USD in a lose-lose situation, AUD caution

February 14, 2012 — Mitul Kotecha

News that Moody’s Investor service cut the debt ratings on six European countries while revising its outlook on the UK’s and France’s AAA rating to “negative” dampened sentiment for the EUR. Markets will likely trade cautiously ahead of tomorrow’s meeting of European Union Finance Ministers especially as it appears that at least Germany and Netherlands remain sceptical of Greece’s austerity plans, which could frustrate the approval of a second EUR 130 billion bailout package.

The USD is firmer overnight but still struggling to make headway in an environment of improving risk appetite. The fact that USD speculative positioning has dropped sharply to its lowest level since September last year highlights a major shift in USD sentiment. The USD is currently in a lose-lose situation helped neither by economic data or risk appetite. For example a healthy gain in January retail sales expected today, will help to boost risk appetite which in turn will help maintain pressure on the USD.

Encouragingly for the USD, 2 year bond yields have been rising since the start of February in line with firmer economic data. However, rather than giving the USD a boost (except vs. JPY) it has been outweighed by the fact that bond yields elsewhere have risen even more aggressively. The net result is that the prospects for the USD to strengthen further look somewhat restrained over the short term.

AUD has benefited from a firmer tone to risk appetite at the start of the week but for a currency in which speculative positioning is fast approaching all time highs I would be cautious of adding to long positions at current levels. Remaining one of the most sensitive currencies to gyrations in risk appetite the AUD will continue to be mainly driven by global events especially the Greek saga.

Nonetheless, there a few data releases at home that will capture market attention, in particular the January jobs report on Thursday. After a surprisingly large 29.3k fall in December a bounce is expected in January, with around a 15k increase likely. The report will provide clues to just how long the RBA will pause in its rate cutting cycle. I suspect that even a positive outcome will have a briefly positive impact on AUD, with the currency set to struggle to break above resistance around its 2012 high at 1.0845 versus USD.

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Dollar, euro and yen view

February 13, 2012 — Mitul Kotecha

Pressure on the US dollar was maintained last week but there were definite signs that selling momentum is slowing. The lack of major US data releases meant that the key focus for the USD was events in Europe. This week there will be some return of attention back to the domestic front, with heavyweight releases such January retail sales, manufacturing surveys, industrial production and inflation data.

On balance the data will provide more evidence of US recovery but as we have noted previously this is not necessarily positive for the USD. Firmer US data helps to boost risk appetite, which in turn plays negatively for the USD. This could be counterbalanced if US interest rate expectations turn more hawkish but the Fed has effectively ruled out such a prospect, with its commitment to maintain easy policy.

Europe has some important data releases over coming days including the German February ZEW survey and GDP data across the Eurozone. The data will be less encouraging, especially the Eurozone GDP data, compared to the US and is unlikely to give any support to the EUR. Instead events surrounding Greece will be crucial for EUR sentiment. EUR/USD appeared to lose some traction at the end of the week but the EUR remained firm against other currencies.

Greece’s approval of austerity measures overnight will bode well for markets but the tough stance of EU officials towards Greek austerity implementation means that focus will turn to yet another extraordinary meeting of European officials on Wednesday. Even assuming that some form debt deal and second bailout package is ironed out it is questionable how much the EUR will rally as so much good news is already in the price.

The JPY for a change managed to register relatively big moves, with USD/JPY pushing higher over the past week. The revelation that ‘stealth’ FX intervention was carried out by the authorities in Japan taken together with verbal warnings threatening more intervention helped to exacerbate JPY moves.

Speculation that the Bank of Japan is pondering further easing steps at its policy meeting on Tuesday may also be contributing to the softer tone in the JPY. Such hopes may be disappointed however, as we expect the BoJ to retain its current policy settings. The biggest factor explaining the move in USD/JPY is the fact that US bond yields moved higher relative to Japan, with the yield differential ending the week at its highest so far this year.

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Risk currencies flying high

February 1, 2012 — Mitul Kotecha

The first month of 2012 passed rather more positively than anticipated and clearly was a good month for risky assets. Even the beleaguered EUR strengthened despite calls for an extended decline. Assets that were most heavily sold over 2011 were the biggest winners over January. Further signs of improvement in US economic data, receding fears of a China growth crash and even signs of tentative progress in the Eurozone debt crisis mean that sentiment may have finally turned a corner. This has been reinforced by the Fed’s commitment to maintain accommodative monetary policy until the end of 2014 and the ECB’s long term LTRO. I’m not entirely convinced but it wouldn’t pay to buck market optimism just yet.

