Renewed Eurozone Tensions

January 5, 2012 — Mitul Kotecha

The USD has so far failed to build on the strong momentum seen at the end of last year. Its early days yet however, and given the ongoing tensions in the Eurozone the USD is hardly likely to lose much ground in the weeks ahead. US data continues to impress relative to elsewhere as revealed in the December ISM manufacturing survey data and overnight news that sales at auto makers and retailers were firmer in December. This economic outperformance may however, feed into a tone of improved risk appetite which could play negatively for the USD.

The USD will face a test from the release of the December payrolls data tomorrow, with forecasts currently looking for the gradual improvement in job market conditions to continue. As usual the December ADP private sector jobs released today will be instrumental in finalising the forecasts for payrolls. Overall, the USD will continue to benefit from the travails in the Eurozone, keeping the USD index well supported around 80.00.

EUR/USD has failed to sustain gains above 1.3000 so far this week and has continued to come under pressure on the crosses. While the potential for short covering may limit its losses sentiment continues to be downbeat. Better than forecast December service sector PMI data have helped to allay the worse fears about the Eurozone economy but this will be of little help to the EUR as further deterioration is likely in the months ahead.

Meanwhile yield differentials continue to have some bearing on EUR/USD. The fact that German 2-year yields have dropped further below US 2-year yields therefore ought to spell bad news for the EUR and will likely act as a cap to any rally in the currency. The news flow in the Eurozone will continue to weigh on the EUR too, with speculation that Spain will need an European Union (EU) / International Monetary Fund (IMF) loan intensifying and press reports that Spain will need to increase its provisions for bad property assets by up to EUR 50 billion. Attention today will turn to a EUR 8 billion bond auction in France.

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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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Ratings agencies spoil the party

December 13, 2011 — Mitul Kotecha

Just as I thought that attention may finally switch to the US along comes the ratings agencies to spoil the party once again. Moody’s and Fitch Ratings criticised last week’s European Union Summit outcome for falling short of a comprehensive solution to Eurozone ills. Consequently the risk of further sovereign credit downgrades across Europe remains high over coming weeks especially as economic growth weakens. Moody’s also put 8 Spanish banks and two bank holding companies on review for a possible downgrade.

The EUR and Eurozone bonds came under pressure as a result, with EUR/USD verging on its strong support level around 1.3146. Further pressure is likely into year end although the fact that the speculative market is still very short EUR may limit its downside potential in the short term. Disappointment that the ECB has not stepped up to the plate to support the Eurozone bond market more aggressively is also having a damaging effect on confidence. A test of sentiment will come from today’s EFSF and Spanish bill auctions while on the data front we look for a below consensus outcome for the German December ZEW survey, which will deteriorate further.

The comments from the ratings agencies resulted in risk assets coming under pressure once again, leaving the market open to further selling today given the lack of positives. US data and events will at least garner some attention, with the Federal Reserve FOMC meeting and November retail sales on tap. We do not look for any big surprise from either of these, but at least the Fed may sound a little more positive in light of firmer data over recent weeks. Even so, speculation of more Fed QE early next year will remain in place. In the current environment demand for US Treasuries remains strong with a Treasury auction yesterday receiving the highest bid/cover ratio since 1993.

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Germany Caught in the Contagion

November 24, 2011 — Mitul Kotecha

Equity markets came off their lows overnight despite a 236 point drop in the Dow Jones, but sentiment remains extremely fragile and any let up in pressure on risk assets will prove temporary. A weak bond auction in Germany highlights the severity of contagion across Europe. If the core is being hit then there is no safe haven in Europe anymore. On a positive note it might just make German officials finally realise that they need to act quickly to provide solutions to the crisis.

Weak data notably outside the US adds to the malaise, with in particular China’s HSBC November weaker purchasing managers’ indices coming in below the 50 boom/bust level. Europe’s weaker purchasing managers indices highlight the prospects of looming recession while the news in Germany is not only bad on the bond front bad also on the data front. Today’s German November IFO survey will continue in the same vein, with further weakness in this business survey expected.

Bearing in mind the US Thanksgiving holiday today thin liquidity will mean that conditions are ripe for exaggerated market moves. EUR/USD has already sustained a drop below the important 1.3500 level as even the underling strong Asian demand appears to have been pulled back. More downside is expected but technicals suggests that it will be hard trudge lower, with near term support seen around 1.3285 (10 day Bollinger Band). The near term range is likely to be 1.3285-1.3505 although given the US holiday the range may be even tighter.

Aside from the IFO attention today will focus on a meeting between Chancellor Merkel, President Sarkozy and Prime Minister Monti. As usual expect a lot of hot air but little action. Also note there is a general strike in Portugal today protesting against austerity measures in the country.

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Eurozone contagion spreading quickly

November 17, 2011 — Mitul Kotecha

Contagion from the eurozone debt crisis is spreading quickly, threatening to turn a regional crisis into a global crisis. As highlighted by Fitch ratings further contagion would pose a risk to US banks. Consequently risk assets continue to be sold but interestingly oil prices are climbing. Taken together with comments earlier in the day from the Bank of England that failure to resolve the crisis will lead to “significant adverse effects” on the global economy, it highlights the risks of both economic and financial contagion.

Predominately for some countries this is becoming a crisis of confidence and failure of officials to get to grips with the situation is resulting in an ever worsening spiral of negativity. Although Monti was sworn in as Italian Prime Minister and Papademos won a confidence motion in the Greek parliament the hard work begins now for both leaders in convincing markets of their reform credentials. Given that there is no agreement from eurozone officials forthcoming, sentiment is set to worsen further, with safe haven assets the main beneficiaries.

EUR/USD dropped sharply in yesterday’s session hitting a low around 1.3429. Attempts to rally were sold into, with sellers noted just below 1.3560. Even an intensification of bond purchases by the European Central Bank (ECB) failed to prevent eurozone bond yields moving higher and the EUR from falling.

Against this background and in the absence of key data releases EUR will find direction from the Spanish 10 year bond auction while a French BTAN auction will also be watched carefully given the recent increase in pressure on French bonds. Having broken below 1.3500, EUR/USD will aim for a test of the 10 October low around 1.3346 where some technical support can be expected.

US data releases have been coming in better than expected over recent weeks, acting to dampen expectations of more Fed quantitative easing and in turn helping to remove an impediment to USD appreciation. While the jury is still out on QE, the USD is enjoying some relief from receding expectations that the Fed will forced to purchase more assets. Further USD gains are likely, with data today including October housing starts and the November Philly Fed manufacturing confidence survey unlikely to derail the currency despite a likely drop in starts.

Posted in central banks, Currencies, ECB, Economics, Economy, equity markets, Europe, eurozone, Federal Reserve, Financial crisis, Fiscal/Budget, France, FX, Germany, Greece, Interest rates, Italy, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »
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