Speculators bail out of USDs

October 4, 2010 — Mitul Kotecha

Risk appetite held up reasonably well last week, with markets failing to be derailed by concerns over Ireland’s banking sector and growing opposition to austerity measures across Europe. The main loser remained the USD, with the USD index hitting a low marginally above 78.00 and speculative positioning as reflected in the CFTC IMM data revealing a further sharp drop in sentiment to its lowest since Dec 2007.

This week is an important one for central bank meetings, with four major central banks deliberating on monetary policy including Bank of Japan (BoJ), Reserve Bank of Australia (RBA), European Central Bank (ECB) and Bank of England (BoE). The major event of the week however, is Friday’s release of the September US employment report. The RBA is set to hike its cash rate by 25bps, the BoJ may announced more easing measures whilst in contrast both the ECB and BoE are unlikely to alter their policy settings.

Whilst the BoJ is widely expected to leave its policy rate unchanged at 0.1%, it may announce further measures against the background of persistent JPY strength, a worsening economic outlook as reflected in last week’s Tankan survey and decline in exports. Japanese press indicate that the BoJ may increase lending of fixed rate 3 to 6 month loans to financial institutions as well as buy more short-term government debt.

The measures alongside risks of further JPY intervention may prevent USD/JPY slipping further but as reflected in the increase in speculative net long JPY positions last week, the market is increasingly testing the resolve of the Japanese authorities. Strong support is seen around USD/JPY 82.80, with the authorities unlikely to allow a break below this technical level in the short-term.

Although we will only see details of the voting in two weeks in the release of the UK BoE Monetary Policy Commitee (MPC) minutes it is likely that there was a three-way split within the MPC as reflected in recent comments, with MPC member Posen appearing to favour more quantitative easing whilst the MPC’s Sentance is set to retain his preference for higher rates. As has been the case over recent months the majority of the MPC are likely to have opted for the status quo.

GBP was a laggard over September as markets continued to fret over potential QE from the BoE. This uncertainty is unlikely to fade quickly suggesting limited gains against the USD and potentially more downside against the EUR. GBP speculative sentiment has improved but notably positioning remains short. EUR/GBP will likely target resistance around 0.8810.

In contrast to GBP the EUR has taken full advantage of USD weakness and looks set to extend its gains. Although there is a risk that speculative positioning will soon become overly stretched it is worth noting that positioning is well below its past highs according to the IMM data. EUR may have received some support from Chinese Premier Wen’s pledge to support Greece, and a stable EUR. Whilst there continues to be risks to the EUR from ongoing peripheral debt concerns such comments likely to be repeated at the EU-Asia summit today and tomorrow, will keep the EUR underpinned for a test of 1.3840.

Posted in central banks, China, Currencies, Economics, equity markets, Europe, eurozone, Federal Reserve, Financial crisis, FX, Interest rates, Ireland, Japan, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

USD pressure, EUR resilience, GBP whipsawed

September 29, 2010 — Mitul Kotecha

Speculation the Fed will begin a new program of asset purchases or QE2 as soon as November is intensifying. The weaker than expected reading for US consumer confidence in September released on Tuesday has only added to this expectation as sentiment continues to be hit by job market concerns. Against this background the USD remains under strong downward pressure, with little sign of any turnaround.

The prospects of further USD debasing as well as intervention in many countries to prevent their currencies from strengthening against the USD continues to power gold prices which hit a new record high having breezed through the $1300 per troy ounce mark. In the current environment it is hard to see gold prices turning much lower although there may be some risk of profit taking in the weeks ahead.

The EUR remains a key beneficiary of USD weakness but this currency has problems of its own to contend with. Indeed, peripheral debt concerns, especially with regard to Ireland and to a lesser extent Portugal have increased, with borrowing costs rising as the yield on their debt widens against core eurozone debt. The stronger EUR will only make it harder for these countries to achieve any sort of recovery and could also damage the stronger exporting countries of Northern Europe led by Germany.

So far however, the EUR has managed to show some impressive resilience to renewed peripheral country sovereign debt concerns including comments by S&P about the high costs of rescuing an Irish Bank. Perhaps the knowledge that there is a still a huge bailout fund from the EU and IMF available if needed and also the prospect that the ECB will increase its buying of eurozone debt, has provided a buffer for the EUR.

At some point the ECB may be forced to join the battle in at least attempting to talk its currency lower but at this stage the central bank is showing no inclination to either talk down the currency or physically intervene to weaken the EUR. In the meantime, EUR/USD is likely to strengthen further despite the likely negative impact on European growth, with the currency likely to set its sights on an eventual break above 1.40.

