US dollar pull back to prove short lived

January 13, 2014 — Mitul Kotecha

Having spent the tail end of last week in Singapore and Phnom Penh presenting the Global outlook for 2014 to clients as part of our Asian roadshow it struck me that there is a strong consensus view about a number of market movements this year. In particular, most expect the USD to strengthen over 2014. Indeed just as it looked as though the USD was going to surge into the new year, along comes the US jobs report to spoil the party. Clearly, it’s not going to be a one way bet in 2014.

The surprisingly weak US December payrolls data in which only 74k jobs were added compared to consensus expectations of close to 200k helped to support expectations that Fed tapering would take place only gradually, lending a helping hand to risk assets at the turn of this week.

I don’t believe the jobs data materially changes the picture for the Fed. Adverse weather may have played a role in the weakness in jobs while complicating matters was the drop in the unemployment rate to 6.7% largely due to around 350,000 people leaving the labour force. The data resulted in a drop in US bond yields and a weaker USD although equity market reaction was more mixed. Meanwhile gold and other commodity prices rose.

While risk assets may find some support in the wake of the jobs report this week much of the US data slate will if anything highlight that economic growth is strengthening, suggesting a reversal of some of the price action in US Treasuries, USD and gold. Data releases include a likely healthy increase in core US retail sales in December together with gains in manufacturing confidence surveys (Empire and Philly Fed) and industrial output as well as a further increase in consumer confidence (Michigan sentiment survey).

Additionally several Fed speakers are on tap over coming days, which may give more colour on Fed thinking in the wake of the jobs report. However, it is doubtful that they will indicate that the Fed will not taper as expected in January.

Clearly markets were caught overly long USDs last week as reflected in CFTC IMM speculative positioning data as of 7th January which showed that net USD long positions had reached their highest since September 2013. The pull back in the USD is set to be short lived, however, especially if US data over coming days reveals further improvement as expected.

USD/JPY in particular bore the brunt of the pull back in US yields, as long positions were unwound. A Japanese holiday today may limit activity but much will depend on the propensity for US yields to bounce back, with 10 year US Treasury yields currently around 2.85% compared to around 2.97% on Friday.

Asian currencies have been the most sensitive to US Treasury yields gyrations over the past three months. In order of sensitivity to US 10 year Treasury yields the highest is the JPY, followed by MYR, THB, PHP and SGD. These currencies would be expected to benefit the most in the wake of the drop in yields at the end of last week although as noted any pull back in US yields is likely to prove temporary. While the THB may suffer from political concerns in the near term the other currencies are likely to see some short term gains.

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Caution continues

January 7, 2014 — Mitul Kotecha

The cautious tone in risk assets was maintained at the turn of this week as equity markets slipped further overnight in the US and recorded mixed performances in Asia. While the rise in risk aversion is unlikely to reflect a major change in market sentiment, it does highlight that risk assets will not repeat the one sided moves recorded in Q4 last year over coming months. US equity valuations for example look far richer compared to historical valuations while earnings expectations are softer, suggesting that equity momentum may not be as robust.

Ahead of the key data and events this week including European Central Bank and Bank of England policy decisions and the US employment report, caution is likely to prevail. Highlights today include flash December Eurozone CPI inflation data, which is likely to show inflation pressures remaining subdued, German December employment data and the US November trade balance.

Disappointing US non manufacturing confidence data released yesterday (53.0 for the ISM non manufacturing survey against expectations of 54.7) has taken the wind out of the USD’s sails although most major currencies look set to gyrate in relatively tight ranges over the near term. JPY will find some support from a generally softer risk tone that has filtered through markets and may struggle to retake the 105 level.

Meanwhile EUR/USD has failed to hold onto recent gains, with sentiment turning less positive as indicated by the latest CFTC IMM data on speculative positioning. Likely soft Eurozone inflation data to be released today will likely undermine the currency further. However, given that it is unlikely that the ECB will sound any more dovish at this Thursday’s policy meeting the downside for the EUR is set to be limited, with technical support around 1.3525.

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USD/JPY pulls back, AUD range bound

January 3, 2014 — Mitul Kotecha

USD/JPY pulled back sharply overnight dropping swiftly below 105 as weaker global equities / higher risk aversion together with a pull back in US yields weighed on the currency pair. Nonetheless, its pull back is set to prove temporary and if anything provides better levels to initiate long positions. A Japanese holiday today will limit the scope for much movement in the currency.

Japan clearly has a lot of policy challenges in the months ahead (consumption tax hike, Prime Minister Abe’s third arrow, and hitting the 2% inflation target) which could prompt some volatility in the JPY but the risks remain skewed for more downside in the currency, especially given the potential for more aggressive BoJ policy action and of course the likelihood that the real yield differential between the US and Japan widens further.

AUD was undermined somewhat by the release of weaker than expected Chinese manufacturing and non manufacturing confidence data and softer commodity prices but overall the currency looks like it has found a new range around 0.8820- 0.8980 against the USD over the short term. This relative stability even in the wake of disappointing news in China marks a major shift compared to the selling pressure registered over much of Nov/Dec 13.

