Greek Saga Rumbles On – Does Anybody Care?

March 24, 2010 — Mitul Kotecha

The debate over Greece continues to rumble on. France and Spain requested a separate summit meeting of the 16 heads of eurozone countries immediately before the full 27-member EU summit starting tomorrow but this was met with resistance. Meanwhile, Germany has called for “a substantial contribution” from the IMF towards a Greek aid package, whilst maintaining that no EU deal will be reached for Greece at the summit.

Frankly, the whole Greek saga has become extremely boring, with the lack of agreement about how to fix it doing little to inspire confidence. In particular the fractured opinion amongst EU leaders highlights the difficulties in reaching an agreement in a union made up of so many conflicting interests. At most the summit may agree on the conditions for a rescue package for Greece rather than a package itself. This will leave markets unimpressed,

US new home sales data today is likely to paint a slightly better picture with a small gain expected, albeit following the 11.2% plunge in the previous month. Sales will be helped by the extension of the home buyer tax credit. The US February durable goods orders report is also released today, with a small increase expected. A smaller gain in transport orders suggests that the 2.6% jump last month will not be repeated.

In Europe, the key release is the March German IFO business climate survey and a rebound is likely following February’s decline, helped by warmer weather and a weaker EUR. Flash readings of Eurozone March purchasing managers indices (PMIs) are also released but these are unlikely to extend gains from the previous month. Despite expectations of firmer data the EUR/USD is vulnerable to a further decline, with support around 1.3432 in sight for an imminent test.

Attention in the UK will turn to the pre-election Budget and particularly the government’s plans to cut spending and reduce the fiscal deficit. Failure to provide a credible blue print to restore fiscal credibility will damage confidence, heightening the risks of an eventual sovereign ratings downgrade and more pressure on GBP which appears destined for another drop below 1.50 versus USD.

Most currencies have remained within ranges and the most interesting currency pair is EUR/CHF having failed to react to verbal warnings from the Swiss National Bank (SNB) about excessive CHF strength. EUR/CHF looks vulnerable to a further decline unless the SNB follows up rhetoric with action. Even if there is FX intervention by the SNB it may prove to be a temporary barrier to a market with an eye on the psychologically important 1.4000 level.

Despite the pressure on the Japanese government and Bank of Japan (BoJ) to engineer a weaker JPY, export performance has proven resilient, with exports jumping 45.3% on the year in February, helped by the strength of demand from Asia. Unfortunately this is doing little to end Japan’s deflation problem and even if there is less urgency for a weaker JPY to boost exports, JPY weakness will certainly help to reduce deflationary pressures in the economy. USD/JPY is stubbornly clinging to the 90.00 level, with little inclination to move in either direction.

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What To Watch This Week

March 13, 2010 — Mitul Kotecha

A “crisis over” mode is being adopted across markets as worries about Greece wane and economic data provides support to recovery hopes, whilst importantly allaying fears of a “double-dip”. Equities, bonds and currencies are reacting accordingly; equities are close to year highs, bond yields have risen and spreads have narrowed, whilst the USD and JPY are weaker, and conversely risk currencies are stronger. Even EUR/USD pushed higher on its way to 1.3800 as a number of stops were cleared and shorts were squeezed.

The coming weeks will be important to determine whether there is any staying power in the upward move in risk assets. A lot of the February data in the US will likely be obscured by bad weather however, including industrial production figures this week, leaving markets with little to go on. In Europe, the key release is the March German ZEW investor confidence survey, and better news in Greece, will likely prevent a sharper decline in confidence.

After both the Swish National Bank (SNB) and Reserve Bank of New Zealand (RBNZ) unsurprisingly left policy unchanged last week this week sees the turn of the US Federal Reserve and Bank of Japan (BoJ). Neither central bank is likely to shift policy but the Fed statement will be looked upon for guidance on the timing of rate hikes. The comment in the FOMC statement that the Fed Funds rate is expected to remain low for an “extended period” is set to be retained, even if some FOMC members are itching to remove it soon.

The BoJ meeting will be particularly interesting. I have just returned from a week long trip in Japan and on the ground there is plenty of speculation that the BoJ will take extra action to combat deflation and weaken the JPY. Additionally comments by Japan’s Prime Minister and Deputy PM have highlighted the potential for action to weaken the JPY although the usual market hesitation to sell JPY into fiscal year end and repatriation talk may mean a weaker JPY path is not straightforward.

