Cyprus vote awaited

March 19, 2013 — Mitul Kotecha

The big market mover overnight was the VIX ‘fear gauge’ spiking in the wake of increased risk aversion. Follow through looks limited, however. Markets look a bit calmer as the panic following the news of levy of bank deposits in Cyprus as part of a EUR 10 billion bailout for the country, eased. No sign of bank runs elsewhere in the Eurozone and the go ahead to make the deposit levy more progressive (ie a higher levy on bigger deposit holders) while maintaining the total amount at around EUR 5.8 billion, have helped to calm tensions.

Nonetheless, today’s delayed vote in Cyprus’ parliament to approve the levy could provoke more nervousness especially as the outcome is too close to call. Attention will therefore remain firmly fixed on developments in Cyprus, with economic data taking a back seat. The highlights on the data front include likely gains in the German March ZEW investor confidence survey and US February housing starts and building permits.

Currency movements look to be limited ahead of the Cyprus vote and then the Fed FOMC outcome tomorrow. The EUR remains the weakest link, with gains in the currency likely to be sold into although support around EUR/USD 1.2876 is likely to hold unless the Cyprus vote fails to endorse the deposit levy. If this is the case, expect further sharp pressure on the EUR and a much bigger drop in the currency and risk currencies in general. European and Cyprus officials would have to back to the table but in the meantime panic would ensue.

The RBA minutes released this morning maintained that the door remains open for further policy rate cuts although they did note that the economy is responding to previous cuts with the impact having further to run. There is little in the minutes to suggest further easing is imminent. The RBA minutes are unlikely to dent the AUD which remains resilient having managed to remain well supported even despite the Cyprus panic. AUD/USD is likely to consolidate around current levels just below 1.0400 before embarking on further gains over coming weeks.

Posted in Australia, Cyprus, eurozone. Tags: , , , , . Leave a Comment »

Setting the cat among the pigeons

February 22, 2013 — Mitul Kotecha

The Fed’s FOMC minutes which raised the spectre of an earlier than anticipated tapering off of asset purchases have really set the cat amongst the pigeons, fuelling selling in equities, commodities and various currencies against the USD. The impact was reinforced overnight following relatively hawkish comments from the Fed’s Bullard and Fisher.

US Treasuries rallied however, as risk aversion crept back into the market following weaker data releases in the Eurozone (manufacturing and service sector purchasing managers indices) and in the US (February Philly Fed manufacturing survey and higher than forecast weekly jobless claims).

The German IFO business survey is the main event on the data calendar today, with a small gain expected. The second 3 year LTRO payback to be announced today and the Italian elections will also be in focus.

In the US attention will turn to a meeting between President Obama and Japanese Prime Minister Abe. Given the IMF’s tacit approval of Japanese policy it is unlikely that any criticism of Japanese FX policy will be forthcoming at the meeting.

Markets are set to trade cautiously around these events but the main theme will be the overriding impact of this week’s Fed minutes, which has really changed the dynamic in markets, especially for currencies, with the risk / reward of selling USDs now looking much less attractive.

USD is set to continue to trade with a firm tone and EUR in particular looks vulnerable. The continued fall out from Fed FOMC minutes, disappointing PMIs yesterday, Italian election uncertainty and likely lower than expected ECB LTRO repayments today suggests that EUR/USD will face more downside risks. Look for a test of support around 1.3140, which if broken will open the door for the psychologically important 1.30 level.

USD/JPY is likely to consolidate further awaiting the announcement of a new Bank of Japan governor, with JPY selling momentum continuing to abate. AUD was lifted by RBA governor Steven’s comments which did not indicate an urgency to cut policy rates further nor to intervene to lower the value of the currency. AUD/NZD continues to look constructive on the upside given the contrasting comments on the AUD and NZD from both central banks.

Please note my blog posts will be a bit sporadic over the next couple of weeks a I am will be traveling.

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

Contrasting Fed and BoE stance

February 21, 2013 — Mitul Kotecha

A contrasting stance in the minutes of the Fed and Bank of England impacted FX markets. Firstly the Fed minutes revealed some unease among officials about maintaining current quantitative easing settings as the economic outlook improved. In contrast the BoE minutes revealed a more dovish than anticipated 6-3 vote in favour of further easing. Consequently GBP/USD dropped sharply while the USD made broad gains. It will take a move higher in US bond yields to reinforce USD strength and notably 10 year Treasury yields have yet to break the 2.0634 high reached on 14 February.

While the JPY is likely to continue to weaken over coming months I maintain the view that the bulk of its cyclical decline has already taken place, with the risks much more balanced. My models continue to show that the magnitude of JPY weakness is not justified by its usual drivers. Risks of a short term JPY correction higher notwithstanding I expect any further weakness to be much more gradual in the months ahead.

Consistent with my model output, the feeling on the ground in Japan is that the currency has indeed fallen too far, too quickly, while there is plenty of scepticism about the fact that so far there has actually been little in terms of actual policy measures to justify the drop in the JPY. In the meantime the new central bank governor will be scrutinised to determine whether he will be sufficiently aggressive to warrant the drop in the JPY. A decision may take place very soon. Whatever the decision USD/JPY looks set to struggle to break above 94.00 in the short term.