I am more constructive on AUD going forward and expect much more limited downside potential in the week ahead. Direction next week will come from trade data, building approvals and retail sales, but movement ahead of this will be limited.

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Cautious start to the year

January 2, 2014 — Mitul Kotecha

Happy New Year!

2013 ended with a solid performance by US equities and further pressure on US Treasuries helped by a bigger than expected increase in US December consumer confidence. The S&P 500 ended close to 30% higher over the year while 10 year Treasury yields rose above 3%, registering an overall rise of around 108 basis points over 2013. In contrast commodity prices dropped sharply, with the CRB index recording a sharp drop and ending 5% lower over the year. Meanwhile the USD index ended the year close to where it began although this performance belies some significant volatility over the year, with losses against the EUR and gains against the JPY.

The first trading day of 2014 begins on a more cautious note as a disappointing reading for the December Chinese purchasing managers’ index (51.0 versus 51.2 consensus forecast) will cast a shadow over markets today. Indeed, the data alongside weaker commodity prices will weigh on AUD. Japanese markets will be closed over the rest of the week, while many market participants will not return until next week, suggesting limited activity. Nonetheless, as far as the JPY is concerned the currency is set to remain on the back foot versus USD given the ongoing widening in real yield differentials between the US and Japan.

Meanwhile EUR/USD looks like it will struggle to make much headway over the short term, with only the final reading of the December Eurozone PMI due for release today. The data will likely confirm a relatively healthy looking reading of 52.7, its highest reading since May 2011 but will unlikely provoke much of a market reaction. Instead markets will look ahead to the European Central Bank meeting next week. Recent ECB comments suggest little chance of another rate cut anytime soon despite a very subdued inflationary backdrop. Against this background any EUR slippage in the short term is likely to be limited although further out the relatively inferior Eurozone growth outlook compared to the US, highlights plenty of scope for downside EUR pressure.

Asian currencies will also look somewhat subdued in the wake of China’s softer PMI reading. Additionally a bigger than expected decline in Singapore Q4 GDP release (-2.7% QoQ annualised) will also not bode well although the drop in GDP will be seen as temporary, with official estimates still pointing to growth around 2-4% for 2014. In contrast robust export data from South Korea will be positive for the KRW in line with our view that the currency will be one of 2014’s outperformers along with the TWD and CNH. Elsewhere the THB continues to be hamstrung by political concerns, which are showing little sign of easing ahead of planned elections February 2.

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On track for a positive end to the year

December 23, 2013 — Mitul Kotecha

A solid revision higher to US Q3 GDP at the end of last week sets up a positive tone for risk assets into year end even as they digest the imminent onset of Fed tapering. The data revealed a revision higher to a 4.1% QoQ annualised pace of growth and if anything lent credence to the Fed’s decision to begin tapering. The GDP data will be followed by a series of positive data releases in the US this week including November personal income and spending and a likely upward revision to December Michigan consumer confidence both on tap today.

Tomorrow, November durable goods orders and next week December Conference Board consumer confidence will also paint a picture of broadening improvement in economic conditions, providing further validation to Fed tapering. Against this background US yields should be well supported along with the USD. Into next year US economic outperformance will continue, leading to both higher US yields and a firmer USD.

A Japanese holiday (Emperor’s birthday) today will dampen market action although Japanese data releases over the rest of the week will highlight further progress on the economic front, with November inflation pushing higher and industrial output expanding at a healthy clip. USD/JPY retained a foot hold above 104 but the large extent of short JPY positioning highlights scope for profit taking. Even so, the rise in US Treasury yields suggest limited downside risks for USD/JPY.

There is on little on tap on the data front in the Eurozone allowing markets to digest the steps towards banking union announced last week. Consequently EUR/USD is set to remain rangebound around 1.3650-1.3750.

There may be more interest in events in China as money market conditions and confidence surveys garner interest. Tight money market conditions will weigh on regional sentiment. A likely decline in both the manufacturing and service sector purchasing managers’ indices will also act to dampen Asian currencies reinforcing the pressure already in place from a broadly stronger USD. News in Thailand that the opposition Democratic Party has decided to boycott the Feb 2 elections will add to political uncertainty and pile more pressure on the THB although the regional underperform remain the IDR.

Overall, a thinning in market conditions as both liquidity and market participants disappear for the holidays imply limited activity over coming days. The fact is that the end of the year will market a solid year for equities and a poorer year for bonds but at least the debate over Fed tapering timing has finally been put to the rest. More of the same is likely next year but notably the growth gap between developed and developing economies will narrow, which at a time of heightened competition for capital amid Fed tapering, suggests that capital flows will increasingly be steered towards developed economies.

Dear readers, this is my last post for 2013. Thank you for taking the time to read my blog posts. I wish all Econometer readers happy holidays, success, prosperity and good health in the year ahead.

Posted in Asian currencies, China, eurozone, Federal Reserve, Japan, US. Tags: , , , , . Leave a Comment »
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