Rising risk aversion

December 5, 2013 — Mitul Kotecha

The US ADP November jobs report and October new home sales both beat expectations yesterday piling on the pressure on US Treasuries and adding further weight to support those looking for the Fed to taper at the December 17-18 FOMC meeting. Consequently non farm payrolls expectation will likely be revised higher from the current consensus of around 180k. In contrast the ISM non manufacturing index came in below consensus, with the jobs component slipping. US equities ended marginally lower while the USD held its ground. However, risk measures such as the VIX “fear gauge” moved higher. Rising risk aversion may reflect expectations of imminent tapering and some angst ahead of US budget talks.

US November payrolls data to be released tomorrow will be crucial to provide more decisive clues to the timing of Fed tapering. Attention ahead of the jobs report will turn to the European Central Bank policy decision where no action is expected although some downward revisions to staff forecasts are likely. We continue to expect a more aggressive ECB stance into 2014. The Bank of England and Norges Bank will also decide on policy rates but no change is expected in both cases. In the US an upward revision to Q3 US GDP is expected to around 3.1% QoQ annualised while jobless claims will also be in focus. Market nervousness is likely to continue today although activity is likely to be limited ahead of the US payrolls data tomorrow.

The USD should be supported due to higher US Treasury yields although USD/JPY has lost some ground in the wake of higher risk aversion. The large short JPY market position may also be limiting the JPY’s downside for now. EUR/USD is trading shy of its recent highs above 1.36 and could be vulnerable to a dovish ECB statement today as well as to growth forecast downgrades by the ECB. AUD continues to remain under pressure having traded just below 0.90 overnight in the wake of disappointing GDP data yesterday and is likely to remain vulnerable to further slippage. CAD was further undermined by a relatively dovish Bank of Canada statement following the decision overnight to leave policy rates unchanged.

Given that US Treasury yields have risen by around 33bps since the end of October it is worth looking at which currencies are most sensitive to rising yields. In Asia the most correlated currencies with 10 year US Treasury yields over the last 3 months and therefore most vulnerable currencies are the SGD, THB, and MYR. The least sensitive have been CNY, IDR and KRW. Playing long KRW / short SGD appears to be a good way of playing an environment of rising US yields, especially given that yields are set to continue to rise over the coming months.

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Plenty of data and events before winding down

December 2, 2013 — Mitul Kotecha

Although markets already appear to be in wind down mode ahead of the year end holidays there is plenty of data and events over coming days that could change the complexity of market activity. To begin the week news that that China’s official November purchasing managers’ index remained at an 18 month high will bode well for markets, especially in Asia.

Elsewhere it is still too early to gauge how well the four day spending over the US Thanksgiving holiday fared for US retailers although initial indications suggest that spending will be down on last year. Over coming days there will be plenty of evidence to finalise opinions about what the Federal Reserve will do at its December 17-18 FOMC meeting. US data releases this week include the November ISM manufacturing survey, home sales, Fed’s Beige, US Q3 GDP revision and the November jobs report.

Ahead of the Fed meeting other central banks will be in focus this week including the European Central Bank, the Bank of England and the Reserve Bank of Australia. No change in policy is expected from any of them leaving all the attention on the US jobs report. This ought to ensure that the asset allocation shift from bonds to equities will leave equities around record highs while core bond yields continue to edge higher.

The USD has failed to benefit versus EUR despite higher US yields but has made gains against the JPY and many commodity and EM currencies. I look for the USD to move higher over coming weeks. Overall risk appetite is likely to remain supported into year end although much will depend on the plethora of data releases and central bank meetings this week.

EUR is looking increasing stretched around current levels, especially given the likelihood that the ECB will sound relatively dovish this week, with staff growth forecasts likely to be revised lower and inflation forecasts remaining below target. The strength of the EUR is clearly acting as a counterweight to efforts to ease policy but efforts to sell the currency continue to face renewed buying interest. Technical resistance around EUR/USD 1.3627 ought to provide a short term cap.

GBP has made somewhat better progress against the EUR and there appears to be little to stop its upward progress at present. Meanwhile USD/JPY remains under upward pressure, with last week’s inflation data highlighting that there has been some progress on ending deflation although the likelihood of more Bank of Japan easing in the months ahead suggests that further JPY downside is in store.

Aside from the JPY last month’s biggest underperformers in Asia were the IDR and THB. There is little sign of this pattern changing. Indeed, in terms of Asian FX relative value in terms of North versus South East Asia continues to pay dividends. Both Indonesia and Thailand registered outflows of equity capital last month compounding the pressure on the currencies.

THB has taken another leg lower in the wake of escalating protests over the weekend and looks set to test its 6 September USD/THB high at 32.480. As noted by the BoT governor the protests are affecting the economic outlook. In Indonesia questions about the external balance remain a weight on the currency An expected widening in the October deficit and higher November inflation will not help the IDR today.

