Fed Tapering Concerns/Rising COVID Cases In Europe

November 22, 2021 — Mitul Kotecha

Equities struggled at the end of last week amid news of rising COVID cases and hints by Federal Reserve officials of a preference for faster tapering though tech stocks benefitted from a rally in US Treasuries.  Oil prices fell further as markets pondered the potential for releases from China, Japan and US strategic oil reserves. Meanwhile, various countries are registering record daily COVID cases in Europe, resulting in partial lockdowns in a few countries. The outlook doesn’t look good heading into the winter flu season, while protests against mobility restrictions are on the rise. 

The US dollar extended gains at the start of this week helped by hawkish comments from Federal Reserve officials.  Conversely, rising COVID cases across Europe and resultant mobility restrictions, have hurt the euro, with the EURUSD exchange rate falling through 1.13 and showing little sign of any reversal.  Worsening sentiment towards the euro has fuelled a collapse in speculative euro positioning, with the market being net short for 6 out of the last 7 weeks (according to the CFTC IMM net non-commercial futures data).  In contrast, China’s authorities are becoming more concerned with the strength of the Chinese renminbi, which is currently around five year highs in trade weighted terms.  Measures to cap renmimbi strength are likely to be forthcoming.

Risk assets could struggle in the wake of speculation/pressure for more aggressive Fed tapering.  Fed Vice Chair Clarida and Governor Waller sounded relatively hawkish on Friday. Clarida said that the FOMC could discuss the pace of tapering at the December FOMC meeting and separately Waller stated that recent data had pushed him toward “favoring a faster pace of tapering and a more rapid removal of accommodation in 2022.”  This implies that the December Fed FOMC meeting will be a live one and could potentially see the announcement of more rapid tapering than the $15bn per month rate that was announced at the last Fed meeting. 

As such, the Fed FOMC minutes (Wed) will be under scrutiny to provide clues to any hint of support for more aggressive tapering though they will likely reveal that most officials see no rush for rate hikes.  On the same day the US core Personal Consumption Expenditure (PCE) report is likely to have registered a strong increase in October keeping inflation concerns at the fore.  Fed nominations are also likely this week, and markets will be especially focused on whether Fed Chair Powell will be reaffirmed for another term.  The overall composition of the FOMC is likely to become a more dovish one next year. 

Several central bank policy decisions are scheduled this week including in China where the Peoples Bank of China (PBoC) unsurprisingly kept its Loan Prime Rate on hold today.  However, in its latest quarterly monetary policy report released on Friday, the PBoC removed some key phrases cited in its previous reports, implying a softer tone to policy ahead. Any such easing would be targeted such as recent support for lenders via a new special relending facility to support the clean use of coal, via loans at special rates.  Additionally, a cut in the reserve ratio (RRR) cannot be ruled out.

Next up will be the Reserve Bank of New Zealand (RBNZ) (Wed), with a 25bp hike likely and risks of an even bigger 50bp hike. The Bank of Korea is also likely to hike, with a 25bp increase in policy rates likely (Thu) given rising inflation pressures and concerns about financial imbalances. The Riksbank in Sweden (Thu) is likely to keep policy unchanged though an upgrade in their forecasts is expected. 

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US Dollar Sliding, Gold At Record Highs

July 27, 2020 — Mitul Kotecha

Risk sentiment has turned south and the US stock rotation out of tech into value has gathered pace, with the Nasdaq ending down for a second straight week.  Gold is turning into a star performer, registering a record high today, while the US dollar continues to lose ground.  Economic activity is slowing, second round virus cases are accelerating in places that had previously flattened the curve, while US- China tensions are heating up.  Attention this week will centre on US fiscal discussions while US-China tensions remain a key focal point.

Reports suggest that Senate Republicans and the US administration have agreed on a $1 trillion coronavirus relief package.  This will be the opening offer in discussions with Democrats (who had passed a $3 trillion package in House in May), with less than a week before unemployment benefits expire.  Whether the $1 trillion on the table will be sufficient to satisfy Democrats is debatable and a figure of around $1.5 trillion looks plausible. Time is running out and pressure to reach a compromise is growing.   Further uncertainty will likely weigh on US markets in the days ahead.

US-China tensions remain a key focus for markets. Worries about a dismantling of the Phase 1 trade deal still looks premature even as China has fallen behind in terms of purchasing US imports.  The closure of the US consulate in Chengdu following the closure of the Chinese consulate in Houston will be seen as a proportionate move, that is unlikely to escalate matters.  Nonetheless, a further escalation is inevitable ahead of US elections in November, with a broad array of US administration officials becoming more aggressive in their rhetoric against China.  As such, further sanctions against Chinese individuals and companies could be on the cards.

The week could prove critical for the US dollar given that it is breaching key technical levels against a host of currencies, with the currency failing to benefit from rising risk aversion recently. While not a game changer the European Union “recovery fund” is perceived as a key step forward for the EU, a factor underpinning the euro.  Key data and events over the week include the Federal Reserve FOMC meeting (Wed), US (Thu) and Eurozone Q2 GDP (Fri) and China purchasing managers indices (PMI) (Fri).  US Q2 earnings remain in focus too.  Before these data releases, today attention turns to the German IFO survey (consensus 89.3) and US durable goods orders (consensus 6.8%).

 

Posted in Asia, central banks, China, coronavirus, COVID-19, Currencies, ECB, Economics, emerging markets, equity markets, Europe, eurozone, Federal Reserve, FX, Hong Kong, Monetary Policy, Politics, Trade, Trump, US, US administration. Tags: , , , , , , , , , , , , , . Leave a Comment »

Cyprus deal reached but risk rally to fade

March 25, 2013 — Mitul Kotecha

A deal between Cyprus and the Troika has been reached “in principle”, an outcome that will be met with relief across markets, with the EUR and risk assets rallying. Most details have yet to emerge but it appears that only depositors above EUR 100k will be hit by a levy while the country’s second largest bank will be closed. However, the levy is likely to be fairly hefty.

