR/SEK has dropped sharply.

A further drop to around 8.95 (trend line from beginning April) is on the cards in the near term but further SEK gains are unlikely unless risk aversion improves. On the positive side, Swedish economic data is at least perking up as reflected in the bigger than expected jump in May consumer confidence yesterday. GDP data today ought to confirm that the drop in growth in Q4 will not be sustained, which will to provide short term relief to the SEK.

Posted in eurozone, FX, Greece, Spain, Sweden. Tags: , , , , . Leave a Comment »

SNB shakes up FX markets – Pressure now on Japan?

September 7, 2011 — Mitul Kotecha

The action by the Swiss National Bank yesterday rippled through FX markets fuelling sharp moves across major currencies. In case you missed it the SNB introduced a currency floor in EUR/CHF at 1.20 and committed itself to buy FX in unlimited amounts. The last time the SNB did something similar was in 1978 when a ceiling was set against the Deutsche Mark. The sharp initial reaction to the news saw EUR/CHF jump by around 8.5% largely as a result of the shock from the announcement.

The SNB will not need to worry about the inflationary implications of pumping CHF into the market while it is clear that the currency is highly overvalued, supporting their cause. However, the real test will be evident over coming days and weeks in the commitment to hold the 1.20 level at a time when the situation in the eurozone periphery continues to deteriorate and demand for CHF remains strong. The risk is that the SNB may have simply set up a target for markets to attack. One other implication of the SNB’s move is that it could be a trigger for an intensification of ‘currency wars’.

The onus is now on the Japanese authorities to act more aggressively especially if safe haven flows focus increasingly on the JPY and less on the CHF given the new EUR/CHF floor. So far FX interventions have clearly not worked as was the case in Switzerland and Japan’s new Prime Minister is likely to want to prove his credentials. Japan has had a tendency to underwhelm with regard to JPY measures in the past and unless there is a major announcement today USD/JPY is likely to move lower again below 77.00.

Scandinavian currencies are also set to be beneficiaries of the SNB’s decision. EUR/SEK has come under increasing downside pressure over recent weeks even as risk aversion has intensified and it appears that safe haven flows out of Europe are now targeting Scandinavian currencies. As the CHF is now less attractive in this respect, the SEK as well as NOK will find themselves under further upside pressure over coming days and weeks. Both NOK and SEK versus EUR and USD have had insignificant correlations with risk over recent months, highlighting their appeal as anti-EUR currencies.

Posted in central banks, Currencies, Economics, Economy, Europe, eurozone, FX, Japan, Monetary Policy, Sweden, Switzerland. Tags: , , , , , , , , , , , , , , , . Leave a Comment »

Payrolls sour mood, Eurozone concerns intensify

September 5, 2011 — Mitul Kotecha

The market mood has soured further and risk aversion has increased following disappointing August US jobs report in which the change in payrolls was zero and downward revisions to previous months has reinforced the negative mood on the US and global economy while raising expectations of more Federal Reserve action. Moreover, the report has put additional pressure on US President Obama to deliver fresh jobs measures in his speech on Thursday though Republican opposition may leave Obama with little actual leeway for further stimulus.

There is plenty of event risk over coming days, with a heavy slate central bank meetings including in Europe, UK, Japan, Australia, Canada and Sweden. The European Central Bank will offer no support to a EUR that is coming under growing pressure, with the Bank set to take a more neutral tone to policy compared its previously hawkish stance. In the UK, GBP could also trade cautiously given recent comments by Bank of England Monetary Policy Committee members about potential for more UK quantitative easing.

The EUR has been unable to capitalise on the bad economic news in the US as news there has been even worse. The negative news includes the weekend defeat of German Chancellor Merkel’s centre-right bloc in regional elections, which comes ahead of a vote in Germany’s constitutional court on changes to the EFSF bailout fund.

The withdrawal of the Troika (ECB, IMF and EU) from Greece has also put renewed emphasis on the country at a time when protests are escalating. If all of this is not enough there is growing concern about Italy’s apparent backtracking on austerity measures, with the Italian parliament set to discuss measures this week. Separately Germany, Holland and Finland will hold a meeting tomorrow on the Greek collateral issue. On top of all of this is the growing evidence of deteriorating growth in the euro area.

Data releases are unlikely to garner a great deal of attention amidst the events noted above, with mainly service sector purchasing managers indices on tap and at least threw will look somewhat better than their manufacturing counterparts. In the US the Beige Book and trade data will be in focus but all eyes will be on Obama’s speech later in the week. The USD has maintained a firm tone despite the jobs report but its resilience may be better explained by eurozone negativity rather than US positivity. Even so, the USD is looking less uglier than the EUR in the current environment.

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