On track for a positive end to the year

December 23, 2013 — Mitul Kotecha

A solid revision higher to US Q3 GDP at the end of last week sets up a positive tone for risk assets into year end even as they digest the imminent onset of Fed tapering. The data revealed a revision higher to a 4.1% QoQ annualised pace of growth and if anything lent credence to the Fed’s decision to begin tapering. The GDP data will be followed by a series of positive data releases in the US this week including November personal income and spending and a likely upward revision to December Michigan consumer confidence both on tap today.

Tomorrow, November durable goods orders and next week December Conference Board consumer confidence will also paint a picture of broadening improvement in economic conditions, providing further validation to Fed tapering. Against this background US yields should be well supported along with the USD. Into next year US economic outperformance will continue, leading to both higher US yields and a firmer USD.

A Japanese holiday (Emperor’s birthday) today will dampen market action although Japanese data releases over the rest of the week will highlight further progress on the economic front, with November inflation pushing higher and industrial output expanding at a healthy clip. USD/JPY retained a foot hold above 104 but the large extent of short JPY positioning highlights scope for profit taking. Even so, the rise in US Treasury yields suggest limited downside risks for USD/JPY.

There is on little on tap on the data front in the Eurozone allowing markets to digest the steps towards banking union announced last week. Consequently EUR/USD is set to remain rangebound around 1.3650-1.3750.

There may be more interest in events in China as money market conditions and confidence surveys garner interest. Tight money market conditions will weigh on regional sentiment. A likely decline in both the manufacturing and service sector purchasing managers’ indices will also act to dampen Asian currencies reinforcing the pressure already in place from a broadly stronger USD. News in Thailand that the opposition Democratic Party has decided to boycott the Feb 2 elections will add to political uncertainty and pile more pressure on the THB although the regional underperform remain the IDR.

Overall, a thinning in market conditions as both liquidity and market participants disappear for the holidays imply limited activity over coming days. The fact is that the end of the year will market a solid year for equities and a poorer year for bonds but at least the debate over Fed tapering timing has finally been put to the rest. More of the same is likely next year but notably the growth gap between developed and developing economies will narrow, which at a time of heightened competition for capital amid Fed tapering, suggests that capital flows will increasingly be steered towards developed economies.

Dear readers, this is my last post for 2013. Thank you for taking the time to read my blog posts. I wish all Econometer readers happy holidays, success, prosperity and good health in the year ahead.

Posted in Asian currencies, China, eurozone, Federal Reserve, Japan, US. Tags: , , , , . Leave a Comment »

Running into resistance

December 18, 2013 — Mitul Kotecha

Currency markets will remain range bound today although many currencies appear to be running into resistance in the wake of recent sharp moves. For instance, GBP/USD has run into a wall and lost momentum following the release of softer than forecast UK November CPI data yesterday. Unless the UK jobs report and MPC minutes today are particularly strong, GBP/USD will remain capped around 1.6300.

Similarly EUR/USD will find it difficult to make much further headway although a gain in the German IFO survey will keep the currency pair supported around 1.3730. USD/JPY’s upside is being undermined by lower US yields but firmer Japanese equities are helping to keep the currency pair supported.

AUD faced yet more jawboning by RBA Governor Stevens attempting to talk the currency lower. Given that such comments are nothing new markets are beginning to discount them, with AUD/USD likely to consolidate above 0.8900.

Asian currency direction will be limited ahead of the Fed outcome too although lower US yields will give some relief. Overall, it remains a case of South East Asian FX underperformance versus North East Asia outperformance.

The exception is the INR which has outperformed so far this month but will face an obstacle in terms of today’s RBI policy decision. 25 bps hikes in the repo and reverse repo rates are widely expected in the wake of higher inflation readings but the INR will also have one eye on the Fed FOMC given that it is the most sensitive Asian currency to US yield movements as outflows from India’s bonds continue. INR will continue to remain capped against this background.

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JPY, EUR and GBP view

December 17, 2013 — Mitul Kotecha

It is highly unlikely that the Bank of Japan adjusts policy at its meeting later this week but further action next year remains likely. More importantly for USD/JPY will be the actions of the Fed this week and the subsequent move in US yields. US 10 year yields have struggled to sustain a move above 2.9% recently, reducing the yield advantage over JGBs and in turn pulling USD/JPY back from its highs.

It is only a matter of time before US yields resume their uptrend and in this respect the outlook remains for more USD/JPY upside. Nonetheless, I am cognisant of the large short (CFTC IMM) JPY position in the speculative market, which into year end suggests plenty of scope for position squaring and short USD covering.

The EUR is set to end the year on firm note but further upside looks limited and the risk / reward favours selling the currency from current levels. Although economic data reveals continued improvement as reflected in the flash Eurozone composite purchasing managers’ index yesterday, much in terms of recovery expectations is in the price.

While a strong basic balance (current account + FDI + portfolio flows) continues to underpin the EUR I do not expect this to persist. Nonetheless as many bears have found out the EUR is a difficult currency to sell and while EUR/USD is likely to increasingly struggle on its approach to 1.3800, any sell off will not be rapid unless the ECB belatedly adopts a more aggressive monetary policy stance.

