Calm ahead of US payrolls and ECB meeting

April 30, 2012 — Mitul Kotecha

It’s non-farm payrolls week in the US, with currencies treading water until Friday when the report is released. Ahead of the data there are several other releases on tap which will give clues to the outcome of the April jobs report, including the ISM manufacturing survey and ADP jobs report. The USD has taken a softer tone as risk appetite improved and US bond yields dropped further.

Given the Fed kept open the door to more easing it will act as a restraint on the USD unless markets become convinced that there will no further Fed balance sheet expansion over coming months. In the meantime unless risk aversion spikes again the USD is set to find it difficult to sustain any gains.

It’s always the same story with the EUR, a tale of ongoing resistance to bad news. Weaker Eurozone confidence surveys as well as a downgrade to Spain’s credit ratings did little to weaken the EUR. The key event is the European Central Bank (ECB) meeting on Thursday but despite growing growth worries, a policy rate cut is unlikely as the ECB remains in wait-and-see mode.

Data releases will not be too damaging for the EUR, with monetary and credit aggregate set to rise and German retail sales set to rebound in March. The EUR looks poised to edge higher against this background in the short term, but will be constrained by uncertainty ahead of the US jobs report. Technical resistance to the upside will be found around the 1.3265 area.

The JPY barely flinched when the Bank of Japan announced an expansion of its asset purchase fund by JPY 10 trillion in its aim to reach a 1% inflation goal. Unfortunately for the BoJ the ongoing narrowing in the US Treasury yield premium over Japan JGB yields overwhelmed the negative impact of its action on the JPY.

Overall, my quantitative models continue to show USD/JPY lower over the short term, with a move below 80.00 on the cards. If as I expect, risk aversion also creeps higher, it will imply more short term upside JPY pressure. Trading will be relatively quiet, with no major data on the calendar due to Golden Week holidays in Japan.

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Calm Returns

April 12, 2012 — Mitul Kotecha

Returning from being out over the last couple of weeks it seems as though global markets look in a much worse state than when I left. Nonetheless, a semblance of calm returned to markets overnight helped in part by comments from European Central Bank council member Coeure that the ECB may restart its Securities Market Purchases (SMP) programme to support Spanish bonds while Spanish Prime Minister Rajoy denied any need for a Greek style bailout.

Consequently equity markets have firmed helped also by a solid start to the US earnings season from Alcoa. The lack of any fresh positive fundamental news suggests that any risk rally will be fragile. Renewed Spanish and Italian debt worries will not fade quickly while growth concerns have been reignited by last week’s weaker than expected US jobs report.

This leaves currencies in a state of limbo. After having dropped over the last couple of weeks the EUR has stabilised at a weaker level versus USD. In contrast as warned previously the risk of a pull back in the JPY was very high and subsequently it has strengthened sharply from its lows close to 84.00 against the USD. However, comments from the Bank of Japan’s Shirakawa that the BoJ will continue to pursue “powerful” monetary easing may help to limit the bounce in the JPY to technical support around 80.69.

AUD has been on a downward trajectory as the yield differential with the US has narrowed but the currency benefited from a strong March employment report in which the number of jobs added (+44k) was far more than forecast. As a result expectations of further rate cuts from the Reserve Bank of Australia have been pared back. Much will depend on the Q1 CPI release on April 24 to provide further clarity on the prospects of a May move. China’s GDP data tomorrow will provide further direction and will help to determine whether the bounce in AUD can be sustained.

An upcoming Italian bond auction today as well as US Q1 earnings will garner most attention in the absence of first tier data releases. The main event of the week will be tomorrow’s GDP release in China, however. It will require positive results for all of the above to maintain the rally in risk currencies and consequently downward pressure on the USD. However, it seems that markets are in corrective mode and fresh Eurozone and global worries will likely limit any risk rally, leaving the USD well supported.

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More Bad News In Europe

January 16, 2012 — Mitul Kotecha

Several pieces of bad news soured sentiment at the end of last week undoing much of the good news since the beginning of the year and dashing hopes of a relatively swift resolution to Eurozone’s ills. S&P ratings agency downgraded nine Eurozone countries’ credit ratings leaving 14 on negative outlook. In particular France and Austria, which lost their triple AAA status while not particularly surprising, comes as a major blow to efforts to resolve the crisis. The downgrade puts at risk the EUR 180 billion in credit guarantees underpinning the EUR 440 EFSF bailout fund.

Separately the breakdown of talks on Greek debt restructuring and criticism by the Euuropean Central Bank (ECB) on a new draft of a treaty to ensure fiscal discipline added to the malaise, with the ECB noting that proposed revisions amount to a “a substantial watering down”. Such criticism will likely be an obstacle to the ECB stepping up its peripheral debt buying potentially threatening any decline in bond yields. It is difficult to see sentiment improving this week, with risk aversion set to remain elevated as Eurozone leaders attempt to restore confidence. In contrast, US data continues to support evidence of economic recovery, albeit gradual and this week’s releases including industrial production and manufacturing surveys will likely add to this.

