Watch to watch this week

September 9, 2013 — Mitul Kotecha

While the world awaits US Congress’ vote on military action in Syria there is at least some distraction on the data front. Friday’s US August employment report contributed a further layer of uncertainty to the Fed tapering debate. Payrolls came in lower than forecast, with downward revisions to previous months. The unemployment rate dropped 7.3% but this was largely due to less people looking for jobs, something that the Fed will take into consideration.

It is doubtful that the jobs data will prevent tapering beginning at the September 17-18 FOMC meeting but it does support the view of a smaller (USD 10 billion) taper. In any case, data this week will if anything reinforce expectations that the Fed will commence tapering asset purchases this month, with a solid August retail sales reading forecast. Consequently the USD is set to maintain a firm tone into this week.

Eurozone markets may be dented by ongoing political issues, with Italian politics in particular legal action against former PM Berlusconi in focus. Meanwhile, worried that its forward guidance is having less impact than hoped for as core bond yields rise the Eurozone Central Bank sounded decidedly dovish at its policy meeting last week. The dovish cause will be supported by a contraction in Eurozone industrial production. As a result, the EUR will remain capped over the coming days.

Similarly the Bank of England has had little success in containing the rise in gilt yields with its forward guidance given the positive run of UK data releases over recent weeks and a likely firm UK September jobs report will make the job even more difficult. Outperformance of UK data continues to support relative GBP strength especially against EUR.

Elsewhere news that Japan has been awarded the rights to host the 2020 Olympics has boosted growth expectations and hit the JPY even as the debate over whether to increase the consumption tax grow. An upward revision to Japanese Q2 GDP releases this morning supports the view that the economy will be able to withstand the tax hike.

Meanwhile Australian markets will be buoyed by the election victory of Tony Abbott’s Liberal-National Coalition although notably it will have to deal with a host of minority parties to pass legislation through the Senate. AUD will likely see a post election boost in the short term.

Posted in Bank of England, ECB, Economics, Federal Reserve, Japan. Tags: , , , . Leave a Comment »

Central banks in focus

September 5, 2013 — Mitul Kotecha

All the action will come from central banks today, with the Bank of Japan, European Central Bank, Bank of England, Riksbank and in Malaysia Bank Negara set to deliver policy decisions today. None are likely to alter policy settings but accompanying press statements will be under scrutiny. The policy decisions take place against the background of relatively calmer market conditions ahead of the August US jobs report at the end of the week and vote by the US Congress on limited military actions against Syria.

Among the several central banks deliberating on policy today the ECB will be among the most closely watched. Although no policy change is expected EUR direction will be determined the tone of the press conference. Modest upward revisions to staff growth forecasts will bode well for the EUR. Additionally in the wake of recent better data it is possible that the ECB shifts the balance of risks upwards to “broadly balanced” which could also help to stem the EUR’s recent decline. However, the ECB is unlikely to want to give markets the impression that it is turning more hawkish, with “forward guidance” set to be repeated.

While the BoE is highly unlikely to deliver any surprises today GBP is finding ongoing support from relatively positive data surprises including a series of purchasing managers’ indices released this week. Although the BoE will attempt to limit the rise in gilt yields via the use of forward guidance markets will find it difficult to ignore the better data. Given that positioning in GBP is generally short the currency is likely to remain supported both against the EUR and USD.

The BoJ is not likely to act on policy at its meeting today given that recent economic data both on the growth and inflation front are moving in line with expectations. However, there are still plenty of risks that higher inflation will not be sustained, implying potential fore more aggressive policy action in the months ahead. This, combined with relatively higher US bond yields relative to JGBs, will maintain upside pressure on USD/JPY over the coming weeks and months. In the near term USD/JPY may struggle around the 100 level but this is likely to prove to be a temporary barrier.

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

AUD helpd by RBA, JPY slipping, GBP buoyed

September 3, 2013 — Mitul Kotecha

Firm August purchasing managers’ confidence indices from China to Europe have helped to maintain a positive bias to risk assets overnight although the Labor Day holiday limited trading activity. Attention centred on China’s service sector PMI, with a slight decline revealed to 53.9 in August. Elsewhere Australia’s central unsurprisingly kept monetary policy on hold. Later on the US ISM manufacturing survey is set to add to a run of negative US data surprises, with a decline expected in August, albeit with the index remaining in expansion territory. The employment component will be scrutinised for clues to Friday’s August non-farm payrolls report.

AUD faced today’s RBA policy meeting having bounced in the wake of an improvement in risk appetite, a jump in July building approvals and a rise in Chinese manufacturing confidence. Ahead of the RBA meeting July retail sales data disappointed versus expectations but weakness in AUD was reversed following the unchanged RBA decision and neutral statement. Indeed, the fact that the statement was not more dovish comes as a relief to AUD bulls. As a cut in the cash rate was not priced in nor expected by analysts the impact overall should be limited, however. While the door is kept open to further rate cuts the prospects of further easing are declining. AUD looks well supported, with the next resistance seen around 0.9070.