One currency that may struggle in the wake of expectations of Fed QE2 is GBP. Uncertainty over whether the Bank of England will follow the Fed in implementing further quantitative easing could see GBP lag the gains in other currencies against the USD. Conflicting comments from MPC members Posen who noted that there may be a need for further QE in the UK to support the faltering economy were countered by Sentance who noted that there was no need for more QE. GBP/USD is likely be whipsawed as the debate continues and is set to lose further ground against the EUR.

Posted in Bond markets, central banks, Commodities, Currencies, Economics, Economy, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Germany, IMF, Interest rates, Ireland, Monetary Policy, Portugal, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Exhausted

September 14, 2010 — Mitul Kotecha

No the title is not meant to describe how I felt this morning when I woke up but how I feel the market is looking at present in terms of risk trades. Firmer than feared economic data in the US and China and the agreement in Basel on new bank capital ratios boosted risk appetite but the moves are already beginning to fade. It would be easy to jump on the bandwagon but after the sharp gains registered over recent days I would suggest taking a cautious stance on jumping into risk trades at present.

The EUR has played a degree of catch up to risk currencies, rallying sharply against the USD, helped in part by the European Commission which raised its forecasts for the eurozone economy from 0.9% for 2010 to 1.7%. Although the change in forecasts should come as little surprise give that it is now in line with the European Central Bank’s (ECB) expectations the news bolstered the view of economic resilience in the eurozone. Unfortunately as the ECB noted following its last meeting there are plenty of downside risks to growth next year and upcoming data releases will be viewed to determine how sharply growth momentum will slow into next year.

One currency that strengthened was the JPY and this was mainly due the view that Prime Minister Kan will win the contest for leadership of the governing DPJ party in Japan. The race remains very close, with Prime Minister Kan having a slight lead according to Japanese press. The FX market will pay particular attention to the result given that the other contender Ichiro Ozawa has stated his willingness to drive the JPY lower as well as increase fiscal spending. The results of the election will be known shortly and should Ozawa win USD/JPY will likely find support although the bigger influence is likely to be a shift in relative US/Japan bond yields which due to the sell off in US Treasuries over recent days has become more supportive of a higher USD/JPY.

GBP has lagged the move in many risk currencies, failing to take advantage of the weaker USD. There was some relief overnight from an increase in consumer confidence in August according to the Nationwide index, which rose 5 points to 61, from a 14-month low in July. However, any boost to GBP sentiment will have been outweighed by a fall in UK house prices according to RICS, which revealed the sharpest one-month fall in August since June 2004. The data supports the view that the rally in UK house prices could soon be over. Weaker housing activity will also likely limit any further improvement in consumer confidence. Some of this is already priced into GBP however, and over the short-term EUR/GBP may struggle to breach the 0.8400 level.

Another underperformer overnight was the NZD which was hit by disappointing retail sales data for July, which fell 0.4%. Although the drop followed a strong gain in the previous month the data supports the view that the consumer remains cautious in New Zealand, a factor that will likely play into the view that New Zealand’s central bank, the RBNZ will keep policy on hold when they meet tomorrow. NZD slipped off its highs around 0.7347 overnight and also managed to dampen the upside momentum for AUD/USD which will likely struggle to sustain a break through resistance around 0.9350.

Today’s data will provide further direction for the days ahead, with the September German ZEW survey of investor confidence likely to be closely scrutinized. A drop in the economic sentiment gauge to around 10 is expected from 14 in August, highlighting that eurozone growth momentum is beginning to wane. Hard data in the form of eurozone industrial production will also record a weaker performance, likely to drop 0.3% in July. The data will likely cap the EUR today.

In the US the main release is the August retail sales report for which a 0.3% gain in both headline and ex-autos sales is expected. Sales will have been helped by back to school spending although major discounting will have weighed on retailers’ profits. Nonetheless, any gain even if modest will be a welcome development for Q3 growth in the US.

Posted in Australia, bank rescue, central banks, China, Commodities, Currencies, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Fiscal/Budget, FX, Germany, Interest rates, Japan, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

What goes down must go up

September 2, 2010 — Mitul Kotecha

What goes down must go up! A day that began with a stronger than forecast increase in China’s purchasing managers index (PMI) and firm Australian Q2 GDP continued with a surprise jump in the August ISM manufacturing index. The ISM rose to 56.3 from 55.5 in July an outcome that contradicted most of the regional US manufacturing surveys. It was not all positive in terms of data, yesterday however, with a weaker UK manufacturing PMI and unexpected drop in the August US ADP employment report casting a shadow over markets.

Nonetheless, for a change the market decided to act on the good news, with risk assets surging. Despite the improvement in risk appetite it still feels as though the market is grasping for direction. The jump in equities is unlikely to prove durable in an environment characterized by various uncertainties about growth and policy, especially the US.

