Euro fails too hold on to gains

September 19, 2011 — Mitul Kotecha

Any improvement in sentiment following the USD liquidity support announcement by various central banks last week is already filtering away against the background of European Union (EU) officials’ failure to make any headway at the Ecofin meeting over the weekend, a delay in the approval of the next bailout tranche for Greece and ongoing collateral dispute between Greece and Finland. On top of all of this German Chancellor Merkel suffered a further setback in regional elections over the weekend.

Greece will remain in focus this week and markets will look for signs that the country is back on track on its austerity plans and its next loan tranche. Prime Minister Papandreou cancelled a trip to the US while the Greek cabinet are apparently deciding on new fiscal measures. Attention will turn to a teleconference today from the Greek Finance Minister with EU and IMF officials.

Speculative sentiment for the EUR has already soured further and according to the latest CFTC IMM report, positioning in EUR is at its lowest since the end of June 2010. EUR/USD will continue to look very vulnerable having already dropped sharply from a high of around 1.3899 in Asian morning trading as the bad weekend news hit the currency. EUR/USD will find some technical support just below 1.3500 this week but any upside is set to prove limited unless some concrete announcements are delivered relating to Greece over coming days.

In contrast to the EUR, USD speculative appetite has turned net long for the first time since July 2010. The extended Fed FOMC meeting will help to dictate USD sentiment as markets wait for further measures to stimulate the economy. The Federal Reserve has already committed to hold rates steady until at least mid 2013 and the extended two day meeting this week will likely discuss further options. However, more quantitative easing (QE3) appears unlikely at this stage while an ‘Operation Twist’ type approach is more probable. The USD will benefit from a lack of further quantitative easing but this is largely already priced in.

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US Dollar On The Rise

May 16, 2011 — Mitul Kotecha

There are plenty of US releases on tap this week but perhaps the most important for the USD will be the minutes of the April 26-27 Fed FOMC meeting. Taken together with speeches by Fed officials including Bernanke, FX markets will attempt to gauge clues to Fed policy post the end of QE2. The Fed’s stance at this point will be the major determinant of whether the USD can sustain its rally over the medium term. The lack of back up in US bond yields suggests that USD momentum could slow, with markets likely to move into wide ranges over coming weeks.

It is worth considering which currencies will suffer more in the event that the USD extends its gains. The correlation between the USD index and EUR/USD is extremely strong (even accounting for the fact that the EUR is a large part of the USD index) suggesting that the USDs gains are largely a result of the EUR’s woes. Aside from the EUR, GBP, AUD and CAD are the most sensitive major currencies to USD strength whilst many emerging market currencies including ZAR, TRY, SGD, KRW, THB, IDR, BRL and MXN, are all highly susceptible to the impact of a stronger USD.

Robust Q1 GDP growth readings in both Germany and France helped to spur gains in the EUR but this proved short-lived. Sentiment for the currency has soured and as reflected in the CFTC IMM data long positions are being scaled back. Nonetheless, there is still plenty of scope for more EUR selling given ongoing worries about the eurozone periphery, which are finally taking their toll on the EUR. A break below EUR/USD 1.4021 would open the door for a test of 1.3980.

The eurogroup and ecofin meetings will be of interest to markets this week but any additional support for Greece is unlikely to be announced at this time. However, likely approval of Portugal’s bailout may alleviate some pressure on the EUR but any positive impetus will be limited. Even on the data front, markets will not be impressed with the German ZEW index of investor confidence likely to register a further decline in May.

Japanese officials have been shying away from further FX intervention by blaming the drop in USD/JPY over recent weeks on general USD weakness despite the move towards 80. However, this view is not really backed up by correlation analysis which shows that there is only a very low sensitivity of USD/JPY to general USD moves over recent months. One explanation for the strength of the JPY is strong flows of portfolio capital into Japan, with both bond and equity markets registering net inflows over the past four straight weeks.

This is not the only explanation, however. One of the main JPY drivers has been a narrowing in yield differentials. This is unlikely to persist with yield differentials set to widen sharply over coming months resulting in a sharply higher USD/JPY. As usual data releases are unlikely to have a big impact on the JPY this week but if anything, a further decline in consumer confidence, and a negative reading for Q1 GDP, will maintain the pressure for a weaker JPY and more aggressive Bank of Japan (BoJ) action although the BoJ is unlikely to shift policy this week.