The bailout deal will mean that the risks of Cyprus defaulting and leaving the Eurozone will have significantly diminished. Nonetheless, the deal will still involve a huge amount of work on Cyprus’ part to find the USD 5.8 billion needed to supplement the EUR 10 billion bailout and subsequently a lot of economic pain involved. The current risk rally is likely to fade quickly as markets begin to focus on the task at hand.

Elsewhere Italy begins the formal process of forming a government this week but the prospects of a quick resolution to the political impasse in the country looks very limited, with fresh elections still a very possible outcome. Reflecting the uncertainty both around Cyprus and Italy, economic sentiment gauges in Europe will likely decline in March.

Meanwhile in the US data releases will look more impressive, with Durable goods orders set to record an impressive gain in February and Q4 GDP likely to be revised sharply higher. Although consumer confidence and new home sales will slip, this will take place from healthy levels.

EUR/USD broke through 1.3000 following the Cyprus deal but will run into resistance around 1.3135 and we expect gains to fade in the short term as markets look past the headlines. Downside risks to EUR will remain in place due to relatively unfavourable data releases and ongoing political uncertainty in Italy.

Posted in Cyprus, eurozone, US. Tags: , , , . Leave a Comment »

No Fed suprises, Cyprus unresolved, Kuroda weakens yen

March 21, 2013 — Mitul Kotecha

The Fed delivered no surprises overnight, with policy settings and guidance left unchanged and only minor changes the statement. Slight downward revisions to near term growth and the unemployment rate reflected recent fiscal issues but the Fed sounded more upbeat on current economic conditions. The Fed statement helped markets retain a better mood despite the continued fluidity of the situation in Cyprus.

On this front, as Cyprus tries to renegotiate the terms of EUR 10 billion the country appears to be stuck between a rock and a hard place. Increasing the levy on higher value deposits as has been suggested threatens to infuriate Cyprus’ biggest creditor Russia but at the same time a lack of any forthcoming deal will put at jeopardy and liquidity support from the ECB to Cyprus’ banks. Markets appear to be giving the country and Eurozone officials some leeway leaving most asset markets in ranges.

Although the saga in Cyprus had helped to extend the EUR’s decline the truth is that the currency was already in decline from its 1 February high around 1.3712 in the wake of an increasingly adverse growth and yield gap with the US and Italian political uncertainty.

While market panic over Cyprus appears to have eased helping the EUR to find some stability the fact remains that no solution is on the table and once again it feels as though Eurozone officials are belatedly scrambling to find solutions before market patience runs out. EUR/USD looks supported however, around the 200 day moving average at 1.2878.

USD/JPY has been correlated most with the relative move in 10Y yield differentials between US Treasuries and Japanese JGBs. Given the prospects that the 10Y differential in terms of Treasuries versus JGBs will widen further it implies yet more gains in USD/JPY.

It is worth watching yields closely but at this point I await stronger signals that US bond yields are headed higher before contemplating a further JPY decline. In the near term USD/JPY looks supported around 94.72 as risk appetite returns and ahead of an inaugural speech by BoJ Governor Kuroda in which he is expected to announce a major policy shift aimed at bold easing according to Japanese press.

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

USD undermined, CHF and NZD risks

January 31, 2013 — Mitul Kotecha

The surprise drop in US Q4 GDP (-0.1% QoQ annualised) and relatively cautious but not much different Fed statement (pause in growth, elevated unemployment, inflation below long term objective) helped to undermine risk assets, and the USD overnight while 10 year Treasury yields slipped back below 2%. Consequently EUR/USD was propelled above the 1.35 level. Gold prices benefitted however, with the precious metal trading above its 200 day moving average.

The Fed showed little indication of pulling back from its USD 85 billion in monthly asset purchases but that did little to prevent stocks from closing lower. The data calendar is limited in terms of first tier releases today, with ranges likely to dominate and markets turning their attention to tomorrow’s US jobs report.

Following an impressive drop of around 3% from around 9 January the CHF appears to have stabilised, at least temporarily versus EUR. I believe this stability will prove short lived. CHF is finally seeing a reversal in safe haven flows while also suffering from its growing use as a funding currency (again). Indeed, recent weeks have seen a decline in speculative CHF appetite, which I expect to continue over coming weeks.

The recent drop in the CHF has done little to placate Swiss government officials however, while economic data such as the 8 month low registered for the January KoF leading indicator give further support for a weaker currency. There is even renewed speculation that the Swiss National Bank should catch markets on the hop by raising the EUR/CHF 1.200 floor. I don’t expect the floor to be raised anytime soon but do expect more weakness in the still overvalued CHF.

My quantitative models now send a ‘strong sell; signal for NZD but maintain a neutral signal for AUD. Is it time to buy AUD/NZD? Technical signals suggest little upside directional impetus in the short term. Moreover, speculative positioning in AUD/NZD looks stretched. In other words expect range trading in the near term and better opportunities once stale longs have been shaken out.

The RBNZ’s decision to keep policy on hold overnight will have little impact on the NZD given that it was widely expected but the concerns expressed about Kiwi strength will not go unnoticed by market players. NZD has benefited more from the risk rally over recent weeks than AUD but gains in risk appetite according to my risk barometer appear to have stalled. I suggest waiting for opportunities to sell kiwi on any move the 0.84 versus USD

Posted in Federal Reserve, New Zealand, Switzerland, US. Tags: , , , , . Leave a Comment »
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