The next hurdle for markets is the US payrolls data tomorrow. Although the ADP jobs report revealed a surprise 10k decline the employment component of the ISM manufacturing survey strengthened to 60.4, suggesting an improvement in August manufacturing payrolls. Ahead of the payrolls release the US data slate today largely consists of second tier releases including July pending home sales, August chain store sales, weekly jobless claims, and factory orders. It is worth paying particular interest to jobless claims given that the four week moving average has been edging higher, suggesting renewed job market deterioration. The consensus is for a 475k increase in claims, which will still leave the 4-week average at an elevated level.

Given that one of the biggest debates raging through markets at present is whether the Fed will embark on further quantitative easing comments by Fed officials overnight were closely scrutinized for further clues. In the event, Fed Governor Kohn highlighted that the Fed’s reinvestment of the proceeds from mortgage-backed securities will not automatically lead to further QE, suggesting some hesitancy on his part. Meanwhile, Dallas Fed President Fisher noted his reluctance to expand the Fed’s balance sheet until fiscal and regulatory uncertainties are cleared up.

Both sets of comments highlight the difficulty in gaining a consensus within the FOMC for a further increase in QE, suggesting that the hurdle for further balance sheet expansion will be set quite high. Moreover, such comments put the onus on Congress to move quickly in clearing up fiscal policy uncertainties.

As markets flip from risk on to risk off almost on a daily basis the question for today is how sustainable the rally in risk trades will prove to be against the background of so much policy and growth uncertainty. Unfortunately today’s data will provide few clues and markets will turn their attention to tomorrow’s US non-farm payrolls report for further direction. To an extent this suggests that it may be a case of treading water until then. Nonetheless, I still maintain that risk trades remain a sell on rallies over coming weeks

Posted in Australia, central banks, China, Currencies, Economics, Economy, equity markets, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Interest rates, Japan, Monetary Policy, UK, US, US administration. Tags: , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

US payrolls clues

September 1, 2010 — Mitul Kotecha

Most investors will be glad to see the back of August, a month that marked the biggest monthly decline in US stocks in nine years. The main imponderable is whether September will be any better. A series of manufacturing surveys globally today will do little to restore confidence although there was some good news in a slight increase in China’s official August purchasing managers index (PMI) as well a stronger than forecast increase in Australian Q2 GDP, which will likely provide some short-term relief for risk trades.

There was also some slight solace for markets in terms of US data at least from the point of view that the data was not as disappointing as many recent releases. Although the August Chicago PMI slipped (to 56.7) consumer confidence increased (to 53.5) though admittedly confidence remains at a relatively low level. The job market situation detailed within the consumer confidence report was more pessimistic in August than the previous month, however, with those reporting jobs hard to get moving higher. This sends a negative signal for Friday’s payrolls data.

There will be more clues to Friday’s US jobs report today which will enable any fine tuning of forecasts to take place in the wake of the August ADP employment report and ISM manufacturing survey. Consensus forecasts centre on a 15k increase in private jobs. Despite the slight increase in the Empire manufacturing survey in August, the falls in other manufacturing surveys point to some downside risks to the ISM today, with a simple average of the three pointing to the ISM closer to the 50 mark, which will highlight a loss in US manufacturing momentum.

Manufacturing surveys elsewhere will also be in focus, with the final PMI readings scheduled to be released for the eurozone and UK. There is likely to be confirmation of the slight drop in the eurozone PMI to 55.0 in August while the UK PMI is likely to drop to around 57.0 over the month. Both surveys remain at a relatively high level but it is clear that activity is moderating in H2 2010 from a healthy level in H2. The data will give little support to the EUR but the currency has found a degree of stability over the last couple of days. Nonetheless, a further downward move is in prospect.

The Fed FOMC minutes provided little for markets to get excited about. The minutes noted concerns about large scale asset purchases from some Fed officials, indicating resilience to increasing quantitative easing despite acknowledging increased downside risks to the growth and inflation outlook. It is unclear exactly what will be the trigger for further QE as acknowledged by Fed Chairman Bernanke last week.

The minutes will do little to help market confidence given the hesitancy to pursue further QE and provide further stimulus to the economy but the USD is likely to benefit from the fact that the Fed may not be as eager to expand its balance sheet further. Other currencies that remain beneficiaries in the current risk averse environment are the JPY and CHF. The JPY may find further upside more difficult given ongoing intervention fears but the trend remains for a lower USD/JPY in the coming weeks.

Posted in Asia, Australia, central banks, China, Currencies, Economics, Economy, equity markets, Europe, eurozone, Federal Reserve, FX, Interest rates, Japan, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , . 1 Comment »
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