EUR jumps on Spanish news, but Greek risks ahead

June 11, 2012 — Mitul Kotecha

Spain’s request for a EUR 100 billion bailout for its banks has significantly shifted the bias for markets this week, with risk assets buoyed and safe haven assets pressured. The fact that Spain will receive a bailout ‘light’ in terms of the conditions of the loan, will also have come as good news as the stringent measures associated with bailouts of Greece, Portugal and Ireland, will be avoided. Taken together with mixed (but less bad than feared) Chinese data over the weekend, the scene is set for markets to rally early in the week.

However, plenty of event risk remains, not least of which is the outcome of Greek elections at the weekend and results of French parliamentary elections today, which could easily reverse the positive mood of markets.

The USD has continued to head lower a trend that has been established since the end of May, with its drop set to accelerate at the start of the week following news of Spain’s banking bailout and the subsequent bounce in risk assets.

Although Fed Chairman Bernanke provided some relief for the USD last week by not indicating a desire to embark on fresh quantitative easing, the reality is that US data has been disappointing of late, keeping the door open to such action, restaining the USD.

More damaging to the USD is the bounce in risk appetite even before the Spanish news. Softer US data this expected week including likely sluggish May retail sales, a small increase in industrial production and lower manufacturing and consumer confidence surveys, will keep the debate on QE firmly open, leaving the USD struggling in the days ahead.

EUR/USD lurched higher following Spain banking bailout request. However, the sum of EUR 100 billion is far higher than the EUR 40 billion anticipated and could add around 20% to Spain’s sovereign debt. While the size of the package is significant it is also worrying, a fact that could come back and haunt the EUR.

Undoubtedly the upside in EUR is being helped by the fact that speculative positioning reached a fresh record low last week (according to the CFTC IMM data) leaving plenty of scope for short covering. In the near term EUR/USD will remain buoyed but any gains will be restricted to technical resistance around the EUR/USD 1.2690 level where sellers will emerge, especially given uncertainty surrounding the outcome of Greek elections.

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Risk assets rally, AUD jumps on strong jobs data

June 7, 2012 — Mitul Kotecha

Risk assets rallied hard overnight overcoming, albeit temporarily, fears of a Eurozone calamity. The boost to markets appeared to come from hopes of stimulus on many fronts. Although the European Central Bank (ECB) did not cut policy interest rates President Draghi did note that he ‘stands ready to act’ if needed. This implies that rates cuts are in the pipeline very soon but any more action will require European politicians to act first. Following the G7 conference call there is also speculation that EU officials are coordinating some form of support for Spain, especially for its banking sector but details of what this will entail is lacking.

Meanwhile, speculation that the Fed will at least extend ‘Operation Twist” if not opt for a further round of quantitative easing has helped to support the uplift to sentiment. Further clues will come from Fed Chairman Bernanke’s testimony to Congress today although we don’t expect him to signal a policy shift. Markets are clearly grasping for any potential positives in the form of potential policy support but the risk of disappointment remains high, especially in Europe where policy makers have yet to reveal any fresh plans.

The USD dropped further overnight as risk currencies rallied. Market positioning had become very long USDs and some correction of long positioning / profit taking is obviously taking place Data releases did not provide any support to the currency although the Beige Book did note that the economy was continuing to grow ‘moderately’ which was perhaps less negative than it could have been. The USD may find some support from the Bernanke’s testimony today. Although the Fed chief is set to be cautious in his outlook he is unlikely to point to further stimulus at this stage.

It’s worth highlighting the Australian data this morning. Employment rose by surprisingly strong 38.9k. The details of the jobs report are even better than the headline. Full time employment was up 46.1k, while part time jobs were down 7.2k. The only slight negative is the rise in the unemployment rate to 5.1% but this was largely due to a rise in the participation rate to 65.5% from 65.2%. This is the second solid Australian reading in a row following on from the Q1 GDP data yesterday. Given today’s jump in risk assets the data will help compound AUD gains in the short term. AUD/USD will face strong resistance around 1.0021.

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Euro eyes ECB, Yen intervention risks rise

June 6, 2012 — Mitul Kotecha

Following an onslaught of disappointing economic news globally the outcome of the US May ISM non-manufacturing index came as a relief, with the index rising to 53.7 from 53.5. Taken together with reports of a credit line to Spain from Europe’s bailout fund, it left markets in perkier mood overnight.

As per usual form, the emergency G7 conference call on the Eurozone turned out to be a non event while Fed speakers including Bullard and Fisher downplayed May’s soft jobs report. Much in terms of market direction today will hinge on the outcome of the European Central Bank (ECB) meeting and press conference, with positive sentiment likely to trickle through into trading until then.

The ECB will be under considerable pressure to cut interest rates today and a 25bps rate cut could be delivered. While the outcome is by no means clear cut and not pre-warned by the ECB a rate cut would at least help to alleviate a little of the pain in Europe. The fact that EUR/USD has a reasonably strong correlation with interest rate differentials over the past 3-months suggests that the EUR will actually come under pressure in the wake of such a move.

