Which is the ugliest currency?

July 11, 2011 — Mitul Kotecha

The contest of the uglies has once again been set in motion in FX markets as last Friday’s weak US jobs report, which revealed a paltry 18k increase in June payrolls, downward revisions to past months and a rise in the unemployment rate, actually left the USD unperturbed. Europe’s problems outweighed the negative impact of more signs of a weak US economy, leaving the EUR as a bigger loser.

The USD’s resilience was even more impressive considering the drop in US bond yields in the wake of the data. However, news over the weekend that talks over the US budget deficit and debt ceiling broke down as Republicans pulled out of discussions, will leave USD bulls with a sour taste in their mouth.

Should weak jobs recovery dent enthusiasm for the USD? To the extent that it may raise expectations of the need for more Fed asset purchases, it may prove to be an obstacle for the USD. However, there is sufficient reason to look for a rebound in growth in H2 2011 while in any case the Fed has set the hurdle at a high level for more quantitative easing (QE).

Fed Chairman Bernanke’s reaction and outlook will be gleaned from his semi-annual testimony before the House (Wed) although he will likely stick to the script in terms of US recovery hopes for H2. This ought to leave the USD with little to worry about. There will be plenty of other data releases this week to chew on including trade data, retail sales, CPI and PPI inflation and consumer confidence as well as the kick off to the Q2 earnings season.

Fresh concerns in Europe, this time with contagion spreading to Italy left the EUR in bad shape and unable to capitalise on the soft US jobs report. In Italy high debt levels, weak growth, political friction and banking concerns are acting in unison. The fact that there is unlikely to be a final agreement on second Greek bailout package at today’s Eurogroup meeting will act as a further weight on the EUR.

Discussions over debt roll over plans, the role of the private sector and the stance of ratings agencies will likely drag on, suggesting that the EUR will not find any support over coming days and will more likely lose more ground as the week progresses. If these issues were not sufficiently worrisome, the release of EU wide bank stress tests on Friday will fuel more nervousness. Against this background EUR/USD looks vulnerable to a drop to technical support around 1.4102.

The Bank of Japan is the only major central bank to decide on interest rates this week but an expected unchanged policy decision tomorrow is unlikely to lead to any JPY reaction. In fact there appears to be little to move the JPY out of its current tight range at present. USD/JPY continues to be the most correlated currency pair with 2-year bond yield differentials and the fact that the US yield advantage has dropped relative to Japan has led to USD/JPY once again losing the 81.0 handle.

However, as reflected in the CFTC IMM data the speculative market is still holding a sizeable long position in JPY, which could result in a sharp drop in the currency should US yields shift relatively higher, as we expect over coming months. In the short-term USD/JPY is likely to be well supported around 80.01.

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US dollar on the rise

June 27, 2011 — Mitul Kotecha

Risk aversion is on the rise as uncertainties about Greece and worries about weaker economic data weigh on sentiment. A number of key events rather than data will be the main drivers this week. First and foremost amongst these is the vote in the Greek parliament on the country’s budget reform plan, which if passed will pave the way for the way for a disbursement of EUR 12 billion from the European Union / IMF and a new bailout package.

Meanwhile in the US talks on raising the debt ceiling are likely to resume in earnest, with the market likely to become increasingly nervous about the lack of resolution on the issue. Nonetheless, it is Europe that will dominate the headlines and on this front even if the reform plan is passed any market relief is likely to be limited given the ongoing uncertainty about private sector participation in any Greek debt roll over. This suggests that the EUR will remain under pressure over the week despite reassuring comments from Chinese Premier Wen.

Data releases will be relegated to background noise but what there is will not help sentiment. Signs of slowing activity remain evident as revealed in disappointing eurozone manufacturing surveys last week and this will be echoed in the US ISM manufacturing survey at the end of this week. Economic sentiment gauges in Europe are also set to reveal a decline. Given the lack of ammunition and/or unwillingness to risk using further stimulus from the Fed, the sensitivity of markets to weak data will be high, keeping risk aversion elevated.

Indeed, although well flagged the end of the Fed’s QE2 this week will mark a major shift in market dynamics, especially in currency markets where the USD will finally see a massive weight lifted from its shoulders. As indicated by Fed Chairman Bernanke following the FOMC meeting the Fed is not considering a further round of asset purchases, a fact that will help the USD to find firmer support.

Notably the USD index moved has above its 100-day moving average providing a positive technical signal given that it has failed on its last two attempts. The USD index now looks set to break its April high around 76.610.

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US Dollar Finding Support

June 13, 2011 — Mitul Kotecha

The US dollar is finding growing relief from the fact that the Fed is putting up a high hurdle before more quantitative easing (QE3) is even considered. As highlighted by Federal Reserve Chairman Bernanke last week he is not considering QE3 despite a spate of weak US data. Of course until US bond yields move higher the USD will fail to make much of a recovery and in turn this will need some improvement in US economic data.


The May retail sales release is unlikely to provide this with headline sales likely to undergo an autos related drop while core CPI released on Wednesday is set to remain benign in May. There will be better news on the US manufacturing front, with surveys and hard data likely to bounce back.

There is still plenty of scope for USD short covering as reflected in the fact that IMM USD positions fell further as of the 7th June, with the market still heavily short USDs. The USD index has likely found a short term bottom, with a break above the 50-day moving average level around 74.6874 in focus.