The EUR slid further at the end of last week reversing earlier gains, as the bad news mounted in the Eurozone. Ratings downgrades, breakdown of Greek debt talks and ECB criticism over watered down fiscal rules, combined to make a dangerous concoction of negative headlines. The news put an end to the EUR’s short covering rally, leaving the currency vulnerable too further declines this week. Speculative sentiment according to IMM data reached another all time low last week (-155k net positions), suggesting that any good news could lead to a strong bounce as short positions are covered.

However, it is difficult to see where such news will come from and even a small expected bounce in the German January ZEW investor confidence survey this week will do little to detract from the negative news on the policy front. A meeting between Merkel, Monti and Sarkozy will be eyed closely as they prepare for a meeting of European Union (EU) Finance Ministers and markets will be looking for aggressive action to turn confidence around. Debt sales in In the meantime EUR/USD will continue to languish but strong technical support is seen around 1.2588.

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The Devil is in the details

December 12, 2011 — Mitul Kotecha

The “partial solution” delivered by European Union (EU) leaders last week has failed to match the high hopes ahead of the EU Summit. Nonetheless, the deliverance of a “fiscal compact”, acceleration of the European Stability Mechanism (ESM) to July 2012 , no forced private sector participation in debt restructuring (outside Greece), and possible boost to the International Monetary Fund (IMF) of up to EUR 200 billion, are steps in the right direction. The fact that UK Prime Minister Cameron threw a spanner in the works to veto a joint proposal to revise the EU Treaty should not detract from the progress made.

Nonetheless, the measures may not be sufficient to allay market concerns, with disappointment at the lack of European Central Bank (ECB) action in terms of stepping up to the plate as lender of the last resort still weighing on sentiment. Data will add to the disappointment this week as “flash” Eurozone purchasing managers indices (PMI) drop further in December.

This week events in the US will garner more attention, including the Federal Reserve FOMC meeting, November inflation and retail sales data plus manufacturing confidence gauges as well as November industrial production on tap. The Fed will not shift its policy stance at this meeting but may sound a little more upbeat on the economy following recent firmer data. Inflation will likely remain subdued while the other data will continue to show gradual recovery.

Overall, the market is likely to thin further as the week progresses and holidays approach, with ranges likely to dominate against the background of little directional impetus. Our call to sell risk assets on rallies remains in place, however. The EUR will likely struggle to make much headway in the current environment, especially given that many details of the EU agreement still need to be ironed out and once again the risk to market confidence lies in implementation or lack of it. A range of EUR/USD 1.3260-1.3550 is likely to hold over the short term.

Posted in ECB, Economics, Economy, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , . Leave a Comment »

All Eyes On Europe

December 8, 2011 — Mitul Kotecha

EUR looks range bound ahead of key events including the European Central Bank (ECB) meeting, European Union Summit and release of bank stress test results. A senior German official poured cold water over expectations of a concrete outcome from the EU Summit, dampening EUR sentiment as a result.

There will be plenty of attention on the ECB to determine whether they will give a little more ground and provide further assistance to the Eurozone periphery. While a refi policy rate cut is highly likely as well as additional liquidity measures I do not expect any move in the direction of more aggressive action to support peripheral bonds in terms of becoming “lender of the last resort’.

If however, the ECB hints at intensifying its securities market purchases of Eurozone bonds this will likely bode well for the EUR. Indeed, reports overnight suggest that the ECB will announce a set of measures to stimulate bank lending including easing collateral requirements for banks.

More weak UK data in the form a bigger than consensus drop in manufacturing and industrial production in October add to the soft BRC retail sales and house price data, in putting pressure on the Bank of England (BoE) to increase its quantitative easing at today’s policy meeting. While the BoE is set to keep policy unchanged it is only a matter of time before additional asset purchases are announced.

Despite the weaker IP data GBP has held up relatively well against the USD although downside risks appear to be intensifying. If I am correct in the view of no change by the BoE today we expect little change in GBP although there could be a risk of a push higher in EUR/GBP if the ECB delivers some positive news, with resistance seen around 0.8665.

The RBNZ unsurprisingly left policy rates unchanged at 2.5%, sounded less hawkish than the previous meeting and also lowered growth forecasts. The NZD was left unmoved by the rate decision and looks well supported at current levels perhaps due to relief that the statement was not more dovish. The kiwi has been an underperformer over the year but unlike the AUD it has not been particularly influenced by gyrations in risk aversion.

Interest rate futures differentials have seen a renewed widening versus the US over recent weeks. This is significant given that the NZ-US interest rate differentials have a very strong correlation with the performance of NZD/USD. If this widening is sustained it will point to upside potential for the Kiwi.

Posted in Currencies, ECB, Economics, Economy, Europe, eurozone, Fiscal/Budget, FX, Interest rates, Monetary Policy, New Zealand, UK. Tags: , , , , , , , , , , , , , , , . Leave a Comment »
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