Even the reaction is not obvious, however. Arguably a rate cut could also be good news for the EUR as it would help to underpin growth. Moreover, a policy rate cut is largely priced in so the impact on the EUR will not be as potent as it could have been had it not been discounted. The accompanying statement will also be of interest. If the ECB indicates that it will cut rates further it will put even further more pressure on the EUR. Near term downside EUR/USD support is seen around 1.2375.

USD/JPY shows little sign of breaking its downtrend. A combination of further yield compression (2 year US bond yield advantage over Japanese yields continues to narrow) and elevated risk aversion has led to a firmer JPY much to the frustration of Japanese officials. Against this background it was perhaps unsurprising that Japanese finance minister Azumi pushed for the G7 to reaffirm its policy stance that excess volatility and disorderly FX movements are undesired. He faced no opposition in his request, paving the way for Japanese FX intervention to weaken the JPY.

The problem for Japan is that the impact of any intervention will be short lived against the factors mentioned above. Nonetheless, intervention fears will at least engineer a degree of two way risk into markets. Technical support for USD/JPY will be seen around 77.95.

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US dollar could stall as QE hopes rise

June 4, 2012 — Mitul Kotecha

Growth concerns are increasingly accompanying Eurozone tensions as major weights on market sentiment. US jobs data at the end of last week which revealed a disappointing 69k increase May payrolls added to other data including weaker than expected Chinese purchasing managers index (PMI) and even more disappointing Eurozone data highlighting intensifying downside risks to economic activity.

Combined with the lack of traction towards solutions to the Eurozone crisis it has led to an acceleration in the demand for safe haven assets. The weak US data has also reopened the debate about more US quantitative easing, with Fed Chairman Bernanke’s congressional testimony on the economic outlook on Thursday likely to garner plenty of attention.

Another central bank under pressure to act is the European Central Bank (ECB) but action such as restarting its Securities Market Purchases program and/or a third Long Term LTRO are unlikely to take place at least until after the Greek election on June 17 if at all. Until then investors will have to put up with more procrastination, prevarication and inaction from policy makers in Europe as the ECB continues its game of chess with European politicians.

Other central banks in focus this week include the Reserve Bank of India (RBA) and Bank of England (BoE) but while the ECB may still cut policy interest rates this week it is not obvious that the other central banks will follow suit despite growing pressure for easier policy. Against this background risk measures will remain highly elevated while core bond yields will remain suppressed and the USD will remain on the front foot.

The weaker than forecast US May jobs report has really set the cat among the pigeons. The prospects of more Fed quantitative easing is firmly back on the table and while Fed Chairman Bernanke is unlikely to countenance such action in his testimony this week, the market will still speculate on this option. Consequently the USDs one way bet is not longer so clear cut despite the elevated level of risk aversion providing some support for the currency.

Ahead of Bernanke’s testimony on Thursday the USD will struggle to make too much headway leaving the currency to consolidate its gains in the short term. Other US data releases this week are inconsequential for FX markets although the Fed’s Beige Book will be watched for clues ahead of the Fed’s 19-20 June FOMC meeting.

EUR/USD is well off its lows and will consolidate ahead of Thursday’s ECB meeting. Event risk is high and various rumours have resulted in a cautious tone for EUR bears. Talk of a ‘secret master plan’ consisting of structural reforms, banking union, fiscal union and political union to save the EUR as well as of the ECB buying sovereign bonds will keep markets wary of aggressively selling EUR from current levels. Attention is centred on Spain and its banking sector and debate about the country is next in line for a bailout.

Worries about Spain and of course the outcome of Greek elections on June 17 will limit any bounce in the EUR. Nonetheless, speculative positioning in EUR/USD reached another all time low in the latest week according to the CFTC IMM data, suggesting that scope for short covering is growing. EUR/USD will find technical support around its 2012 low around 1.2287 while upside potential will be restricted to resistance around 1.2505.

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Calm start to the week

May 28, 2012 — Mitul Kotecha

There will be some relief reverberating through markets at the news this weekend that Greek opinion polls show growing support for pro-bailout parties. While the Greek election is still some weeks off suggesting that uncertainty will not ease quickly this news will allay fears of a quick ‘Grexit”. The week will begin quietly, with holidays in the US, keeping market trading largely thin and within ranges.

However, there are plenty of data releases and events which will result in increased nervousness as the week goes on. Data this week will reveal further contrasts between the US and Eurozone, with sentiment gauges in the latter set to deteriorate further while consumer confidence in the former will improve. In turn, Eurozone asset underperformance including EUR weakness will remain in place.

The contrast in the outlook for the US and Eurozone has been reflected in a significant shift in speculative positioning. CFTC IMM data reveals an all time high in speculative US positioning but in contrast an all time low in EUR positioning. The USD is winning by being a less ugly currency than the EUR and for now the markets are content to ignore US problems. This is set to continue over coming weeks.

Key data and events this week include the Irish referendum on the fiscal pact on Thursday and the US May jobs report on Friday. Ahead of these there is some periphery supply, with Italy coming to the primary market today. Polls point to a ‘yes’ vote in the Irish referendum, perhaps unsurprising given the risks of losing access to funding if voters vote ‘no’.

In the US markets look for a 150k increase in payrolls though its worth noting that there are less clues this month given the early release date. This slow but steady improvement in jobs will not be particularly exciting but at the same time it will no do the USD much damage either.

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