AUD resilient, JPY downside risks

February 25, 2014 — Mitul Kotecha

Against the backdrop of concerns about Chinese growth and a weaker path for China’s currency, the AUD has failed to make any headway over recent days. Perhaps more interesting is the fact that AUD remains one of the best performing currencies despite such concerns. From a positioning perspective the market is still net short AUD, albeit less so over recent weeks, implying that there is still scope for short covering.

The rally in commodity prices over recent days will likely have helped the AUD but notably it’s the wrong commodities that are rallying. For instance, iron ore prices have dropped sharply. Nonetheless, improving risk appetite is giving AUD some relief and downside risks to the currency remain limited, with its resilience set to continue. Consequently AUD/USD is set to see strong buying interest on any dip to technical support around 0.927.

USD/JPY has been range bound over recent sessions failing to make any significant headway above the 102.50 level. The consolidation in US Treasury yields is a factor capping gains in USD/JPY but an improvement in risk appetite and gains in Japanese equity markets will likely help fuel some downside risks for JPY over the near term.

There are also signs that after several weeks of net inflows, Japan is finally beginning to register renewed outflows of portfolio capital which ought to add further downward pressure on the JPY. The fact that the speculative market remains net short JPY may limit the pace of JPY depreciation, however. It is difficult to see JPY volatility decline further from already very low levels but a break of current ranges may require a bigger move in US Treasury yields. We remain long USD/JPY at 102.39.

Posted in Australia, Japan. Tags: , . Leave a Comment »

Weak US data overlooked

February 25, 2014 — Mitul Kotecha

Although US stocks could not hold onto record highs overnight they still managed to close higher following on from gains in European equity markets. Firmer US equities will give a positive lead to Asian markets today although the gyrations in CNY and CNH will be watched closely. Our risk barometer as well as the VIX ‘fear gauge” indicate that risk appetite is on a positive trend while US Treasuries and the USD consolidate.

Weaker data in the US in the form of the Chicago Fed activity index and Dallas Fed activity index as well the Markit service sector PMI confidence index were shrugged off by the market, with weakness continuing to be attributed to harsh weather conditions. This theory will be tested over coming weeks as weather conditions normalise but for now markets are giving the US economy the benefit of the doubt.

Meanwhile, Eurozone inflation data yesterday highlighted the significant amount of room that the European Central Bank has to ease policy further. On tap today of note is the French INSEE survey and US consumer confidence, both for February and neither of which is likely to prove particularly market moving.

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

What to watch in Europe and Japan this week

February 24, 2014 — Mitul Kotecha

European equuty markets ended higher last week shrugging off some disappointing manufacturing and service sector survey readings. The highlight of the Eurozone calendar this week is today’s release of the February German IFO business confidence survey which is expected to register a small increase from the 110.6 reading in January, supporting the message that German growth is consolidating over Q1 14.

Eurozone inflation readings will be important too, with the flash reading of February HICP inflation released at the end of the week set to record another soft reading of 0.7% YoY, supporting the case for further policy easing from the European Central Bank soon.

While the EUR may benefit from a firm IFO reading any gains will be short lived. Soft inflation will help cap gains in the currency especially given the renewed warning this weekend by ECB President Draghi of more policy action if needed.

Elsewhere, data this week will reveal that the main measure of Japanese inflation appears to be peaking around 1%, with core inflation set to decline over coming months. After last week’s softer than expected Q4 GDP reading the pressure on the Bank of Japan for monetary action and in turn a weaker JPY will continue.

Meanwhile, Japan’s job data is expected to reveal that the unemployment rate held steady at 3.7% in January. USD/JPY will remain support around its 100 day moving average at 101.65.

Posted in Bank of Japan, Germany, Japan. Tags: , , . Leave a Comment »

US data this week

February 24, 2014 — Mitul Kotecha

Despite a softer tone to US equity markets at the end of last week market tensions appear to be easing, with news over the weekend of the ousting of Ukraine’s President helping in this respect. Although US equities ended the week slightly lower the overall tone to risk appetite was firm.

The G20 meeting proved to be a non event in terms of immediate market impact although the aim to lift GDP by more than $2 trillion over the next five years appears to be ambitious to say the least. However, at least focus has shifted from austerity to growth in terms of G20 thinking.

Last week’s release of the February Markit US PMI manufacturing survey which revealed a stronger than expected reading helped to allay some concerns afflicting markets over the pace of US growth giving markets reason for optimism. Indeed, in general markets have attributed recent weakness in US economic data to adverse weather conditions rather than a shift in growth trajectory.

Unfortunately this week’s US data releases are unlikely to be particularly helpful in shaking off growth worries. Although February consumer confidence is likely to be unchanged at a relatively high reading (tomorrow) declines in new homes sales (Wednesday) and durable goods orders (Thursday) in January will not bode well while a revision lower to US Q4 GDP (Friday) will highlight a slower pace of growth momentum at the end of last year than previously recorded.

The US data is likely to be bond friendly helping to cap gains in Treasury yields as well as restraining the USD. Nonetheless, the message from a plethora of Fed speakers on tap this week will likely be one of continued willingness to maintain the current pace of tapering, with recent and current weakness in economic data being shaken off as bad weather related.

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

USD/JPY edging higher

February 18, 2014 — Mitul Kotecha

The release of a much weaker than expected print for Japan’s Q4 GDP placed today’s BoJ meeting in a different light. While there was very little expectation of any policy action by the BoJ today the Bank surprised by increasing its lending program.

While asset purchases were not increased it is unlikely to be long before the BoJ embarks further along this path too. Clearly as the GDP data shows the task to boost growth / end deflation is going to be tough especially given the upcoming consumption tax hike. In other words the potential for future action remains significant.

USD/JPY fell initially on the BoJ outcome but pushed higher after an initial disappointment. The recent widening in the US / Japan yield differential (10 year differential at 224 basis points) indicates that USD/JPY will be supported on the upside, with support around 101.38.

Posted in Bank of Japan. Tags: . Leave a Comment »
« Older posts
Newer posts »