Losing Your Addiction

February 28, 2011 — Mitul Kotecha

An interesting thing happened to me last week. On a business trip to Europe my blackberry broke and failed to work for the rest of the week. I felt like an addict coming off an addiction. The first couple of days were very tough; my usual instinct to constantly check for messages resulted in constant fidgeting and major withdrawal symptoms.

Once this had worn off I must admit I felt liberated. My addiction gone, it felt great to be weaned off my crackberry. The message here is that life goes on without access to mail. It’s an experience I would recommend to all users of such devices.

Back to reality and my view from Hong Kong this week is as follows. The risk-off tone as reflected in related to the turmoil in Libya and the increase in oil prices (as supply concerns intensify), may help to limit the pressure on the USD this week, but the overall tone is set to remain weak.

Much will depend on this week’s key US data releases and a testimony by Fed Chairman Bernanke to the US Senate, to determine whether the USD will find a more stable footing. Clearly the more hawkish tone of the European Central Bank (ECB) and Bank of England (BoE) in contrast to the lack of inclination by the Fed towards a tighter monetary policy stance could undermine the USD.

In this respect, it is doubtful that Bernanke will change his stance of the Fed failing to meet its dual mandate due to too low inflation. The main event is the February US jobs report at the tail end of the week. The consensus expectation of a 190k increase in payrolls will be finalised after gaining more clues from the US February ISM surveys and ADP jobs report earlier in the week. The week’s releases will likely reveal further improvements in US economic data, but given that this will do little to budge the Fed’s stance, the USD may be left somewhat underwhelmed.

The intensification in risk aversion over recent days has also been felt in the Eurozone periphery where bond market pressures have resumed. Nonetheless, the fallout on the EUR has been limited by hawkish ECB jawboning. Thursday’s ECB meeting will surely maintain this stance, and following the release of data on Tuesday likely to show a further increase in inflation in February, upside inflation risks are likely to be highlighted by ECB President Trichet in the press conference.

A likely pre-emptive strike from the ECB cannot be ruled out. Two rate hikes in H2 2011 are now likely even as the Bank maintains liquidity support for weaker peripherals. No change in policy but a hawkish press statement on Thursday will on the face of it play for a firmer EUR but i) the fact that the market has already discounted the possibility of early rate hikes and ii) the proximity of the US payrolls data on Friday and iii) uncertainty over the impact of the Irish election outcome in which the Fine Gael party won a clear victory, suggest that EUR risks are asymmetric. The net long positioning overhang also points to some downside risks to EUR.

There are plenty of other events and data on the calendar this week including Japan’s slate of month end releases, interest rate decisions by the Reserve Bank of Australia and Bank of Canada, UK PMI manufacturing survey data and Swedish Q4 GDP data.

The bottom line is that currencies will be driven by the conflicting influences of improving economic data on the one hand and elevated risk aversion on the other. The main beneficiaries of higher risk aversion will be the CHF and JPY though both have risen far whilst the USD will be restrained by a dovish Fed.

In contrast the EUR and GBP may yet extend gains but in both cases, markets have already shifted policy tightening expectations sharply over recent weeks and we suspect EUR/USD will be capped at resistance around 1.3860, whilst GBP/USD will similarly struggle to break its year high around 1.6279.

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FX Winners and Losers

February 16, 2011 — Mitul Kotecha

There has been a sense of mean reversion in FX markets so far this year as some of last year’s winners have become losers. Namely NZD, CHF, JPY and AUD have all lost ground whilst EUR and GBP have gained ground. The odd one out is the SEK which has strengthened over 2010 and in 2011 versus USD. I expect this pattern to change and the likely winners over the next 3- months are NZD, AUD and CAD, with CHF and JPY the likely losers.

EUR held up reasonably well in the wake of slightly disappointing growth data, with eurozone GDP rising less than expected in Q4, and a smaller than expected gain in the February German ZEW investor confidence survey (economic sentiment component). My sense is that the net long EUR speculative position has already been pared back somewhat over recent days reducing the potential selling pressure on the currency in the near term.

Given that EUR/USD is one of the only major currency pairs being influenced by interest rate differentials, its direction will hinge more on policy expectations but in the near the announcement by the German Finance Minister this morning of a restructuring plan for WestLB may give the currency some support.

Perhaps one explanation for the stability of EUR/USD around the 1.3500 level is that US data was also disappointing yesterday. January retail sales rose less than forecast whilst revisions to back months suggest less momentum in Q4 consumer spending than previously envisaged. As with the eurozone data weather likely played a role in contributing to the outcome.

The net impact on currencies is that they are largely stuck within tight ranges. Further direction will come from the release of the Fed FOMC minutes for the January 26th meeting. The minutes may undermine the USD if a likely dovish slant continues to be expressed but given that the FOMC decision at that meeting to hold policy setting unchanged had no dissenters this should not come as a surprise.

Whilst the battle between the USD and EUR ended in a stalemate GBP outperformed in the wake of the increase in UK January CPI inflation and in particular the letter from the BoE governor to the Chancellor keeping open the door to a rate hike. The Quarterly Inflation Report (QIR) today will be particularly important to determine whether the bounce in GBP is justified.

I remain hesitant to build on long GBP positions given the net long speculative overhang in the currency. The risks following yesterday’s jump in GBP are asymmetric, with a hawkish QIR likely to have less impact on the currency than the negative impact from a more dovish than expected report.

Econometer.org has been nominated in FXstreet.com’s Forex Best Awards 2011 in the “Best Fundamental Analysis” category. The survey is available at http://www.surveymonkey.com/s/fx_awards_2011

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All Eyes On US Jobs Data

January 3, 2011 — Mitul Kotecha

Happy New Year!