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Gyrating expectations for Fed tapering

November 18, 2013 — Mitul Kotecha

Gyrating expectations for Fed tapering have left FX markets in somewhat of a limbo. Just as markets had shifted expectations for Fed tapering to next month or January 2014 Fed Chairman nominee Yellen managed to add a dovish spin on things by indicating strong support for ongoing Fed quantitative easing. The USD hasn’t been harmed too much as policy expectations in Japan and the Eurozone has also taken a more dovish slant leaving the EUR and JPY exposed to downside pressure. In contrast, GBP has benefitted from the Bank of England’s revisions to growth and employment expectations.

Yellen’s comments last week and some likely softer economic data releases this week including subdued CPI inflation, declines in retail sales and existing home sales, will likely cap US Treasury bond yields and the USD. Fed FOMC meeting minutes will have some bearing on market direction. Nonetheless, as noted above any pressure on the USD is set to be limited given the relatively dovish policy stances in other countries. Indeed, weak Eurozone and Japan Q3 GDP released last week have led to expectations of more monetary policy action from both the Eurozone Central Bank and Bank of Japan. Consequently EUR/USD will struggle to sustain any recovery above 1.3500 and USD/JPY will find a stronger footing above 100.

GBP/USD has retained a degree of composure but GBP bulls are better taking a long position against EUR where further GBP gains are likely given revelations in the BoE quarterly inflation report that the unemployment threshold will be hit sooner than expected, indicating higher policy rates earlier than forecast. Although the EUR may find some solace from better data this week in the form of flash manufacturing surveys and increases in the German ZEW investor confidence and IFO business confidence surveys any EUR upside will likely remain limited given expectations of further monetary easing by the ECB in the wake of very subdued inflation pressures.

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USD and EUR contrasts

November 11, 2013 — Mitul Kotecha

Finally markets appear to be reacting rationally to economic data. There was always a risk that strong US data releases would prompt renewed Fed tapering fears and result in a sell off in risk assets as has been the case in the past. However, the reaction to Friday’s much stronger than expected US October jobs data (+204k + upward revisions to previous months) was what would be normally be expected. US equities rallied, US yields rose and the USD strengthened.

While the US data added further weight to the potential for Fed tapering in December or January it was also recognised as evidence of a growing economy, and one that barely flinched in the wake of the government shutdown. This week’s US data is unlikely to detract from this view, with the November Empire manufacturing survey and October manufacturing production likely to have shown further improvements. This should ensure that the USD remains firmly supported over coming days.

In Europe, the opposite is true. Faced with very low inflation (this is an issue across most major economies) the European Central Bank cut policy rates last week and looks set to intensify its dovish shift with other policy measures to reinforce its forward guidance. Consequently the EUR sold off sharply and is set remain under pressure.

This week’s Eurozone data releases will add more weight to the argument for further policy actions, with Eurozone GDP set to barely expand in Q3 while inflation likely to be confirmed at 0.7% YoY in October. Meanwhile industrial production is set to have declined in September (-0.4%). Given the contrasts in data releases and in policy stance, EUR/USD is set to decline further, with initial support seen around 1.3295.

In the UK, there will be attention on the Bank of England’s Quarterly Inflation Report, with jobs data and retail sales also on tap. Faced with mounting evidence of firming growth, the BoE will likely have to revise its assumptions upwards. Consequently this bodes well for GBP and while gains against the USD are likely to be limited, EUR/GBP is set for a further downward correction, with a break 0.8300 on the cards shortly.

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Data and central banks in focus

November 4, 2013 — Mitul Kotecha

Risk sentiment remains positive although there will be a test of the market’s optimism this week, with a heavy slate of data releases and central bank policy meetings on tap. A Japanese holiday today may start the week off on a quieter note but central bank decisions by the European Central Bank (Thu), Bank of England (Thu), RBA (Tue) and speeches by various Fed speakers will help stir things up.

While none of the central banks are expected to alter policy settings this week there will be plenty of attention on the ECB to see whether they open the door to further policy easing in the wake of softer data including CPI inflation last week. The rout in the EUR over recent days has reflected the expectation of a shift in ECB stance, with the currency likely to continue to edge lower as the meeting approaches.

On the data front, US numbers have looked somewhat perkier, including the ISM manufacturing survey at the end of last week which beat expectations, helping US 10 year Treasury yields to edge back above 2.6%. This in turn has boosted the USD and will likely help to keep the currency supported in the short term.

However, there will be some caution ahead of Friday’s October employment report, which is likely to look decidedly weaker. The expect the impact of the government shutdown to manifest itself in particular in the unemployment rate, which is set to increase to move higher. Aside from the jobs data, US Q3 GDP and October Michigan confidence are on tap.

In Europe, the European Commission will release its Autumn economic forecasts, with deficit forecasts for peripheral countries a particular focus.

In Australia a slate of releases including retail sales, which revealed a much stronger than expected 0.8% monthly increase in September are on tap. The sales data provides more support to the view that the RBA will be disinclined to ease policy further although the relative strength of the AUD will still give the central bank some cause for concern. September trade data and October jobs data are also scheduled for release this week. AUD will find some support from the sales data this morning but will face headwinds from a generally firmer USD.

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