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Data and earnings focus

January 17, 2011 — Mitul Kotecha

Friday’s round of US data were generally upbeat, highlighting that consumer spending is coming back to life. Inflation pressures however, remain benign at least on the core reading highlighting the Fed’s concern that inflation is running below the level consistent with its mandate. In other words it will be a long time, probably late into 2012 before policy rates increase.

While the Fed is no hurry to raise rates despite a few hawkish rumblings within the FOMC the European Central Bank (ECB) in contrast appears to have become more eager to pull the trigger for higher rates. ECB President Trichet’s hawkish press conference last week set the cat amongst the pigeons and marked a clear shift in ECB rhetoric towards a more hawkish stance.

A very big problem for the ECB is that the eurozone economy is not performing along the lines that its hawkish rhetoric would suggest, especially in the periphery. Growth momentum in the core in contrast, as likely reflected in the January ZEW investor confidence and IFO business confidence survey data this week in Germany, remains positive. Both surveys are likely to stabilize at healthy levels but how long can the likes of Germany drag along the eurozone periphery?

There will be relatively more attention on the meeting of Eurogroup/Ecofin officials, with focus on issues such as enlarging the size of the European Financial Stability Facility (EFSF) bailout fund and development of a “comprehensive plan” to contain the eurozone crisis. Don’t look for any conclusive agreements as this may have to wait until the European Union (EU) Council meeting on 4 February assuming (optimistically given ongoing German resistance) some agreement can even be reached.

Following the success (albeit at relatively high yields) of the eurozone debt auctions last week, sentiment for peripheral debt will face further tests this week in the form of debt sales in Spain, Belgium and Portugal.

The US Martin Luther King Jr. holiday will result in a quiet start to the week for markets but there will be plenty to chew on. This week’s key earnings reports include several banks scheduled to release Q4 earnings. Financials are a leading sector in the rally in equities at present and these earnings will be critical to determine whether the rally has legs.

The US data slate includes January manufacturing surveys in the form of the Empire and Philly Fed, both of which are likely to post healthy gains whilst existing home sales are also likely to rise. This will not change the generally weak picture of the US housing market, with high inventories and elevated foreclosures characterizing conditions. As if to prove this, housing starts are set to drop in December. On the rates front, the Bank of Canada is likely to keep its policy rates on hold this week.

After coming under pressure last week much for the USD will depend on the eurozone’s travails to determine further direction. Concrete evidence of progress at the Ecofin may bolster the EUR further, with resistance seen around 1.3500 but don’t bank on it. The ability of eurozone officials to let down often lofty expectations should not be ignored. In any case following sharp gains last week progress over coming days for the EUR will be harder to achieve.

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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.

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EUR under pressure

January 20, 2010 — Mitul Kotecha

The EUR continues to struggle both due to the direct and indirect impact of Greece’s fiscal problems. The indirect impact was felt when the EUR dropped sharply following the release of the below consensus German ZEW survey, which dropped to 47.2 in January compared to consensus expectations of 50.0 and a reading of 50.4 in December. Investor sentiment as measured by the ZEW was dented by growing concerns about Greece outweighing any positive bias.

In terms of the direct impact on the EUR, concerns about the seriousness and/or ability of Greece to solve its problems are also weighing on the currency. The Ecofin meeting of European finance ministers this week inspired little confidence about the fate of the country. Officials noted that Greece would not receive help from its neighbours but said its problems are a concern for all of the eurozone. Officials urged Greece to take the necessary steps to reduce its burgeoning budget. In particular, officials called on Greece to detail “concrete” measures to achieve planned reforms.

The strength of the EUR was also discussed at the Ecofin meeting, with the EU’s Juncker stating that it should better represent European interests. The EUR is clearly overvalued and will act as yet another constraint to eurozone recovery so such concerns should be taken at face value but there is little that will likely be done about it. Intervention is certainly not much of a prospect at current levels. Greece’s problems may give some comfort on this front as it will likely keep the EUR under pressure but this benefit is small compared to the bigger cost that problems in Greece could have on the eurozone.

EUR/USD looks especially vulnerable below its 200-day moving average around 1.4298, the first time it has traded below the 200 day moving average since May 2009. Concerns about Greece will not go away quickly and will likely put further pressure on EUR/USD. EUR/USD 1.4250 will be an important level to watch and if a drop below this level is sustained on a closing basis a quick move towards 1.40 will beckon.

Going forward downside risks to the EUR may be limited by the general improvement in risk appetite as markets appear to be shaking off earnings disappointments, which in turn could put the USD under renewed pressure but for now the EUR will find it difficult to shake off the negativity surrounding the problems in Greece.

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