Markets will be very data-dependent in terms of determining AUD direction in the weeks ahead. A further batch of soft data will reinforce expectations of further RBA rate cuts and undermine the AUD further. I do not expect this to occur, with some stabilisation in economic data likely, an outcome which ought to restrain AUD bears. My quantitative model suggests that AUD/USD is now looking relatively cheap, with the regression estimate at around 1.07.

AUD’s drop against NZD has been particularly sharp. I do not believe the drop is justified and yesterday’s jump in AUD/NZD based in large part on comments by RBNZ governor Wheeler warning about FX intervention to weaken the kiwi in my view marks a shift in the fortunes of the currency pair. Such comments should not be surprising given the failure of the G20 to chastise Japan on its FX stance. Expect more FX jawboning in the weeks ahead from other central banks.

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

Risk assets pull back as caution prevails

February 5, 2013 — Mitul Kotecha

Risk assets faltered especially in Europe in the wake of renewed political tensions in Italy and Spain. Election uncertainty in the former as former Prime Minister Berlusconi gathers growing support and government corruption allegations in the latter hit equity markets and peripheral bonds.

Consequently the EUR gave back some of its recent gains, with the currency not helped by comments by the French finance minister warning about its strength. EUR/USD downside will be limited to support around 1.3461 in the near term.

Weaker Spanish jobs data did little to help sentiment while service sector confidence indices in the Eurozone today will also provoke further concerns revealing both continued contraction for most countries and divergence in the bigger economies, namely Germany and France. Caution will prevail in the near term as markets begin to question the veracity of the rally in risk assets registered over recent weeks.

AUD has had a fairly erratic start to the year rallying to break 1.06 against the USD but failing to hold gains over recent weeks. The currency has looked a little more stable into February but is still showing little sign of rallying despite the recently firmer risk tone, weaker USD index and firmer Chinese data, all of which would have been supportive for AUD in the past.

Technically AUD/USD looks vulnerable according to the relative strength index (RSI). Moreover, speculative positioning is around the 3 month average suggesting little impetus either way.

The RBA decision today to hold the cash rate unchanged but keep open the door to further rate cuts will inflict more short term pain on AUD but given that the market had already priced in a further rate cut in the cycle any decline in AUD will be limited. A break below the 100 day moving average around 1.0415 will result in a test of support around 1.0381.

Although the AUD is faltering its drop pales into insignificance compared to the sharp decline in JPY over recent weeks. Obviously the drop in the JPY has caused some panic across other currencies, especially in Asia (KRW, TWD, MYR), but this has done little to sway JPY bears. I have some hesitancy in calling the JPY much lower especially as a lot appear to be is in the price (in terms of aggressive policy actions) but technical indicators for both USD/JPY and EUR/JPY remain bullish despite the pull back overnight.

The intensifying hunt for yield means that the JPY will remain on the back foot over coming months but in the short term JPY may find some support from a renewed rise in risk aversion as political tensions in Europe heat up as well as some caution that the risk rally looks overdone. However, speculative positioning is unlikely to get in the way of further JPY declines given that positioning is around the 3-month average and still well above the all time lows reached in June 2007.

Posted in Australia, Italy, Spain. Tags: , , , , . Leave a Comment »

USD undermined, CHF and NZD risks

January 31, 2013 — Mitul Kotecha

The surprise drop in US Q4 GDP (-0.1% QoQ annualised) and relatively cautious but not much different Fed statement (pause in growth, elevated unemployment, inflation below long term objective) helped to undermine risk assets, and the USD overnight while 10 year Treasury yields slipped back below 2%. Consequently EUR/USD was propelled above the 1.35 level. Gold prices benefitted however, with the precious metal trading above its 200 day moving average.

The Fed showed little indication of pulling back from its USD 85 billion in monthly asset purchases but that did little to prevent stocks from closing lower. The data calendar is limited in terms of first tier releases today, with ranges likely to dominate and markets turning their attention to tomorrow’s US jobs report.

Following an impressive drop of around 3% from around 9 January the CHF appears to have stabilised, at least temporarily versus EUR. I believe this stability will prove short lived. CHF is finally seeing a reversal in safe haven flows while also suffering from its growing use as a funding currency (again). Indeed, recent weeks have seen a decline in speculative CHF appetite, which I expect to continue over coming weeks.

The recent drop in the CHF has done little to placate Swiss government officials however, while economic data such as the 8 month low registered for the January KoF leading indicator give further support for a weaker currency. There is even renewed speculation that the Swiss National Bank should catch markets on the hop by raising the EUR/CHF 1.200 floor. I don’t expect the floor to be raised anytime soon but do expect more weakness in the still overvalued CHF.

My quantitative models now send a ‘strong sell; signal for NZD but maintain a neutral signal for AUD. Is it time to buy AUD/NZD? Technical signals suggest little upside directional impetus in the short term. Moreover, speculative positioning in AUD/NZD looks stretched. In other words expect range trading in the near term and better opportunities once stale longs have been shaken out.

The RBNZ’s decision to keep policy on hold overnight will have little impact on the NZD given that it was widely expected but the concerns expressed about Kiwi strength will not go unnoticed by market players. NZD has benefited more from the risk rally over recent weeks than AUD but gains in risk appetite according to my risk barometer appear to have stalled. I suggest waiting for opportunities to sell kiwi on any move the 0.84 versus USD

Posted in Federal Reserve, New Zealand, Switzerland, US. Tags: , , , , . Leave a Comment »
« Older posts
Newer posts »