Interestingly currency markets aren’t necessarily behaving as one would expect. In particular the JPY and CHF, both safe haven currencies, have not weakened despite an improvement in risk appetite. In contrast they have actually strengthened. Other currencies are behaving much as would be expected, especially high beta (risk sensitive) currencies, including AUD, NZD and many emerging market currencies, which have rebounded. Even the EUR has jumped past the 1.30 mark against the USD. Even the slow progress in agreeing on the magnitude of Greek writedowns has failed to dent confidence, with Eurozone peripheral bond yields dropping. Risk / high beta currencies are set to remain well supported over the short term.

Looking ahead the outcome of the US January jobs report at the end of the week as well as a final agreement on Greek debt will help determine whether the positive sentiment for risk assets will be maintained into next week. Meanwhile the USD looks as though it will remain under pressure especially given the continued downward pressure on US bond yields, which only continues to reinforce its role as a funding currency. This explains why both the JPY and CHF have stubbornly refused to weaken as narrowing US versus Japanese and Swiss bond yield differentials have kept these currencies under upward pressure. However, risks of FX intervention by both the Japanese and Swiss authorities suggests that upside may be limited.

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EUR slips, Yen gains

January 31, 2012 — Mitul Kotecha

There has been good and bad news in Europe, with leaders’ rubber stamping the permanent bailout mechanism (ESM) and 25 out of 27 EU countries agreeing on the fiscal discipline treaty. Finally, EU leaders agreed that it was not all about austerity, with growth orientated policies as yet undefined, also required.

The bad news is that there has still been no final agreement on Greek debt restructuring and in turn a second Greek aid package said to total around EUR 130 billion while Portugal is increasingly moving into focus as the next casualty. Unsurprisingly the EUR has lost steam so far this week but markets remain short and any downside looks limited at technical support around 1.3077.

A cautious tone will prevail today, with risk assets likely to remain under mild pressure. Developments in Greece and the Eurozone will continue to garner most attention although US data in the form of the January Chicago PMI manufacturing survey and consumer confidence data will also be in focus.

Both surveys will reveal further improvement in confidence as the US economy continues to show signs of gradual recovery. This was supported overnight by a relatively positive Federal Loan Officers survey which revealed an increase in demand for business loans at banks in Q4 2011. Although the USD has been somewhat restrained by a dovish Fed stance the risk off tone to markets will likely bode well for the currency over the short term.

JPY is benefiting from the risk off market tone despite comments by Japanese Finance Minister Azumi who warned about action being taken to combat JPY strength. The JPY has benefited from the Fed’s dovish tone last week which has weighed on US bond yields relative to Japan. While FX intervention risks have increased, officials will remain wary given the underlying upward pressure on the JPY. The near term risk is for USD/JPY to retest the 2011 low around 75.38.

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US dollar remains under pressure

January 30, 2012 — Mitul Kotecha

Hopes of progress on the Eurozone debt crisis and encouraging data in the US have helped boost market confidence. However, the slightly disappointing US Q4 GDP report (2.8% Qoq annualised growth) revealed the markets continued vulnerability while Fitch’s downgrade of six Eurozone countries’ sovereign ratings brought a dose of reality back to the region.

Nonetheless, the Eurozone Central Bank (ECB) unlimited 3-year loans to banks and Fed hints at quantitative easing (QE3) have provided markets with a fillip and will help underpin risk assets over coming weeks. If Greek debt talks are wrapped up this week markets will take further solace but the European Union (EU) Summit beginning today will need to deliver on rubber stamping recent agreements for positive sentiment to be maintained.

This is a big week for US data releases and in turn the USD. Heavy weight data including January non-farm payrolls, ISM manufacturing confidence and consumer confidence readings are on tap over coming days. Although payrolls will not be as strong as in December the trend of data releases will continue to be one of improvement as likely to be revealed in the forward looking confidence surveys this week.

The USD may not benefit as much as it would otherwise have done given that the Fed has committed to easy monetary policy for a long while to come to end 2014. It is becoming increasingly clear that firmer activity data may still not prevent a further round of quantitative easing and attendant USD downside risks. Against this background a cautious stance on the USD over coming days is warranted, with the USD index likely to remain under near term pressure.

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