What to watch this week

February 17, 2014 — Mitul Kotecha

Despite a slow start to the week there are plenty of events and data this week for markets to chew on for further direction including in the US the February Empire and Philly Fed manufacturing surveys, January housing starts and existing home sales, as well as CPI and PPI inflation and FOMC meeting minutes. Overall the data will look relatively unimpressive, with softer manufacturing confidence, weaker housing data and benign inflation readings likely.

In the Eurozone, the flash purchasing managers’ indices will capture most attention. A slight softening is expected but this will not alter the picture of gradual recovery in the Eurozone economy. Indeed, last week’s better than expected Eurozone GDP release revealing broad based growth of 0.3% in Q4 highlighted the positive recovery path, in turn maintaining positive sentiment for the EUR.

On the policy front the Bank of Japan decides on policy tomorrow but no change is expected despite a disappointing Q4 GDP release this morning, which revealed that growth came in at a paltry 0.3% QoQ compared to 0.7% expected. Nonetheless, the weaker GDP data highlights that the BoJ and government has a big job to do in the months ahead especially given the risks to growth from the upcoming consumption tax hike. USD/JPY may find some support if the data translates into expectations of more aggressive BoJ action.

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EUR and GBP outlook this week

February 10, 2014 — Mitul Kotecha

In Europe, the main focus will be on the preliminary estimate of Eurozone Q4 2013 GDP data which is likely to post a gain of 0.2% QoQ as most countries in the Eurozone are set to have recorded positive growth over the quarter. EUR traded more positively at the end of last week but looks like it will struggle to retain gains versus USD above its 100 day moving average around 1.3608.

Markets will also digest the decision by the German Constitutional Court to effectively defer a decision on Outright Monetary Purchases by the European Central Bank to the European Court of Justice. Although there will be some caution ahead of the March 18 final decision on OMT, EUR will find some, albeit limited relief as it seems less likely that the European Court will strike it down.

In the UK the Bank of England Quarterly Inflation Report will reveal an upward revision to growth forecasts but downward revisions to inflation and importantly an adjustment of forward guidance to a broader range of indicators rather than just unemployment. Indeed, as in the US the BoE will not give the impression that they are about to raise policy rates given the sharp fall in the unemployment rate. GBP/USD will be range bound ahead of the release of the QIR, with gains likely gapped around 1.6471.

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Euro treads water ahead of ECB decision

February 6, 2014 — Mitul Kotecha

EUR/USD has been treading water in a relatively tight range ahead of the European Central Bank meeting later today but the currency looks vulnerable to further slippage in the days ahead. Having dropped from its high around 1.3898 on 27 December the EUR has failed to sustain any bounce.

The ECB is unlikely to offer any support to the currency especially given that there is a small chance that they may even trim policy rates at today’s meeting. If the Bank does not cut rates today, the ECB is set to open the door to a cut in March, something that would undermine the EUR further.

Either way, the EUR is losing support and our quantitative models highlight the potential for further downside moves in the currency. Other measures such as short term interest rate differentials also highlight risks to EUR.

EUR/USD is set to edge lower to technical support around 1.3477 in the near term.

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Asian currencies under pressure

January 27, 2014 — Mitul Kotecha

The close to 1% drop in the USD index over recent days is misleading in terms of the USD’s performance against emerging market currencies where it has registered strong gains. For example the ADXY (Asian USD index) has dropped to its lowest level since early September 2013 and looks set to decline further as Asian currencies face more pressure. The best performers in this environment are traditional safe havens, especially JPY and CHF while the EUR and Scandinavian currencies have also capitalised on the weaker USD.

The drop in the USD against many major currencies reflects the fact that positioning had reached extreme levels prior to the sharp moves at the end of last week. For instance, net long USD speculative positions (according to the CFTC IMM data) had risen to the highest level since June 2013 while in contrast EUR positioning had dropped to its lowest since July 2013. The subsequent position adjustment will have proved to be a healthy correction that will set the USD up for an eventual rebound and the EUR for a sell off.

The sharp drop in US Treasury yields will undermine the USD further in the near term, however, and the mixed slate of US data releases will offer the currency little assistance. Nonetheless, the USD is expected to stay firm against Asian currencies. Notably capital flows from Asian equity markets have increased over recent weeks, with Philippines, South Korea, and Thailand on track to register outflows for the first month of the year. Against this background it is unsurprising that both the KRW and PHP are the two worst performing Asian currencies so far this year. While I expect a reversal in both, the near term outlook is for further pressure.

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JPY and EUR find support

January 24, 2014 — Mitul Kotecha

Rising risk aversion is supporting the JPY but the currency may also be finding some support from the misplaced view that the Bank of Japan may not need to be any more aggressive in its policy stance to reach its 2% inflation target, with Japan’s finance minister noting that deflationary conditions have almost ended. Such talk looks premature.

Japan still has a long way to go to reach and sustain inflation at its target. The risk is that without any structural reforms (jobs market, manufacturing sector, immigration) deflation and slower growth could quite easily take hold again. In any case, the Bank of Japan is likely to embark on more aggressive policy in the months ahead in order to achieve the 2% target. In the near term USD/JPY looks supported around 102.50.

The EUR found some additional support from a strengthening in manufacturing confidence in the region, which highlighted that economic recovery continues to take shape. Fitch’s affirmation of Germany’s credit ratings at AAA has also helped sentiment towards the currency.

In the near term much of the same tone is likely although the relatively stronger US economic performance and tapering expectations will mean the USD will not fall too far. EUR/USD will face technical resistance around its 2014 high at 1.3776.

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