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.

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

Market tensions set to return

August 27, 2012 — Mitul Kotecha

Having returned from my summer break it appears that markets are in reasonable shape. Volatility is low, while equities have registered solid gains over recent weeks and markets in general appear to be more settled. In part this is due to hopes and expectations of further stimulus measures in the US and Europe. The coming weeks may be much less calm than experienced over the summer.

Having lost steam over recent weeks the USD may benefit from renewed market nervousness over coming weeks. On the one hand there are hopes of more Fed stimulus in September following comments by Fed Chairman Bernanke that there is “scope for further action”. More information will likely come from the Jackson Hole Fed symposium on Friday and expectations of more quantitative easing could restrain the USD.

On the other hand, it increasingly appears that the summer rally in risk assets is beginning to fade, a factor that will help the USD. The latter effect is likely to be more dominant on the USD especially as it is far from clear that another round of Fed quantitative easing will be USD negative. My analysis suggests that the impact on the USD from QE is ambiguous.

There is plenty of event risk over coming weeks which could feed potential nervousness in the market and help the USD. Markets have to contend with the IMF / EU review of Portugal’s aid program tomorrow which takes place against the background of reports that deficit targets have slipped amid weakening growth. In addition, the 6 September European Central Bank (ECB) meeting will be a major focus given expectations of a further cut in policy rates and other policy steps to purchase Eurozone peripheral debt

Aside from these events, Dutch general elections on 12 September could provoke more uncertainty given that polls currently show a split outcome while the decision by the German constitutional court on the ESM permanent bailout fund on the same date will add to tensions especially as the outcome remains unclear.

Meanwhile, discussions and speculation on Greece’s future within the Eurozone or at least some easing in its bailout terms and a potential formal request for Spanish bailout from the EFSF temporary bailout fund will run alongside these other uncertainties.

To cap it all off, these events combined with the the Eurogroup / Ecofin meeting on 14-15 September will leave markets with plenty to fret about over coming weeks. EUR/USD will struggle to extend upon its gains against this background, with moves above 1.2600 likely to provide better levels to sell EUR.

Posted in ECB, Federal Reserve, Greece, Spain. Tags: , , , , . Leave a Comment »

GBP vulnerable, AUD outperforms

July 19, 2012 — Mitul Kotecha

Risk assets edged higher as the Bernanke effect rippled through markets. The fact that the Fed chief maintains and easing bias as reiterated to the Senate yesterday looks sufficient to provide a floor under risk assets over coming weeks. Sentiment was helped by a 6.9% jump in June US housing starts and positive earnings while the Fed’s Beige Book highlighted that growth was “modest to moderate’.

Q2 earnings have exceeded estimates for 72% of S&P 500 companies reporting so far providing a further element of support to risk assets. Hopes of further stimulus in China have also helped. Unfortunately all of this suggests that the market is looking for more artificial stimulus rather than underlying structural improvements. The efficacy of such stimulus is likely to more limited than in the past, suggesting plenty of scope for disappointment.

GBP took a hit on the chin yesterday as the Bank of England opened the door to a rate cut in the latest set of MPC minutes which were on balance seen as dovish. The currency will face another test today in the wake of the June retail sales report which could come in weaker than consensus.

Added to the fact that my quantitative models point to downside risks for GBP both against the USD and EUR the stars are aligning in the direction of growing GBP pressure over coming weeks. I look for GBP/USD to edge back town to technical support around 1.5518 while EUR/GBP is set to re test resistance around 0.7951 in the short term.

AUD’s outperformance continues unabated and the currency is set to make further strides in the days ahead. While AUD remains a relatively high beta currency, it is also a China play. In this respect it has benefited from expectations of more stimulus measures from China. Separately my risk barometer remains in ‘risk neutral’ territory, conducive for risk currencies.

While weak Aussie jobs data last week may have instigated a degree of caution into AUD bulls the currency is likely to continue to grind higher in the absence of a bout a rising risk aversion. Q2 inflation data next week will provide further direction but to be frank the market is already pricing in around 75bps of further policy rate cuts this year, and a benign inflation reading will do little to change this. The key resistance level on the top side for AUD/USD is 1.0475.

