Swiss franc under pressure

January 15, 2013 — Mitul Kotecha

The US debt ceiling continues to garner most attention in markets, with US Treasury Secretary Geithner warning in a letter to Congress about the adverse economic impact of the failure to raise the ceiling. President Obama gave a similar warning, but with current extraordinary measures due to run out between mid February and early March timing is running out.

While Fed Chairman Bernanke echoed this assessment markets found some relief in his speech as it did not repeat the views of some Fed officials in hinting at an early ending of QE. Bernanke qualified his comments by stating that believes that inflation will stay below 2% over the medium term.

EUR/USD could not hold onto highs around 1.3404 but the currency pair does not looks as though it is running out of momentum. As sentiment towards the Eurozone periphery continues to improve and inflows into Eurozone assets increases the EUR is finding itself as a key beneficiary. However, the strength of the currency will only reinforce the weak economic backdrop across the region, which eventually will come back to bite the EUR.

Indeed data today is likely to confirm that the German economy recorded a weak pace of growth over 2012 finishing the year with a contraction in activity over Q4. Our forecast of no growth in the Eurozone this year could face downside risks should the EUR continue to rise. This is unlikely to stem the near term upside for EUR/USD but adverse growth and yield differentials compared to the US will mean that gains in EUR/USD will not be sustained.

The long awaited move higher in EUR/CHF appears to be finally occurring. EUR/CHF is trading at its highest level in over a year and looks set to make further gains. The fading of Eurozone crisis fears, better global economic developments and search for yield, are combining to pressure the CHF versus EUR although USD/CHF is trading near multi month lows.

Additionally improving sentiment outside of Switzerland is not echoed within the country as domestic indicators have worsened recently such as the KoF leading indicator, adding further pressure for a weaker CHF. Recent inflation data revealing a 0.4% YoY in December, the 15th month of annual declines have reinforced the fact that the currency is overly strong. EUR/CHF looks set to move higher, with the December 2011 high of 1.2444 the next target.

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

USD under pressure, except versus JPY

January 14, 2013 — Mitul Kotecha

Following another positive week for risk assets where equities in particular benefitted from substantial capital inflows this week is unlikely to look much different. A host of earnings, especially from financials will help dictate the equity market and in turn risk tone over coming days. There will also be plenty of focus on speeches by various Fed and European Central Bank (ECB) officials including Fed Chairman Bernanke today.

The week will start off in more subdued fashion however, with a Japanese holiday and little fresh news to digest over the weekend. Hope and faith in global economic recovery helped by data releases in the US and China in particular, have helped to calm markets while there is little angst as yet about the looming debt ceiling / spending cut negotiations in the US.

Despite the rush into equities, core bond yields appear to have hit a short term ceiling. Meanwhile, the USD is likely to maintain a weaker tone over the short term except versus JPY where the currency pair has broken through key technical barriers on the top side and is verging on a break of 90.00 helped by more comments over the weekend by Japanese Prime Minister Abe pushing for a 2% inflation target to be implemented.

Data releases this week will maintain the growth recovery story in the US while the Eurozone will continue to show a weaker trajectory. In the US there are plenty of releases to chew on including December retail sales, inflation, industrial production, manufacturing surveys, housing starts, Michigan confidence, and the Fed’s Beige Book. Overall, US releases will help paint a picture of steady and gradual recovery.

In contrast the Eurozone data slate is more limited and what there is (German GDP, Eurozone industrial production) will be less impressive supporting the view of Eurozone economic underperformance over coming months. Admittedly this has yet to affect the EUR which continue to benefit from peripheral bond yield compression and receding crisis fears although EUR/USD will likely run into resistance around 1.3385 which if broken will open the door for a test of 1.3486.

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EUR and GBP slipping, JPY lower

January 10, 2013 — Mitul Kotecha

Slightly better market sentiment allowed equity markets in the US to close higher in the wake of earnings helped too boost sentiment but overall direction remains limited ahead of a plethora of earnings releases over coming days and more immediately the European Central Bank and Bank of England meetings today.

Fed speakers will also be watched closely, while bond auctions in Spain and Italy will be another key influence for Eurozone markets. Meanwhile, the VIX ‘fear gauge’ rebounded slightly but remains at a low level while the USD index continued its ascent and is likely to continue to remain firm.

The ECB and BoE are set to leave policy unchanged today but this will not prevent both EUR and GBP from losing ground against the USD. The principle risk to GBP revolves around the UK economy. Weaker data releases have restrained GBP both against the USD and EUR.

Given the likelihood that growth will not recover quickly this will continue to act as a weight on GBP in the months ahead. Only the fact that the Eurozone economy will look even weaker will allow GBP to appreciate versus EUR while relative US economic outperformance will ensure a relatively softer GBP versus USD.

