AUD oversold, GBP running into resistance

January 21, 2014 — Mitul Kotecha

AUD/USD has faced a significant bout of pressure since testing a high of around 0.9087. A dismal jobs report in December piled on more pressure on the currency and since then it has failed to recover. Consequently short speculative positioning has increased as sentiment has deteriorated. Yesterday’s slate of Chinese data failed to dent the AUD however, with the currency encouragingly showing some resilience.

Attention will now turn to tomorrow’s CPI inflation data. The release of the TD Securities inflation gauge which printed higher than consensus, highlights upside risks to the release of Q4 CPI and in this respect I believe market expectations of any RBA policy rate cuts look overdone. My quantitative model estimate for AUD/USD suggests that the currency is oversold, with short term fair value seen at around 0.9226.

GBP/USD is edging back up to its year highs around 1.6526 recorded at the turn of the year, a level that is likely to prove to be a tough resistance level. In spite of softer data including manufacturing and service sector confidence readings as well as industrial production the currency was buoyed by a strong December retail sales report at the end of last week.

Jobs data and the Bank of England MPC minutes will be on tap on Wednesday providing more direction for the currency. The minutes are likely to reveal few surprises but there is no doubt that the Bank is moving towards some sort of change in language on its forward guidance. GBP will find little further support over coming days, with consolidation likely. However, market positioning does not appear to be particularly stretched, suggesting limited downside risks.

Posted in Australia, Bank of England, UK. Tags: , . Leave a Comment »

USD firm versus EUR but not against JPY

January 20, 2014 — Mitul Kotecha

Finally back in the office after two weeks of traveling and it appear that the upside momentum for equity markets has definitely waned. Concerns about the pace of growth, earnings and valuations finally appear to have caught up with stocks. Meanwhile US Treasury yields have remained under downward pressure since the release of the disappointing US December jobs report despite some encouraging data since. In Asia China’s GDP release for Q4 reveaked some loss of momentum, with growth decelerating to 1.8% QoQ. Nonetheless, the annual pace of growth looked reasonably healthy at 7.7%, suggesting a limited reaction in markets today.

A US holiday today will likely keep a cap on market activity today but there will be plenty of Q4 earnings reports over coming days to give further direction. In terms of policy decisions the Bank of Japan and Bank of Canada will likely keep policy unchanged following their policy decisions this week. The BoC is faced with inflation well below target while the BoJ continues to battle to push inflation towards its 2% target. Both central banks will maintain easy policy.

On the data front there is very little of note in the US to focus on, with the main release the December existing home sales report on Thursday where a rebound of 1% is expected. European data releases may prove to be more interesting, with the release of flash purchasing managers indices on tap. Further gradual gains are likely to be registered in January although there will be attention on France which has lagged other countries.

Ratings decisions by Moody’s and Fitch on Germany and France, respectively, will also garner some attention. Rumours of a German downgrade are likely to prove unfounded. In the UK the Bank of England MPC minutes will be is likely to reveal an unchanged outcome of voting to keep policy unchanged although the BoE is likely to adjust its guidance soon reflecting the quicker than anticipated fall in the unemployment rate.

The USD looks well placed to extend last week’s gains, especially against the EUR, with a drop below 1.3500 on the cards. Disinflation pressures and relatively soft growth highlight the potential for easier monetary policy. A variety of options for the ECB are on the cards but the EUR will struggle to make headway given expectations of more ECB action. Additionally the EUR appears to be benefiting less from reserves recycling flows, especially given that Asian central bank reserves accumulation has likely to have slowed. The deterioration in speculative positioning reflects the deterioration in sentiment for the currency.

In contrast USD/JPY will struggle too push higher given the drop in US Treasury yields. Additionally weaker Japanese stocks will not help given the correlation between the Nikkei and JPY. The Bank of Japan meeting this week will not give much support for a further move higher in USD/JPY given expectations of an unchanged outcome. Some consolidation around 104.00 is likely over the short term, with upside limited to technical resistance around 104.92.

I fly off to Mumbai tonight for the last leg of our Asia roadshow presentation series. Hopefully my next post can shed some light on the recent stability of the Indian rupee.