Greece will not move too far from the spotlight, with EU officials likely to give the official stamp of approval on Greece’s deficit cutting measures and plenty of discussion at the Eurogroup Finance Minister’s meeting and Ecofin meeting early in the week. Moreover, weekend press reports suggest that a bailout up to EUR 25 billion is close to being agreed. Other topics of conversation will include the possible formation of a European Monetary Fund, though this looks like it will be a non-starter given the many objections to it.

Overall, risk appetite is set to continue its upward trajectory, likely keeping the USD on the back foot. Some deterioration in USD sentiment was reflected in the fact that net long aggregate USD speculation positioning has turned negative again according to the latest CFTC Commitment of Traders (IMM) report. Much in terms of FX direction will depend on what the FOMC says rather than does tomorrow.

EUR/USD may take a crack at resistance around 1.3840 on improving Greek news but it is difficult to see much upside from current levels. The one to watch will be the JPY, especially if the BoJ embarks on aggressive actions at this week’s meeting, leaving USD/JPY plenty of scope to test resistance around 92.16.

Posted in Bond markets, central banks, Currencies, Economics, Economy, equity markets, Europe, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Germany, Greece, Interest rates, Japan, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Optimism dissipates

January 23, 2010 — Mitul Kotecha

Markets have been highly fickle so far this year. Optimism about strong recovery led by China – recall the fact that disappointment from the surprisingly weak US non-farm payrolls report in December was outweighed by strong Chinese trade data – has dissipated. Instead of rejoicing at China’s robust GDP report last week, which revealed a 10.7% rise in the fourth quarter of 2009, investors began to fret about whether China would have to move more aggressively to tighten monetary policy. Fuelling these fears was the release of Consumer price data which showed inflation rising above expectations to 1.9% YoY in China.

If such fears were not sufficient to hit risk appetite, US President Obama’s plan to limit the size and trading activities of financial institutions dealt another blow to financial stocks. The plan followed quickly after the Democrats lost the state of Massachusetts to the Republicans and managed to shake confidence in bank stocks whilst fuelling increased risk aversion. Meanwhile, rumblings about Greece continue to weigh on markets and Greek debt spreads continued to widen even as global bond markets rallied.

Following the US administration’s plans to restrict banks’ activities the fact that the rise in risk aversion was US led rather than broad based led to an eventual pull back in the dollar which helped EUR/USD to avoid a break below 1.40. Risk trades including the AUD came under pressure as risk appetite pulled back. A drop in commodity prices did not help. The AUD was also hit by news that Australia’s Henry Tax Review would look to tax miners in the country. As a result AUD/USD dropped below 0.90 though this level is likely to provide good buying levels for those wanted to take medium term AUD long positions. The one currency that did benefit was the JPY which managed to drop below sub 90 levels.

The aftermath of the “Volker Plan” will reverberate around markets this week keeping a lid on equity sentiment. Meanwhile Greece will be in the spotlight especially its bond syndication. A bad outcome could be the trigger for EUR/USD to sustain a move below 1.40 though it looks as though it may find a bottom around current levels, with strong support seen around 1.4029. The German IFO business survey for January will be important to provide some direction for EUR and could be a factor that weighs on the currency if as expected it reveals some loss of momentum in the economy.

Aside from the Fed the other G3 central bank to meet this week is the Bank of Japan but unless the Bank is seen to be serious about fighting deflation, USD/JPY may remain under downward pressure against the background of elevated risk aversion. Below 90.0 there does appear to be plenty of USD/JPY buyers however, suggesting that further upside for the JPY will be limited. USD/JPY will find strong support around 88.84.

Much will depend on the key events in the US this week including the Fed FOMC meeting and the President’s State of the Union speech. USD bulls will look for some indication that the US government is serious about cutting the burgeoning budget deficit. Also watch out for the confirmation vote on the renomination of Bernanke as Fed Chairman which could end up being close. There is a heavy slate of data to contend with including new and existing home sales, consumer confidence, durable goods orders, the first glance at Q4 GDP and Chicago PMI.

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What’s driving FX – Interest rates or risk?