USD/JPY is finding some upside traction as risk appetite improves and prospects of the implementation of a sales tax in Japan gathers steam. “Abenomics” got a shot in the arm as consultative panels favoured moving ahead with the 5% sales tax in April. Additionally, the yield differential between the US and Japanese 10 year bonds remains above 200bps, sufficient in my view to spur capital outflows from Japan and a weaker JPY. The high level of speculative net JPY shorts may frustrate the move lower in the JPY although it’s worth noting that there is a long way to go before short positions hit their all time extreme levels. USD/JPY may find some near term resistance around the 2 August high at 99.95 but gains are likely to be sustained over coming weeks.

GBP is finding support on a number of fronts ahead of this week’s Bank of England policy meeting. Firstly on the data front, the trend has remained positive, with the August manufacturing PMI beating expectations (57.2 versus 55.0 consensus), with data in the form of PMI construction and Halifax house prices likely to be positive for GBP today too. News that the UK’s Vodafone is planning to sell its US mobile phone business to Verizon Communications will also act as a boost to GBP given the large cash element involved in the sale. I prefer to play long GBP versus EUR in the short term, especially given the outperformance of UK data and relative positioning in the currency pair.

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

Lots of events / data to chew on

September 2, 2013 — Mitul Kotecha

US Labor Day holidays should keep trading relatively subdued over the course of today. Even the prospects of a military strike in Syria have paused following the decision by US President Obama to gain approval from Congress. Given that Congress does not return from summer recess until September 9 any action is not going to be quick. Consequently risk appetite may improve in the near term. Additionally Asian markets will benefit from a rise in China’s manufacturing confidence in August to a 16 month high. ,

Markets will have plenty of data and events to chew over as the week progresses. Overall US data will maintain its less impressive trend, with a drop in the August US ISM manufacturing confidence survey expected, while the July trade deficit is set to widen and non farm payrolls are likely to come in at a softer pace of around 160k. Negative US data surprises will likely see a further bullish retracement in US Treasuries and in turn a loss of upward momentum for the USD.

Elsewhere the four key major central bank decisions on tap this week will likely prove to be non-events, with the Bank of Japan, European Central Bank, Bank of England and Reserve Bank of Australia set to keep policy rates unchanged. The BoJ is likely to take comfort from the improvements in domestic data and rising inflation reducing any pressure for any further easing in the near term. The ECB will likely repeat its forward guidance and reveal updated staff forecasts.

On the data front final Eurozone PMI manufacturing survey readings, July German industrial activity and UK manufacturing PMI will garner attention. Some likely improvement in risk appetite will likely see a further spread narrowing for Eurozone peripheral bonds while the EUR will find some support. In Australia aside from the RBA, retail sales and the federal election this weekend will be in focus. Improving risk appetite will be constructive for the AUD.

In Asia attention will remain on the INR and IDR this week, with both currencies gaining some ground in the wake of USD swap measures with oil companies in India and a policy rate hike in Indonesia. Stability may prove temporary but a slightly firmer tone to risk appetite at the start of this week may give more room for upside in these currencies in the short term. Further out, it is difficult to see any sustained reversal given the prospects for higher US yields, more capital outflows and domestic fundamental fragilities.

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

USD edges higher

August 29, 2013 — Mitul Kotecha

There appears to be some prevarication over possible military strikes on Syria resulting in less angst in markets over an imminent strike. Consequently risk appetite edged higher overnight while US Treasury yields also rose. Potential military strikes have also led to firming oil prices. Pressure on vulnerable emerging market assets has continued unabated however, with tapering worries and domestic vulnerabilities resulting in ongoing capital outflows.

In Asia the INR and IDR remain under considerable pressure. However, INR forwards recovered somewhat overnight and the spot rate strengthened in the wake of the introduction of a forex swap window for Indian oil firms. The measure will help to alleviate some of the demand/supply pressures for USDs but is however, unlikely to arrest the decline in the INR for long. In Indonesia the central bank may increase policy rates by 50bps today which ought to help the IDR in the short term.

The USD gained a little ground as US yields rose. The USD may benefit as markets fret about possible military action against Syria resulting in an attendant rise in risk aversion. Nonetheless, a series of negative data surprises over recent days contrasting with positive surprises in Europe leaves the USD rather vulnerable against major currencies. In contrast the USD is set to continue to remain firm against many emerging market currencies given the ongoing outflow of capital in the wake of higher US yields and tapering fears.

AUD’s tentative recovery in early August has proven to be an abject failure. Like many other high beta currencies AUD has suffered as risk aversion has intensified recently. Additionally speculation of further policy easing has also dampened the AUD. Consequently speculative sentiment remains weak. In reality, further rate cuts may depend on whether the AUD can rally following an over 15% fall since April. Any failure for the AUD to gain ground may stay the hand of the RBA. Although it has found some support today, further downside pressure is likely with a breach of the 5 August low at 0.8848 expected.

GBP underwent some volatility in the wake of BoE governor Carney’s speech. Initial weakness was bought into as shorts were covered however, leaving the currency back where it started. Carney’s speech was interpreted as dovish, with the governor noting that the BoE was read to loosen policy if higher market rates impacted the economy. Nonetheless, there was little immediate implication for policy. Overall GBP is likely to be constrained around resistance at 1.5590, with gains limited ahead of the BoE policy meeting next week.

Posted in Asian currencies, Bank of England, India. Tags: , , , , . Leave a Comment »
« Older posts
Newer posts »