The breach of GBP/USD’s 100 day moving average level around 1.6061 is a trigger for a steeper decline. Conversely EUR/GBP may register some further short term upside but technical indicators suggest a relatively flat picture for the currency pair over coming weeks.

It is clear that the Japanese authorities have a fresh determinism to weaken the JPY as reflected by the news that Japan purchased bonds issued by the European Stability Mechanism. Additionally pressure on the Bank of Japan to implement a 2% inflation target has not eased, with Prime Minister Abe continuing to highlight the prospects of a joint accord between the government and BoJ.

Reflecting these factors and the higher starting point for USD/JPY I have revised my forecast and now look for the currency pair to end 2013 at 92.00 versus 85.00 previously. It will not be a one way bet for the JPY, however. Its drop against the USD looks excessive especially as it has largely been driven by expectations rather than actual policy change. There is scope for disappointment should policy be less aggressive than hoped for.

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

Sell USD / Asia FX on rallies

January 9, 2013 — Mitul Kotecha

The biggest move this year appears to have come from the VIX ‘fear gauge’ which has dropped sharply contributing to an overall improvement in risk appetite. Although the VIX dropped further overnight equity sentiment overall continues to sour as fiscal cliff euphoria faded further and markets brace for the reality of likely protracted negotiations to raise the debt ceiling and avert huge spending cuts.

Caution over a plethora of fourth quarter earnings reports over coming weeks is also limiting upside for risk assets. Economic drivers were thin on the ground overnight but weak German exports data (which likely contributes to an overall decline in GDP in Q4) an increase in Eurozone unemployment and rumours of a French ratings downgrade did not help.

In the US the news was a little better as small business confidence reversed its sharp November drop. A limited data slate today will leave markets focussed on upcoming earnings, with consensus estimates for Q4 at a relatively low 2.9% QoQ.

Asian currencies have registered mixed performances so far this year. Resistance from some Asian central banks, notably Korea, has limited the appreciation of currencies. The incentive to prevent further strength has increased especially as a key competitor the JPY has weakened.

Maintaining its robust performance over 2012 the PHP has been the best Asian FX performer so far in 2013 followed by the THB. Similarly the IDR has maintained its negative performance registered last year. SGD is also likely to underperform further as the currency finds itself being increasingly used as a funding currency for taking long positions in other Asian FX.

We note that risk appetite has a limited correlation with Asian currencies at present but firm capital inflows will continue to provide support, with a sell USD / Asia FX on rallies environment set to persist.

Posted in Asian currencies, Japan, Singapore, South Korea, US administration. Tags: , , , , , . Leave a Comment »

JPY retracement, AUD restrained

January 8, 2013 — Mitul Kotecha

Equity markets looked more restrained overnight as the sharp rally so far this year stalled ahead of the US Q4 earnings season which kicks off with Alcoa earnings after the close today. The looming budget battle in the US has also prompted some hesitancy to buy risk assets.

Direction will remain limited given the notable absence of first tier data releases today, with only Eurozone economic sentiment gauges, German factory orders, US small business confidence and consumer credit on tap. The bulk of releases are due in the later part of the week including rate decisions from the ECB and BoE.

For a currency that spent most of last year trapped in a relatively tight the JPY has lost an incredible amount of ground (12.7%) versus USD since the beginning of October 2012. The historically strong relationship between bond yield differentials and USD/JPY has broken down (albeit temporarily in my view), and cannot be used to explain the jump in USD/JPY.

Expectations of more aggressive monetary policy action have pushed USD/JPY higher especially as Prime Minister Abe continues to highlight his desire for a 2% inflation target. Nonetheless, as wires report today there may be no deadline for achieving this target a factor which may help USD/JPY to push lower in the short term. USD/JPY is likely to find some support around 86.54 (Jan 2 low). Speculative positioning in JPY has become increasingly short but notably is a long way from the all time low, suggesting scope remains for an eventual increase in JPY shorts.

AUD/USD has made an impressive recovery from its lows around 1.0344 at the end of last year. Risk appetite and the USD index both register a limited and insignificant correlation with AUD/USD suggesting that the currency will not be influenced by either over coming weeks. Yield differentials however, remain important and the widening of Australia 2 year yield differentials with Treasuries has provided important support for AUD.

Further upside in the currency will require Australian yields to move higher and this may in turn depend on the outcome of November retail sales data tomorrow but 2 year yields have hit trend line resistance suggesting that the AUD will struggle to move higher from current levels. AUD/USD 1.0585 will offer strong resistance, while my quantitative model suggests AUD/USD short term fair value around 1.0557.

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