December 13, 2009 — Mitul Kotecha

The November US retail sales report has really set the cat amongst the pigeons. For so long we have become accustomed to judging the move in the USD based on daily gyrations in risk aversion. Well, that may all be about to change. There was an inkling that all did not look right following the release of the November jobs report which unsurprisingly helped to boost risk appetite but surprisingly boosted the USD too.

It was easy to dismiss the USD reaction to year end position adjustment, markets getting caught short USDs etc. What’s more the shift in interest rate expectations following the jobs report in which markets began to price in an earlier rate hike in the US was quickly reversed in the wake of Fed Chairman Bernanke’s speech highlighting risks to the economy and reiterating the Fed’s “extended period” stance.

However, it all has happened again following the release of the November retail sales data, which if you missed it, came in stronger than expected alongside a similarly better than forecast reading for December Michigan confidence. The USD reaction was to register a broad based rally as markets once again moved to believe that the “extended period” may not be so extended after all.

Interest rates will become increasingly important in driving currencies over the course of the next few months but if anyone thinks that the Fed will shift its stance at this week’s FOMC meeting, they are likely to be off the mark. No doubt the Fed will note the recent improvement in economic data but this is highly unlikely to result in a change in the overall stance towards policy.

Further improvements in US data this week including industrial production, housing starts, Philly Fed and Empire manufacturing may lead markets to doubt this but the Fed calls the shots and a potentially dovish statement may act to restrain the USD this week. Also, it’s probably not a good idea to rule out the influence of risk appetite on currencies just yet and with a generally positive slate of data expected, firmer risk appetite will similarly act as a cap on the USD this week.

Other than the US events there is plenty of other potentially market moving data to digest this week. More central banks meet this week including the Riksbank, Norges Bank and Bank of Japan. No change is expected from all three but whilst the Riksbank is set to maintain a dovish stance the Norges Bank meeting is a closer call. So soon after the emergency BoJ meeting, a shift in policy appears unlikely but the pressure to increase Rinban (outright JGB buying) operations could throw up some surprises for markets.

Europe also has its fair share of releases this week including the two biggest data for markets out of the eurozone, namely, the German ZEW and IFO surveys as well as the flash December PMI readings. The biggest risk is for the ZEW survey which could suffer proportionately more in the wake of recent sovereign concerns in the Eurozone. Sovereign names may still lurk to protect the downside on EUR/USD and if the USD finds it tougher going as noted above, the EUR may be able to claw back some of its recent losses.

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When things are just not right

November 20, 2009 — Mitul Kotecha

One knows when things aren’t quite right when a football team wins a game by using a hand to help score a goal rather than a foot.  In this case it was French striker Thierry Henry who helped France to qualify for the world cup at the expense of Ireland.  To English soccer fans this looks like decidedly similar situation to the “hand of god” goal scored by Diego Maradona during the 1986 World Cup. 

Similarly things don’t look quite right with markets at present and what began as a loss of momentum turned into a bit of a rout for US (Thursday) and Asian stocks (Friday).  In turn risk appetite has taken a turn for the worse whilst the USD is on a firmer footing.  Profit taking or simply repatriation at year end may explain some of the market moves but doubts about the pace and magnitude of economic recovery are playing a key role.

Ireland has called for a replay of the soccer game but markets may not get such an opportunity as sentiment sours into year end.  Markets chose to ignore some relatively positive news in the form a  stronger than forecast increase in the Philly Fed manufacturing survey and the improving trend in US jobless claims leaving little else to support confidence. 

The only event of note today was the Bank of Japan policy decision.   Interest rates were kept unchanged at 0.1%.  Given that official concerns about deflation are intensifying interest rates are unlikely to go up for a long while and we only look for the first rate hike to take place in Q2 2011.  The BoJ may however, be tempted to buy more government bonds in the future if deflation concerns increase further.   USD/JPY was unmoved on the decision, with the currency pair continuing to gyrate around the 89.00 level though higher risk aversion suggests a firmer JPY bias. 

In the short term increased risk aversion will play positively for the USD against most currencies, especially against high beta currencies such as the AUD, NZD and GBP.   Asian currencies will also be on the back foot due to profit taking on the multi-month gains in these currencies.

Posted in Asia, central banks, Currencies, Economics, emerging markets, equity markets, FX, Interest rates, Japan, US. Tags: , , , , , , , , , , , , , , , , , , , . Leave a Comment »
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