All Eyes on Greece

February 6, 2012 — Mitul Kotecha

The USD is in a lose-lose situation courtesy of the Federal Reserve’s ultra easy stance. Positive economic data releases have been met with USD selling pressure as the data helps to fuel a rally in risk appetite. Although the USD benefited from the better than expected US January jobs report gains will prove fleeting as it is does not change expectations of more Fed quantitative easing (note the drop in the participation rate).

Following the jobs report, there is little on the data front over coming days (only December trade data for which a widening is likely and February Michigan confidence where a gain is expected) to shift USD direction. At best the USD will consolidate giving USD bulls some time to nurse their bruises.

A disaster in the Eurozone (e.g. Greek disorderly debt default) could help the USD but it appears that markets have become resilient to bad news giving officials in the region the benefit of the doubt. In particular, the ECB’s 3-year LTRO has calmed nerves somewhat.

The lack of a final deal on Greek debt restructuring has failed to dent the EUR although notably EUR/USD failed to extend gains above 1.32 and has drifted lower. EUR/USD will remain on tenterhooks ahead of a midday deadline today set by Greek PM Papademos for party leaders to accept strong terms to qualify for a second bail out.

In the absence of agreement prospects of a disorderly debt default will loom large especially given that there is a EUR 14.5 billion bond repayment on March 20. Such an outcome will undoubtedly derail the EUR. Moreover, a meeting of Eurozone Finance ministers this week will give some direction to the EUR while the ECB’s likely status quo on Thursday suggests that there will limited EUR reaction following the meeting.

The risk of JPY intervention has increased significantly as USD/JPY brushes the psychologically important 76.0 level. However, the feeling on the ground is that USD/JPY will need to broach 75.0 before intervention is actually seen. Jawboning by Japanese officials has intensified suggesting increased official concern.

However, in the short term the ability of the authorities to engineer a sustained drop in the JPY is limited given the compression in US – Japan bond yields. This appears to be outweighing even the drop in risk aversion, which in theory should be playing for a weaker JPY. USD/JPY will struggle to make any headway, with strong multi day resistance seen around 77.49.

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US Dollar Under Broad Based Pressure

July 27, 2011 — Mitul Kotecha

ThE USD has registered broad based losses over recent days and the longer the stalemate with regard to extending the US debt ceiling the bigger the problem for the currency. Indeed, it appears that the USD is taking the brunt of the pressure compared to other assets. For example, although US treasury yields have edged higher there is still no sense of panic in US bond markets.

Failure to raise the debt ceiling does not automatically imply a debt default but it will raise the prospect should an agreement not be reached in the weeks after. However, the impact on US bonds maybe countered by the increased potential for QE3 or safe haven flows in the event that no agreement is reached.

The worst case scenario for the USD remains no agreement on the debt ceiling ahead of the August 2 deadline but a short term solution that appears to be favored by some in the US Congress may not be that much better as it would effectively be seen as ‘kicking the can down the road’.

The better than hoped for agreement to help resolve Greece’s debt problems at the end of last week came as a blow to the USD given the almost perfect negative correlation between the USD and EUR over recent months. Moreover, the debt ceiling stalemeate is pouring salt into the wound. However, the situation is highly fluid and should officials pull a rabbit out of the hat and find agreement the USD could rally sharply.

All is not rosy for the EUR either and its gains have largely come by courtesy of a weaker USD rather than positive EUR sentiment. Economic news hardly bodes well for the EUR, with data in the eurozone looking somewhat downbeat. For instance, the Belgian July business confidence indicator dropped to a 9-month low in line with the weaker than expected outcome of the July German IFO survey last week.

Moreover, there are still several questions about last week’s second Greek bailout agreement and contagion containment measures including parliamentary approvals and lack of enlargement of the EFSF which could keep markets nervous until there are clear signs that implementation is taking place successfully.

A clear sign that the EU agreement has failed to inspire as much confidence as officials had hoped for is the lack of traction in terms of narrowing peripheral bond spreads, with the exception of Greece. This partly reflects a renewed ‘risk off’ tone to markets but this is not the sole reason.

EUR/USD has extended gains benefiting from USD weakness rather than any positive sentiment towards EUR, breaking above 1.4446, the strong multi-month corrective channel resistance, signalling a bullish move. The next level of technical resistance is around 1.4568 but direction will continue to come from the debt ceiling talks.

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