USD to edge higher

October 15, 2012 — Mitul Kotecha

The surprise rise in the US University of Michigan sentiment survey to its highest level in 5 years provides a better backdrop for asset markets at the start of the week although the follow through is likely to be limited. Chinese exports data may help sentiment its worth noting that Chinese imports were weak. Overall, it appears that the appetite for taking on equity risk is easing as prospects of disappointing US Q3 earnings and lingering growth concerns weigh on sentiment.

Markets may nonetheless, be given some encouragement from economic data this week including likely gains in September US retail sales, industrial production and October Empire State and Philly Fed manufacturing surveys. This will be echoed in Europe, with a second straight increase in the German ZEW investor confidence survey expected to be revealed in October. While the data will do little to ease global growth concerns it will at the very least suggest a renewed downturn is not on the cards.

Economic data may however, take a back seat once again as attention will turn to political developments around the EU Council meeting on 18-19 October. Any major developments are unlikely to emerge from the meeting although Spain and Greece will be on high on the agenda. The lack of progress in the eurozone towards a bailout in Spain and the distribution of Greece’s next loan tranche will once again restrain any positive tone to markets, leaving most asset markets within ranges.

Currencies do not look as though they are about to break out of recent ranges. Nonetheless, the USD will likely continue to edge higher against the background of growing cautiousness towards risk assets. Indeed, there has been some major short covering in the USD over the past week as reflected in CFTC IMM data and I expect the trend to continue as QE3 USD fears increasingly fade. Conversely, EUR short positions are building up once again and the lack of traction towards resolutions in Spain and Greece, point to growing EUR downside risks in the days ahead.

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

USD buffeted, JPY firming, AUD risks receding

October 9, 2012 — Mitul Kotecha

A lacklustre day for equity markets yesterday saw many indices close lower and risk aversion edge higher, with the VIX ‘fear gauge’ being a prime mover, Some encouraging signs for global activity continue to emerge from the rise in the Baltic Dry Index but market growth fears remain high. Attention remains firmly focussed on events in Europe, with the Ecofin meeting today likely to see further discussions on a wide range of issues. As yet there is no breakthrough regarding a Spanish bailout or next tranche of Greek loan disbursement, with the latter only likely to be confirmed in November. A visit by German Chancellor Merkel to Athens today is unlikely to result in any breakthroughs. US corporate earnings will also garner greater attention as the week goes on, with Alcoa set to begin the earnings season tomorrow.

The USD is being buffeted by conflicting factors at present. QE3 is likely to cap any gains in the currency but the expansion of balance sheets by other central banks suggests that a weaker USD outlook is by no means a foregone conclusion. Moreover, from a growth perspective the USD comes out on top. Even though US recovery is a weak one by historical standards the economic outlook still looks better than in Europe, notwithstanding the looming US fiscal cliff. Further evidence of recovery will be gauged from the release of the September small business optimism survey today. A likely third straight gain will provide encouraging news although the survey still remains lower than levels it was at earlier in the year. Over coming days I expect the USD to edge higher as it capitalizes on the various strands of uncertainty in the Eurozone.

As Japan returns from an extended weekend USD/JPY has reversed its recent break higher and is verging on another test of 78.00. There seems little in terms of directional influences to give any major impetus to the currency pair especially as many JPY correlations have broken down lately. JPY speculative long positions remain relatively high suggesting scope for some reduction and JPY selling but I suspect that USD/JPY will remain stuck in its current 77.77 – 79.00 range for some time to come. Nonetheless, JPY bears may be encouraged by recent signs of strong bond outflows adding to data showing equity outflows over recent weeks. Indeed, in the week to 28 September 2012 Japan registered its biggest net equity and bond outflows since early May.

AUD has been a major underperformer this month, with pressure intensifying following last week’s surprise RBA rate cut. Although a further sharp drop appears unlikely hefty long speculative positioning suggests that upside traction will be limited. Nonetheless, my quantitative models show that the AUD is looking increasingly oversold against the USD. The market is already pricing in another RBA rate cut by the end of the year suggesting that the reaction to upcoming data will be asymmetric. In other words the AUD will rally more in the wake of positive data than it will weaken in the wake of soft data. Business and consumer confidence indicators will provide further direction over coming days, but the main driver will come from the September jobs report on Thursday where a further drop in employment is expected. I continue to look for strong support for AUD/USD around the 1.0100 level, with 1.0285 a barrier to any upside break.

Posted in Australia, Economics, eurozone, Greece, Spain, US. Tags: , , , , . Leave a Comment »

Ranges dominate ahead of payrolls

October 4, 2012 — Mitul Kotecha

Markets were given a boost as US recovery hopes strengthened in the wake of encouraging data out of the US, with both the ADP private sector jobs report and ISM non manufacturing index beating forecasts. Consequently the data will lead to some revision higher of expectations for September non farm payrolls to +135k.

The European Central Bank (ECB) meeting today will not be particularly noteworthy as it takes place just a month after the Outright Monetary Transactions (OMT) announcement. There is an outside chance of a policy rate cut but recent ECB comments suggest this is unlikely. The main question remains about the timing of OMT activation but the ball is firmly in Spain’s court on this issue. So far there is no indication of an imminent request for Spanish aid.

The bottom line is that the ECB meeting will have nowhere near the same impact on the EUR as the last meeting, with the currency set to remain tightly range bound ahead of Friday’s US payrolls data or until Spain decides to formally request a bailout. EUR/USD will find resistance around 1.2971 and support at 1.2804 in the short term.

