Euro sentiment dives to a new low

January 3, 2012 — Mitul Kotecha

Equity markets in Europe began the year in positive mood, with gains led by the German DAX index following the release of firmer than expected readings for Eurozone purchasing managers indices (PMI). Chinese data which showed an increase in its PMI also helped to boost sentiment. The Eurozone data however, remained at a weak level, contracting for a fifth month in a row, and still consistent with Eurozone recession.

It seems unlikely that equity gains will be sustained over the rest of this week, with risk aversion set to remain elevated against the background of ongoing Eurozone debt and global growth concerns. Indeed, both French and German leaders in their new-year messages warned about the risks ahead. A meeting between Germany’s Merkel and France’s Sarkozy is scheduled for January 9th ahead of an EU Finance Ministers summit on January 23rd. It is unlikely that there will be any significant policy decisions in Europe before then.

Meanwhile, press reports noting that Germany is pushing for an even bigger write down of Greek debt than previously agreed will only add to risk aversion over the short term. The report in the Greek press highlighted the prospect of a 75% write down of Greek debt a far cry from the 20% proposed some months ago. Eurozone markets continue to be haunted by the prospects of credit downgrades by major ratings agencies at a time when many countries have to issue large amounts of debt to satisfy their funding requirements.

Against this background the EUR is set to remain under pressure, with a notable drop below EUR/JPY 100, its lowest level in over a decade registered. Reflecting the deterioration in sentiment for the currency, EUR speculative position hit an all time low at the end of last year according to the CFTC IMM data. This is unlikely to reverse quickly, with sentiment set to deteriorate further over coming weeks and months as the EUR slides further.

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Dollar, Euro and Yen Outlook 2012

December 16, 2011 — Mitul Kotecha

The USD index is set for another positive year over 2012 but it will not be a star performer. The USD has been a clear beneficiary of the crisis in the eurozone and will continue to find sustenance unless there are signs of a concrete resolution on the horizon. My forecasts still see the USD index rising to 82.5 by the end of 2012. This would be well below the highs reached during the height of the financial crisis in March 2009 around 89.

While economic recovery is expected to continue over 2012 it will be a tepid one, with prominent downside risks. Therefore, one of the factors likely to hold the USD back is the likelihood that the Fed embarks on a fresh round of quantitative easing which I believe will take place sometime in H1 2012, specifically aimed at mortgage backed securities.

I am not bullish on the EUR but it is clear in my view that there is an underlying degree of support for the currency. In 2012 I expect more downward pressure on the currency. News on the economic front will become more negative and the region is set to slip into recession, albeit a mild one (with downside risks). In contrast, the outlook for the US looks somewhat better even if the recovery will look tame compared to past growth.

Relatively weak growth will maintain the pressure on the ECB to ease monetary policy and further interest rate cuts are likely in the months ahead. Easier policy will be another factor that undermines the EUR. Even if the there was some progress on a resolution to the eurozone debt crisis I doubt that the stress on markets would be relieved overnight. While the crisis has and will not deliver a death blow to the EUR it will mean that investors, even official ones, take a much more cautious view on the currency going forward. I look for EUR/USD to fall to around 1.26 by end 2012.

The JPY has been one of the most well behaved currencies over past months, remaining within a relatively tight range. Unfortunately for the Japanese authorities and for the economy the JPY has failed to build on any negative momentum caused by intervention. I expect USD/JPY and EUR/JPY to edge higher over coming months but the upside for both currency pairs is likely to be gradual over 2012.

Much will depend on whether risk appetite improves and more importantly on yield differentials between Japan and other countries. My end 2012 forecast for USD/JPY and EUR/JPY remain at 85 and 107, respectively but its worth noting that I now expect a firmer JPY in March 2012 against both USD and EUR than previously forecast due to the likelihood of prolonged uncertainty and elevated risk aversion over Q1 2012

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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 »

IMF Hopes For Italy

November 28, 2011 — Mitul Kotecha

Following a week in which risk aversion increased further and equity markets fell sharply the start of this week looks a little steadier. Reports in the Italian press that the International Monetary Fund (IMF) is readying a EUR 600 billion loan for Italy in the event of a worsening in the debt crisis may help to support markets as the week kicks off.

Moreover a report in the German press that German Chancellor Merkel and French President Sarkozy are preparing a fast track “Stability Pact” for euro countries similar to the Schengen agreement, that may be announced this week, will also help to steady market nerves. However, neither report has been confirmed suggesting that as usual the scope for disappointment is high. The sell on risk on rallies environment is likely to persist for a while longer despite such reports.

Liquidity is likely to thin further this week and scope for volatility is high given that there are plenty of events and data on tap. Included among these are debt auctions in Belgium and Italy today and France and Spain later in the week against the background where Germany’s failed bond auction last week has fuelled even more nervousness in bond markets. A European Finance Ministers meeting beginning tomorrow will also come under scrutiny, especially given the lack of progress so far on many issues including the issue of Eurobonds.

The key data of the week will arrive from the US, with the November jobs report, ISM manufacturing survey, Beige Book and consumer confidence reports scheduled for release. Following what appears to be strong Thanksgiving holiday weekend spending the US data will continue to show improvement although this may not be enough to stem speculation that the Fed is verging on buying of mortgage backed securities in a third round of quantitative easing.

Risk currencies have commenced the week in strong firm, with the EUR and AUD rallying. Any gain in the EUR will prove limited and unsustainable unless the weekend press reports are confirmed. EUR/USD will find upside resistance around the 1.3412 level, while the risk of a downside test of support around its October 4 low at 1.3146 remains high over coming days.

Posted in Bond markets, Currencies, Europe, Italy, US. Tags: , , , . Leave a Comment »
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