Like the EUR, GBP is struggling to push higher, as profit takers emerge and a dose of reality sets in given the magnitude of its rally versus USD over recent months (around 10% since July). The rationale for GBP’s gains are clear; surprisingly good economic data and a reassessment of monetary policy implications. However, GBP bullishness has resulted in net long speculative positions reaching their highest since 15 January 2013.

Further GBP gains will require yet more positive economic surprises but this is unlikely to be delivered in the jobs data, inflation data and Bank of England MPC minutes over coming days. Consequently GBP/USD is unlikely to extend gains above 1.6300 in the near term.

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A lot to get through before year end

December 16, 2013 — Mitul Kotecha

As the end of the year nears markets will still need to get through a heavy week in terms of events and data releases before winding down. The main event is the Federal Reserve FOMC meeting on Tuesday and Wednesday and trading direction is likely to be limited ahead of this. There remains a considerable degree of uncertainty about the timing of Fed tapering, with most market participants split between this week and January 30th. We see a one in three chance of Fed tapering beginning this week, with our bet on a January move.

There are also plenty of US data releases on tap including the December Empire manufacturing and Philly Fed surveys, industrial production, CPI inflation, Q3 current account balance, housing starts, existing home sales and Q3 GDP this week. The data will be mixed with manufacturing surveys showing little improvement, home sales declining while in contrast GDP will be revised higher and industrial production will reveal a decent gain.

In Europe there is also plenty to digest amid thinning market liquidity. The final EU summit of the year on 19-20 December will focus on the steps towards banking union while Eurozone flash manufacturing and confidence purchasing managers confidence indices to be released today will show some, albeit limited improvement. Further gains in the German ZEW investor confidence and IFO business confidence surveys are likely to be recorded in December although the surveys are unlikely to match the pace of recent gains.

The UK will also reveal further economic clues in the form of the CPI inflation, jobs data and Bank of England Monetary Policy Committee (MPC) minutes. In particular, the minutes are unlikely to reveal any urgency to change policy despite the faster than anticipated drop in the unemployment rate. In terms of central banks the Bank of Japan is set to leave policy unchanged given recent the progress on inflation while the Reserve Bank of Australia (RBA) minutes will reveal further focus on the strength of the AUD.

The intense focus on the Fed means that there will very limited market movements until after the outcome of the meeting. It is unclear whether the recent slippage in US equities has been due to renewed nervousness about Fed tapering or simply year end profit taking. Either way, a delay in Fed tapering may provide some, albeit limited relief to risk assets.

The USD will benefit if tapering is announced this week, but much will depend on what US bond yields do. Recent moves in currency markets are looking increasingly stretched, with EUR and GBP failing to build on their recent gains, while USD/JPY is also struggling to move higher. This may continue over coming days as FX market activity thins further.

Posted in Australia, Bank of Japan, Federal Reserve. Tags: , , , , . Leave a Comment »

Firm US data not helping the dollar

December 9, 2013 — Mitul Kotecha

The US November employment report released at the end of last week helped to reinforce expectations that the Fed will begin tapering soon, possibly as early as the FOMC meeting in mid December. Non-farm payrolls rose by 203k while the unemployment rate dropped to 7%. Job gains have averaged around 180k per month over the last 6 months. The jobs data followed on from several other firm US data releases over the week highlighting strengthening signs of recovery.

Equities reacted well, rising as fears over tapering were outweighed by concrete signs of recovery. Meanwhile bond yields rose over the week although they slipped on Friday. Attention will turn to next week’s Fed FOMC meeting while this week’s data flow will be more limited. The main event will be the November US retail sales report where a moderate gain in sales is expected in terms sales outside of autos, providing the final clues to the Fed’s decision next week.

Elsewhere markets are still reeling from the ECB’s less dovish than expected statement last week as reflected in the subsequent strength of the EUR. Data this week in the Eurozone will be encouraging, with Eurozone industrial production set to rebound. This will be echoed in the UK, with hard data reflecting the strength in manufacturing surveys.

In Japan this morning’s data slate was disappointing, with Q3 revised lower and the current account registering a deficit for the second straight month in October although the JPY impact will be limited. Finally, the RNBZ is will hold a policy rate meeting this week although no change is expected from the central bank as recent mortgage restrictions will have reduced the need to tighten policy. Nonetheless, as reflected by the latest NZ housing data loan to value mortgage restrictions have yet to have a significant impact.

The USD failed to benefit from the solid data in the US last week undermined by some slippage in US yields, with the reaction indicative of a market that is becoming increasingly accustomed to the idea of an imminent Fed tapering. The USD index appears to be struggling into year end, with the EUR taking advantage of the USD’s inability to push higher especially given that the ECB did not appear to be in any hurry to add more monetary accommodation last week.

Conversely USD/JPY looks set to continue to edge higher as sentiment for JPY continues to deteriorate; latest IMM positioning data shows that net JPY positions have hit their lowest since July 2007. The next key technical resistance level is around 103.74. Firm trade data in China over the weekend helped to bolster AUD and NZD although the latter is benefitting the most, boosted overnight by strong house price data in November. Consequently AUD/NZD continues top plumb new depths.

Posted in Australia, ECB, Federal Reserve. Tags: , , , , . Leave a Comment »
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