2010 ended on a sour note especially for eurozone equity markets (and the Australian cricket team) where there has yet to be a resolution to ongoing growth/fiscal/debt tensions.  The EUR strengthened into year end but this looked more like position adjustment than a shift in sentiment and EUR/USD is likely to face stiff resistance around the 1.3500 level this week, with a drop back towards 1.3000 more likely.  In the US there was some disappointment in the form of a surprise drop in December consumer confidence data but pending home sales and the Chicago PMI beat expectations, with the overall tone of US data remaining positive.

There will be plenty to chew on this week in terms of data and events which will provide some much needed direction at the beginning of the year.  The main event is the December US jobs report at the end of the week.   Ahead of this there will be clues from various other job market indicators including the Challenger jobs survey, ADP employment report, and the ISM manufacturing and non-manufacturing surveys.  The data will reflect a modest improvement in job market conditions and the preliminary forecast for December payrolls is for a 135k increase, with private payrolls set to rise by 145k and the unemployment rate likely to fall slightly to 9.7%.

The minutes of the 14 December Fed FOMC meeting (Tue) will also come under scrutiny against the background of rising US bond yields.  In addition, Fed Chairman Bernanke will speak on the monetary and fiscal outlook as well as the US economy to the Senate Budget Panel.   Bernanke will once again defend the use of quantitative easing whilst keeping his options open to extend it if needed.  However, the changing composition of the FOMC with four new members added in 2011 suggests a more hawkish tinge, which will likely make it more difficult to agree on further QE.   In any case, the tax/payroll holiday package agreed by the US administration means that more QE will not be necessary. 

It’s probably not the most auspicious time for new member Estonia to be joining the eurozone especially as much of the speculation last year focussed on a potential break up.  The beginning of the year will likely see ongoing attention on the tribulations of Ireland after its bailout, with looming elections in the country.  Portugal and Spain will also remain in focus as the “two-speed” recovery in 2011 takes shape.  Data releases this week include monetary data in the form of the eurozone December CPI estimate and M3 money supply.  Inflation will tick up to 2% but this ought to be of little concern for the ECB.  Final PMI data and confidence indices will likely paint a picture of slight moderation.   

The USD ended the year on a soft note, with year lows against the CHF and multi year lows vs. AUD registered, but its weakness is unlikely to extend much further.  The key driver will remain relative bond yields and on this front given the prospects for relative US yields to move higher, the USD will likely gain support.  There maybe a soft spot for the USD in Q1 2011 but for most of the rest of the year the USD is set to strengthen especially against the EUR which will increasingly comer under pressure as peripheral tensions and growth divergence weigh on the currency.

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No Let Up in USD Pressure

September 17, 2010 — Mitul Kotecha

At the end of a momentous week for currency markets it’s worth taking stock of how things stand. Much uncertainty remains about the global growth outlook, especially with regard to the US economy, potential for a double-dip and further Fed quantitative easing. Although there is little chance of QE2 being implemented at next week’s Fed FOMC meeting speculation will likely remain rife until there is clearer direction about the path of the US economy.

In Europe, sovereign debt concerns have eased as reflected in the positive reception to debt auctions this week. Nonetheless, after a strong H1 2010 in terms of eurozone economic growth the outlook over the rest of the year is clouded. Such uncertainty means that markets will also find it difficult to find a clear direction leaving asset markets at the whim of day to day data releases and official comments.

The added element of uncertainty has been provided by Japan following its FX intervention this week. Whilst Japanese officials continue to threaten more intervention this will not only keep the JPY on the back foot but will provide a much needed prop for the USD in general. Indeed Japan’s intervention has had the inadvertent effect of slowing but not quite stopping the decline in the USD, at least for the present.

The fact that Japanese officials continue to threaten more intervention suggests that markets will be wary of selling the USD aggressively in the short term. The headwinds on the USD are likely to persist for sometime however, regardless of intervention by Japan and/or other Asian central banks across Asia, until the uncertainty over the economy and QE2 clears.

Japan’s intervention has not gone down well with the US or European authorities judging by comments made by various officials. In particular, the FX intervention comes at a rather sensitive time just as the US is piling on pressure on China to allow its currency the CNY to strengthen further. Although US Treasury Secretary Geithner didn’t go as far as proposing trade and legal measures in his appearance before Congress yesterday there is plenty of pressure from US lawmakers for the administration to take a more aggressive stance, especially ahead of mid-term Congressional elections in November. Ironically, the pressure has intensified just as China has allowed a more rapid pace of CNY nominal appreciation over recent days although it is still weaker against its basket according to our calculations.

Another country that has seen its central bank intervening over many months is Switzerland, with the SNB having been aggressively intervening to prevent the CHF climbing too rapidly. However, in contrast to Japan the SNB is gradually stepping back from its intervention policy stating yesterday that it would only intervene if the risk of deflation increased. Even so, Japan may have lent the Swiss authorities a hand, with EUR/CHF climbing over recent days following Japan’s intervention.

The move in EUR/CHF accelerated following yesterday’s SNB policy meeting in which the Bank cut its inflation forecasts through 2013, whilst stating that the current policy stance in “appropriate”. Moreover, forecasts of “marked” slowdown in growth over the rest of the year highlight the now slim chance of policy rates rising anytime soon. Markets will eye technical resistance around 1.3459 as a near term target but eventually the CHF will likely resume its appreciation trend, with a move back below EUR/CHF 1.3000 on the cards.

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