GBP continues to look vulnerable both against the EUR and USD. Having dropped from its highs above 1.63 versus USD the downward trajectory looks well entrenched. My quantitative models corroborate this view, with the models pointing to EUR/GBP trading closer to 0.82. Weaker data including both the manufacturing and service sector September purchasing managers indices (PMIs) both of which missed forecasts are helping to undermine the currency.

The Bank of England (BoE) meeting outcome today will not have much of an impact on GBP given a likely unchanged decision but we continue to believe that the central bank will expand its balance sheet further in November, which in turn will act as another drag on the currency.

AUD has been dealt a major blow this week following the surprise rate cut from the Reserve Bank of Australia (RBA). Clearly external concerns are leaving open the prospects of further rate cuts which in turn are damaging sentiment for AUD. Even so, my correlation analysis shows that the AUD has lost some of its interest rate sensitivity, suggesting that it may not suffer too much further.

The currency’s recent drop from its mid September high around 1.0626 has shaken out plenty of long positions and we suspect that further downside in the currency will be more limited. We expect to see good support for AUD/USD around the 1.0165 level while AUD is also likely to see some stabilisation on the crosses including against the NZD.

Posted in Bank of England, ECB, Economics, eurozone, Spain, US. Leave a Comment »

Lower range for the JPY, GBP vulnerable

September 27, 2012 — Mitul Kotecha

The announcement of the Spanish 2013 budget, German jobs data, and the release of European confidence measures mean that attention will remain focussed on the Eurozone today and the news is unlikely to be good. The request for a Spanish bailout moves ever closer and could eventually provide some relief but prevarication continues to weigh on sentiment.

US data releases will not provide much solace for markets either, with weak durable goods orders and a revision lower to US Q2 GDP expected to be revealed. All in all, another tough session for markets is in store.

Meanwhile, currencies against the USD continue to look vulnerable, with EUR/USD, AUD/USD, USD/CHF in particular, close to breaching their 200 day moving average levels. USD/JPY has closed below the 78.00 level throughout this week suggesting that the currency pair may be moving into a new lower range. So far, there is little sign of potential FX intervention by the Japanese authorities.

Interestingly USD/JPY has dropped despite a general rebound in the USD, suggesting that it is very difficult for the Japanese authorities to blame the move on a weaker USD this time. Nor is the JPY particularly sensitive to risk aversion at present. For a change the move in the JPY cannot be blamed on a narrowing in US versus Japanese bond yield differentials too as the sensitivity of USD/JPY to yield differentials has dropped to an insignificant level while the US yield advantage has actually widened.

Net securities inflows into Japan have been strong recently however, suggesting either or both repatriation into Japanese fiscal half year end or renewed foreign interest in Japanese portfolio assets are helping the JPY. USD/JPY is expected to run into bids around the 77.10 level.

EUR/GBP has tracked the move lower in EUR/USD, while GBP/USD appears to be showing some resilience despite a generally firmer USD. Renewed Eurozone tensions are helping GBP as investors once again look for relative save havens although many would question whether GBP can really be considered as a safe haven.

With little on the data front in the UK today (only the third reading of Q2 GDP) GBP will be left to follow the travails of the EUR. Notably my models show that EUR/GBP divergence from its short term fair value estimate is growing, implying that the drop in the currency pair is unlikely to persist, with GBP resilience likely to give way over coming sessions. My estimate for short term EUR/GBP fair value is 0.8143. This is corroborated by my GBP/USD quantitative model, which also shows downside risks.

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

US dollar finding some support

September 25, 2012 — Mitul Kotecha

Global growth concerns are contributing to undermine commodity prices, with most commodities dropping overnight. Gold was the biggest loser. Risk measures continue to creep higher as a host of worries especially the lack of traction in the Eurozone towards a Spanish agreement on a bailout and inability of Greece to agree on deficit cuts, afflicted markets.

The near term outlook is likely to remain one of caution until some progress in the Eurozone is in evidence. However, growth concerns suggest any improvement in sentiment will be tenuous at best.

On a more positive note, there at least appears to be some movement in the US towards finding a solution towards avoiding the fiscal cliff from taking effect as a bipartisan group of senators have agreed to formulate a deficit reduction plan.

The USD index has rallied over recent days despite expectations for weakness in the wake of the Fed;s announcement of QE3. It almost appears to be a case of sell on rumour, buy on fact. Admittedly the USD usually does weaken following QE with the USD index falling during the full periods of both QE1 and QE2 (-4.6% and -2.9%, respectively).

The counter argument in support of a firmer USD which we believe is supported by the massive deterioration in USD positioning over recent weeks and over 5% drop in the USD since 24 July is that the market has already priced in a lot of QE expectations into the currency.

Another factor that will likely play positive for the USD is the fact that the Fed is not alone in expanding its balance sheet. Many central banks are vying to maintain very easy monetary policy. The implication of this is that there is a battle of the balance sheets in progress that does not necessarily involve the USD being the loser.

EUR/USD has fallen well off its recent highs around 1.3173, with sentiment for the currency souring due to inaction by the authorities in Spain on requesting a bailout and disagreements over how to proceed on various issues including banking supervision. The drop in the September German IFO business climate survey, the fifth in a row, did little to help the EUR, with the survey adding to Eurozone growth worries.

Increasingly it looks as though EUR short covering is running its course and while there may yet be a further bounce in the EUR should the ECB begin its bond purchase programme, the near term outlook is more fragile. Business and consumer confidence surveys in Germany and France today will echo the weakness of the IFO in contrast to a likely firming in September US consumer confidence, contributing to a weaker EUR. A test of support around 1.2848 looms

Posted in eurozone, Greece, Spain, US. Tags: , , , , . Leave a Comment »
« Older posts
Newer posts »