Posted in Bank of Japan, Canada, China, ECB. Tags: , , . Leave a Comment »

When good is bad and bad is bad

January 16, 2014 — Mitul Kotecha

When good is bad and bad is bad.

The BAD: Data today in Australia revealed a much worse than expected outcome for the Jobs market last month. Australia cut 22.6k jobs compared to consensus expectations of a 10k increase. The impact was swift. The AUD was hit losing a significant amount of ground settling around 0.88 versus USD. Clearly there has been a worsening in job market conditions over recent months and while I am still constructive on AUD the trend in jobs is sending a worrying signal.

The GOOD: Japan machinery orders rose strongly up 9.3% in November compared to the previous month. This was cited as evidence that Abenomics is working although I’ll only believe this when we see evidence of structural reforms. Nonetheless, it was sufficient to be bad for the JPY with USD/JPY pushing eventually back towards 105. I remain negative on the yen and ultimately see higher US bond yields pushing USD/JPY even higher.

Posted in Economics. 3 Comments »

Bulls back in charge

January 16, 2014 — Mitul Kotecha

Today I’m posting from Seoul after traveling to Singapore, Cambodia, and Beijing as part of our Asia roadshow presentations. Tomorrow I’m in Taipei and next week Mumbai.

Unfortunately as is usual with such trips all I’m seeing are airports and hotels as I move from meeting to meeting. On the other hand it’s great to get a perspective about what investors are thinking at the start of the year.

Investors seem to be still making their minds about whether the economic news is good or bad. The bad news from the disappointing US jobs report last week has quickly been overtaken by better news from core US retail sales, Empire Manufacturing confidence and earnings. The net result is that bulls are back in charge.

Consequently the dollar also looks to be in good shape. Given that the remaining US data releases this week in the US are likely to remain upbeat I see no reason to alter my positive stance on the US dollar.

Clearly it’s still early days for US Q4 earnings releases suggesting that sentiment will remain fickle over coming days but any slippage in the USD should be seen as buying opportunities.

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Shaky start to the year for equities

January 14, 2014 — Mitul Kotecha

Equity markets and risk assets in general are having a decidedly shaky start to the year. Following a 30% increase in the US S&P 500 last year markets are finally looking at whether earnings expectations and economic growth will justify further gains in equities.

Worries ahead of Q4 earnings releases and perhaps concerns about the economy in the wake of the disappointing US December jobs report weighed on US equities overnight. These concerns also fuelled a further drop in US Treasury yields and undermined the USD. In contrast gold prices were buoyed.

The sharp drop in Treasury yields over recent days highlights both the previous extent of bearishness in bonds but also some hope / expectation that the Fed may slow the pace of tapering in the wake of the jobs data. This seems unlikely however, and as indicated by the Fed’s Lockhart overnight the data is highly unlikely to alter Fed policy.

Q4 earnings releases from JP Morgan and Wells Fargo as well as speeches by Dallas Fed President Fisher and Philly Fed President Plosser will be in focus today to provide further direction to markets. On the data front US December retail sales is the main release of note for which a drop in headline sales will be more than compensated by a gain in sales ex autos.

Overall a cautious tone is likely to continue until further clarity on the earnings outlook is revealed but economic data at least should look more encouraging over coming days. Clearly lower US Treasury yields are weighing on the USD but this is likely to prove to be a correction rather than a sustained USD decline.

It is interesting that the EUR has not managed to capitalize on the weakness in the USD. Lingering expectations that the European Central Bank may need to become more aggressive in terms of policy in the wake of soft inflation could be restraining the EUR. A solid reading for November Eurozone industrial production expected to be revealed today is unlikely to help the currency.

GBP was a major loser overnight although there does not seem to be much of a fundamental reason to sell the currency aside from soft November industrial production data released at the end of last week. Perhaps some profit taking on long GBP positioning may be attributable for the drop in the currency but the CFTC IMM data shows that speculative positioning was not overly long. Inflation data today will provide further direction, with GBP likely to remain under short term pressure.

Posted in Federal Reserve. Tags: , , , , . Leave a Comment »
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