EUR has lost momentum , with the European Central Bank’s (ECB) confirmation of a July policy rate hike prompting a major sell off in the currency, even with interest rate markets barely flinching. The EUR is susceptible to developments regarding Greece and the news on this front is not good. Divisions between policy makers including the ECB about the extent of private sector involvement in a second bailout package threaten to prolong the pain.

Similarly divisions within the Greek parliament about further austerity measures needed to secure a second bail could also derail the process. Further negotiations this week will be closely scrutinised, likely taking more importance than data releases, with only the final reading of May inflation and industrial production of note this week.

As revealed by the CFTC IMM data, EUR long positions jumped early last week leaving plenty of scope for unwinding, something that is likely to take place this week. Nonetheless, support around the 30 May low of EUR/USD 1.4256 is likely to prove difficult to break on the downside this week.

GBP took a hit in the wake of yet more weak activity data in the form of May industrial and manufacturing production data. The economic news will be no better this week, with retail sales set to drop in May and CPI inflation set to rise further in April. The data will only add further to the confusion about UK monetary policy as the dichotomy between weak data and persistently high inflation continues.

Admittedly the weak data releases can at least partially be explained away by the Royal wedding and Easter holidays but this will provide little solace to GBP bulls. GBP will likely struggle against a firmer USD this week although its worth noting that GBP speculative position has been negative for 3-straight weeks, suggesting that at least there is less room for GBP position unwinding. GBP/USD is likely to hold above support around 1.6055 this week.

Posted in Bond markets, central banks, Currencies, ECB, Economics, Economy, Europe, eurozone, Federal Reserve, Financial crisis, FX, Germany, Greece, Interest rates, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . 1 Comment »

Euro weaker despite hawkish ECB

June 10, 2011 — Mitul Kotecha

The bounce in EUR/USD following the European Central Bank (ECB) press statement following its unchanged rate decision proved short-lived with the currency dropping sharply as longs were quickly unwound, with EUR/USD hitting a low around 1.4478. The sell off occurred despite the fact that the ECB delivered on expectations that it would flag a July rate hike, with the insertion of “strong vigilance” in the press statement.

The reaction was a classic ‘buy on rumour, sell on fact’ outcome and highlights just how long EUR the market was ahead of the ECB meeting. Interestingly the interest rate differential (2nd futures contract) has not widened versus the USD despite the hawkish ECB message and in any case interest rate differentials are not driving EUR/USD at present as reflected in low correlations.

This leaves the EUR susceptible to Greek developments and the news on this front is less positive. ECB President Trichet ruled out any direct participation (ie no rollover of ECB Greek debt holdings) in a second Greek bailout whilst potentially accepting a plan of voluntary private participation in any debt rollover. The ECB’s stance is at odds with that put forward by German Finance Minister Schaeuble pressuring investors to accept longer maturities on their Greek debt holdings.

In contrast the USD appears to be finding growing relief from the fact that the Federal Reserve is putting up a high hurdle before QE3 is considered. As highlighted by Fed Chairman Bernanke earlier this week the Fed is not considering QE3 despite a spate of weak US data. This was echoed overnight by the Fed’s Lockhart and Plosser, with the former noting that there would need to be a substantially weaker economy and the latter noting that there would have to be a “pretty extraordinary” deterioration in the economy to support QE3.

Posted in central banks, Currencies, ECB, Economics, Economy, Europe, eurozone, Federal Reserve, FX, Germany, Greece, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

EUR Becomes The Anti USD

June 8, 2011 — Mitul Kotecha

The USD is close to giving back the full extent of the gains it made during May. The USD index hit a low of around 72.696 on 4th May and looks on track to re-test this level.

It would be easy to say that the USD is being undermined by low US bond yields but whilst this is partly true only USD/JPY has had a significant correlation with bond yield differentials over the past 3-months.

The reality is that the EUR has become the anti USD at present. Whilst the EUR composes 57.6% of the USD index which would imply a high correlation between the USD index and EUR, it does not explain the fact that the correlation over the past 3-months is at an extremely high 0.98.

It is probably a relief for USD bulls that the currency is not being particularly influenced by yield differentials at present as it would be even weaker if it was so. US bond yields continue to be depressed by growth concerns, following a spate of weaker US data releases, culminating in the May jobs report last week.

Speculation about QE3 is similarly unhelpful for the USD but the prospects of this occurring are still very slim and notably whilst Bernanke highlighted the “frustrating slow” economic recovery in a speech last night he did not indicate a desire to embark on QE3.

Nonetheless, any clues about Fed policy will be closely scrutinised and this includes today’s Beige Book of regional economic conditions. Our expectation of a relatively downbeat report suggests that the USD will find no support from this source.

Ultimately USD recovery will require EUR weakness but the European currency appears to have regained its ‘Teflon’ coating as its resistance to bad news grows once again. The EUR was helped yesterday by a stronger than expected April retail sales report and will undoubtedly find further solace from confirmation of a strong start to the year in terms of Q1 GDP today.

Overall direction continues to come from news in the eurozone periphery, however. The fact that officials appear to be inching towards an agreement in Greece has clearly been appreciated by the EUR. Moreover, potential ECB backing for debt rollovers by private investors will alleviate some concerns.

Nonetheless, at current levels, with EUR/USD on the path to its 4th May high around 1.4940 it appears that a lot is already priced in and the scope for disappointment is high.

Posted in Bond markets, Currencies, ECB, Economics, Economy, Europe, eurozone, Federal Reserve, FX, Greece, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , . 4 Comments »
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