Posted in Australia, Federal Reserve, UK, US. Tags: , , , , , . Leave a Comment »

Bernanke eyed for QE clues

July 17, 2012 — Mitul Kotecha

Range trading is likely to dominate. However, the news flow remains negative, with disappointing retail sales data in the US combined with more the decision by the German constitutional court to delay its decision on the ESM bailout fund until September 12, highlighting the lack of potential for any rally in risk assets in the near term.

The International Monetary Fund (IMF) provided markets with a further dose of caution, with its warning that risks to global growth “loom large” as it cut its forecasts for global growth. Pressure on policy makers to provide more stimulus will grow, but the room for and efficacy of such stimulus is questionable.

The weaker than expected June US retail sales report released yesterday has resulted in fuelling expectations that Fed Chairman Bernanke will announce a shift towards more quantitative easing later today. Consequently the USD has come under pressure losing ground so far this week.

While the USD is set to be restrained ahead of Bernanke’s speech to the Senate we do not believe he will announce a change in stance. Therefore, any USD weakness is likely to prove temporary in the short term. The inability of risk appetite to improve further and the ongoing uncertainties in the Eurozone reinforce the view that the USD’s downside will be limited.

Today’s US releases are likely to reveal gains in June industrial production, and a likely strengthening in long term capital flows in May, factors that will help to provide the USD with further support.

Although the EUR has bounced this week data today will only serve to reinforce its overall downward trajectory. The July German ZEW survey is set to decline further. The range of forecasts for this volatile survey is wide between -10 to -30, with our forecast towards the lower end.

The plethora of negative news in terms of policy progress continues to dampen sentiment and hamper the EUR’s ability to recover. Whether its persistent downgrades of economic growth across Eurozone countries, stalling of reforms and austerity plans, or delays in implementing agreed upon measures, the news is unambiguously bad.

Dashed hopes of progress towards finding and implementing solutions have led to a renewed deterioration in speculative appetite for EUR. Although the potential for short covering remains high, the trigger for any short covering is decidedly absent. We maintain the view that EUR/USD will test 1.2000 over coming weeks.

Posted in eurozone, Federal Reserve, US. Tags: , , , , , , . Leave a Comment »

Bernanke and Eurogroup awaited

July 16, 2012 — Mitul Kotecha

Two main events will garner most attention this week. These are Fed Chairman Bernanke’s Monetary Policy Report to Congress on Wednesday and the Eurogroup meeting on Friday. Ahead of these events trading is likely to be restrained. While a solid close to US and European equity markets at the end of last week suggest at least a firm start to the week for risk assets the many and varied uncertainties afflicting markets suggest that positive momentum will be very limited. US data should generally outperform compared to Europe this week with June retail sales, July Empire manufacturing, May industrial production and June housing starts are set to post gains. In contrast, the German July ZEW survey is set to decline further.

Wide ranging uncertainties in Europe including the inability to seal the deal on the main elements of the recent EU Summit, downgrade of Italy’s sovereign ratings by Moody’s, uncertainty of Greece’s austerity programme, delay in the German Constitutional Court’s verdict on the ESM bailout fund, the hard line stance of German Chancellor Merkel towards banking supervision, disagreement within France’s majority government on how to ratify the Fiscal Pact as well as objections from the Netherlands and Finland on the use of the rescue funds, highlight just some of the difficulties remaining in turning around confidence in Europe. All of this suggests that the EUR will remain under downward pressure while Eurozone peripheral bond spreads will see limited compression.

Aside from a relatively weak EUR which we expect to push lower initially to support around 1.2151 versus USD and then towards the psychologically important 1.200 other risk / high beta currencies will remain relatively resilient. Asian currencies will likely begin the week in positive mood helped by expectation of more stimulus from China but unless risk appetite improves significantly any upward bias will be limited. Although there may be some disappointment from a lack of progress in Europe on resolving its crisis and also from Bernanke’s testimony in which he is unlikely to indicate a greater bias towards more quantitative easing, risk appetite is unlikely to sour too much, especially given thin summer trading conditions and hopes of more policy stimulus out of China.

Posted in eurozone, Federal Reserve, France, Germany, Greece, Italy. Tags: , , , . Leave a Comment »
« Older posts
Newer posts »