Consolidating ahead of payrolls

October 22, 2013 — Mitul Kotecha

Ahead of the belated release of the US September jobs report markets are set to remain range bound, with most assets consolidating recent moves. For instance, the VIX “fear gauge” edged higher following steep declines while US Treasury yields gained a few basis points helping the USD index to push slightly higher. Equity investors will have one eye on earnings reports hoping that the recent run of positive Q3 US earnings surprises continues.

The consensus for US September non farm payrolls is 180k, with a low of 100k and high of 256k according to Bloomberg and unemployment rate likely to remain 7.3%. The data will have important implications for Fed tapering expectations, with the outcome likely to help support expectations that the Fed will not begin tapering until early next year.

Like other asset classes little movement is expected in FX markets ahead of the release of the US jobs report. A payrolls outcome around the consensus will have little market impact but it appears that the consensus is skewed towards a weaker outcome, suggesting a bigger FX reaction should there be an above consensus outcome (around 200k+).

Both the EUR and JPY are struggling to make further headway against the USD. There is nothing of note on the data front from the Eurozone or Japan today suggesting that attention will be mainly centred on US data. Stabilisation in US bond yields leaves the USD in better form against both currencies and given that a lot of bad news is now priced into the USD its downside looks more limited although much will depend on today’s jobs data.

The AUD is the outright winner in terms of gains versus the USD so far this month alongside other commodity currencies, NOK and NZD. AUD has benefitted from receding expectations of interest rate cuts, and firmer Chinese data alongside improving risk appetite. While I have been far more bullish than the consensus on AUD, it may be worth taking profits on recent gains versus USD as consolidation is likely in the short term. I see more scope for gains in AUD versus NZD over coming weeks, however.

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USD edges higher, AUD supported, KRW in focus

October 10, 2013 — Mitul Kotecha

US equities and risk assets in general edged higher overnight as US politicians edged towards a budget deal. The nomination of Janet Yellen as next Fed Chairman was met with a positive reaction from risk assets as it was perceived that she would be more likely to maintain the easy policy of her predecessor, with markets in any case delaying expectations of tapering into next year.

The Fed FOMC minutes released overnight gave little clarity on the timing of Fed tapering however, but it did highlight the split within the FOMC between those wanting to begin tapering in September and those preferring to wait. More consolidation is likely today as markets await political developments in the US.

Contrary to our expectations the USD has actually edged higher over recent days shaking off some the pressure associated with the budget impasse in the US. News that President Obama will meet around 20 senior Republicans from the House following a similar meeting with Democrats highlights progress of sorts, with hints of compromise in the air.

A slight uptick in US bond yields has managed to provide the USD with a semblance of support and further consolidation is likely in the short term as market fears over a US default gradually recede. Indeed, it appears that the USD is in a bottoming out process at present, with short term pain likely to give way to medium term gain.

GBP has lost ground over recent days undermined yesterday by disappointing August manufacturing/industrial production data and a worse than expected trade deficit. The data is unlikely to affect the outcome of today’s Bank of England MPC meeting however, with an unchanged outcome both on policy rates and asset purchases on the cards.

Despite yesterday’s data disappointments UK data has been improving and point to a reasonably good growth outcome in Q3 and a reduced likelihood of further asset purchases by the BoE. Nonetheless, GBP’s gains look overdone, with scope for short covering having diminished. Further pressure is expected against both EUR and GBP in the short term.

Australian jobs data revealed an increase of 9.1k in employment evenly split between full time and part time jobs and a surprise drop in the unemployment rate to 5.6%. The headline increase in employment was below consensus. Moreover, there was a marginal drop in the participation rate which helped to push the unemployment rate lower. On balance, the data will leave the AUD unperturbed, with the AUD/USD likely to remain supported over the short term. AUD/USD looks primed to test resistance around the 0.9530.

Asian currencies are on the back foot in the face of a slightly firmer USD. KRW will be in focus, with the Bank of Korea delivering an unchanged policy outcome but revising lower its growth and inflation forecasts. Against this background KRW appreciation looks overdone and appears to face strong resistance on any breach down to USD/KRW 1070. Nonetheless, downside risks will be limited. Encouragingly Korea has been a major beneficiary of the prospects of a delayed Fed tapering, with the country recording a strong return of equity portfolio flows over recent weeks

Posted in Asian currencies, Australia, Bank of England, US administration. Tags: , , , , , . Leave a Comment »

USD losing steam, AUD, firm, INR bounces back

September 12, 2013 — Mitul Kotecha

Risk appetite has sustained an improving trend since the end of August. A combination of an easing in tensions surrounding Syria and firmer data globally have helped to shore up sentiment. Notably the Baltic Dry Index has surged over recent days too, pointing to an improvement in global growth prospects in the months ahead.

US Treasury yields have lost some upside momentum as tapering worries have eased, providing relief to risk assets including emerging market currencies. Consequently the USD continues to lose ground and looks vulnerable to further slippage in the days ahead. Australian employment data and Eurozone industrial production will be the main data releases of note today.,

In Asia, central banks in Korea, Philippines and Indonesia will follow the RBNZ overnight with policy decisions. No change in policy is expected from any of the central banks. Indeed, the recent firming in the rupiah suggests that there will be less urgency for Indonesia’s central bank to hike rates to protect the currency. The Indian rupee has been the best performing currency since the start of the month as portfolio capital has returned. In the near however, the INR looks may struggle to breach the 63.00 level versus USD.

Despite all the doomsayers’ bearish predictions AUD has managed to sustain a solid recovery, helped by the election victory by Tony Abbot and his coalition, and positive data both locally and in China. Additionally a firmer tone to risk appetite has helped the currency provoking some short covering.

Australian jobs data this morning will provide the next test for the AUD but we don’t expect it to get in the way of further short term strength. However, AUD/USD will face some technical resistance around the 0.9440 level. Separately, AUD/NZD lost some ground following a relatively hawkish statement from the RBNZ in which they pointed to the prospects of higher policy rates next year but this is likely to prove to be a temporary set back for the currency pair.

Swiss officials continue to defend the CHF ceiling and show no sign of eliminating it any time soon. We concur as the CHF remains overvalued but the reality is that Swiss economic data has shown some improvement while foreign demand for CHF assets has eased in the wake of improving sentiment towards peripheral Europe as reflected in reduced Swiss banks’ foreign liabilities.

The SNB is also not intervening to hold back CHF gains, with reserves growth flattening out over recent months. Although any reversal of flows from Switzerland will prove sticky the bias for EUR/CHF will be higher. In the near term the currency pair may run into resistance around the top of its recent range around 1.2438.

Posted in Asian currencies, Australia, central banks, Switzerland. Tags: , , , , , . Leave a Comment »

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 »

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 »
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