Euro slides as Greek worries intensify

September 12, 2011 — Mitul Kotecha

The USD ended last week on high a note having overcome speeches by Fed Chairman Bernanke and President Obama. Bernanke’s lack of detail on potential further Fed stimulus offered the USD a lifeline as there was no mention of QE3 but nervousness may mount ahead of the September 21 FOMC meeting.

This week’s data releases (including retail sales, inflation, industrial production and regional manufacturing surveys may offer some direction to the USD and it is likely that the data over coming days will look less negative than in past weeks, giving the USD some support. Having broken above its 200 day moving average around 76.1986 for the first time in a year the USD index is set to begin the week in positive mode and will likely extend its gains over coming days.

In sharp contrast, EUR/USD crumbled at the end of last week dropping through its 200 day moving average despite positive news from Germany (rejection of bills in the constitutional court) and Italy (passage of austerity measures). The European Central Bank (ECB) did not help the EUR’s cause however, with the change in its stance to a more balanced assessment of risks from its more hawkish stance previously.

However, the real damage occurred as speculation of a Greek default intensified and ECB hawk Stark resigned from the ECB council, highlighting the divisions within the governing board. This week attention will remain on Greece as negotiations between the Troika (ECB, EU and IMF) and Greek officials resume.

Ahead of the talks Greece approved a further EUR 2 billion in austerity measures over the weekend but nonetheless, despite denials by Greek officials speculation of a debt default will continue to hammer the EUR lower. Near term technical support is seen around 1.3525 for EUR/USD.

GBP found some relief last week following the decision by the Bank of England to leave policy unchanged though it is unlikely to be able to make much if any headway against the USD over coming sessions as expectations of further UK quantitative easing may simply have been pushed back to the November meeting.

Inflation data this week will give further clues to policy but once again there is likely to be no sign of any easing in inflation pressure, limiting the room for maneuver for the BoE. Moreover, a weak outcome for UK retail sales in August will maintain the trend of soft UK data keeping up the pressure for more BoE action. As a result GBP will struggle against the USD but given that problems in Europe look even worse, GBP will likely extend gains against the EUR this week.

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Payrolls sour mood, Eurozone concerns intensify

September 5, 2011 — Mitul Kotecha

The market mood has soured further and risk aversion has increased following disappointing August US jobs report in which the change in payrolls was zero and downward revisions to previous months has reinforced the negative mood on the US and global economy while raising expectations of more Federal Reserve action. Moreover, the report has put additional pressure on US President Obama to deliver fresh jobs measures in his speech on Thursday though Republican opposition may leave Obama with little actual leeway for further stimulus.

There is plenty of event risk over coming days, with a heavy slate central bank meetings including in Europe, UK, Japan, Australia, Canada and Sweden. The European Central Bank will offer no support to a EUR that is coming under growing pressure, with the Bank set to take a more neutral tone to policy compared its previously hawkish stance. In the UK, GBP could also trade cautiously given recent comments by Bank of England Monetary Policy Committee members about potential for more UK quantitative easing.

The EUR has been unable to capitalise on the bad economic news in the US as news there has been even worse. The negative news includes the weekend defeat of German Chancellor Merkel’s centre-right bloc in regional elections, which comes ahead of a vote in Germany’s constitutional court on changes to the EFSF bailout fund.

The withdrawal of the Troika (ECB, IMF and EU) from Greece has also put renewed emphasis on the country at a time when protests are escalating. If all of this is not enough there is growing concern about Italy’s apparent backtracking on austerity measures, with the Italian parliament set to discuss measures this week. Separately Germany, Holland and Finland will hold a meeting tomorrow on the Greek collateral issue. On top of all of this is the growing evidence of deteriorating growth in the euro area.

Data releases are unlikely to garner a great deal of attention amidst the events noted above, with mainly service sector purchasing managers indices on tap and at least threw will look somewhat better than their manufacturing counterparts. In the US the Beige Book and trade data will be in focus but all eyes will be on Obama’s speech later in the week. The USD has maintained a firm tone despite the jobs report but its resilience may be better explained by eurozone negativity rather than US positivity. Even so, the USD is looking less uglier than the EUR in the current environment.

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Japan FX Measures Underwhelm

August 24, 2011 — Mitul Kotecha

Currencies continue to show remarkable stability in the face of elevated risk aversion which has prompted huge volatility in other asset markets. Although FX volatility has risen over recent weeks its rise is nothing compared to the jump in the VIX ‘fear gauge’ equity volatility measure. FX markets are in some form of limbo where there are conflicting forces at play and where there is no obvious currency to play. The lack of clarity in markets suggests that this situation will not change quickly.

The USD (index) is trading at the lower end of its recent ranges and verging on a retest of its July 27 low around 73.421, with the currency perhaps suffering from expectations that Fed Chairman Bernanke will announce a desire to embark on more quantitative easing at Friday’s Jackson Hole symposium. Its losses could quickly reverse as such expectations are quickly dashed.

Indeed, while Bernanke will likely keep all options open any hint at QE3 is unlikely as the Fed maintains a high hurdle before any prospect of further quantitative easing is entertained. One option on the table is ‘sterilised’ large scale asset purchases which would not result in an increase in the size of the Fed’s balance sheet. This would be far less negative for the USD than a fresh round of QE and may even prompt a rally in the currency as markets shift away from the idea of QE3.

The USD will benefit from high risk aversion except against safe havens such as the CHF and JPY. In this respect the USD remains a better bet than the EUR which has failed to garner much benefit from renewed ECB peripheral bond buying. Nonetheless, data yesterday failed to feed into negative EUR sentiment despite mixed manufacturing surveys and a sharp drop in the German ZEW investor confidence survey. EUR/USD remains trapped in a broad 1.42-1.45 range.

News that Moody’s ratings agency has downgraded Japan’s sovereign ratings by one notch to Aa3 is unlikely to have much impact on the JPY. Moody’s left the outlook stable while unlike the US and Europe around 95% of Japanese debt is held domestically, suggesting little FX and JGB impact. USD/JPY continues to garner some influence from yield differentials and given that the US bond yield advantage versus Japan has continued to narrow, USD/JPY continues to face downward pressure.

Japan announced measures to deal with JPY strength including the creation of a $100 billion emergency credit facility. However, the main impact on the JPY could come from increased monitoring of FX transactions with firms having to report on FX positions held by dealers. The statement made no comment on FX intervention and this is where there will be most disappointment for JPY bears. Overall, the actions are somewhat underwhelming and are unlikely to have much impact on the JPY. If anything, the JPY may actually strengthen given the lack of comment on FX intervention. USD/JPY downside could face strong technical support around 75.93, however.

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Swiss franc to remain strong

August 3, 2011 — Mitul Kotecha

Given the uncertainties enveloping both the US and Europe safe haven and various emerging market currencies have looked increasingly attractive. Currencies that remain on top in the current environment are the CHF and to a lesser extent the JPY, much to the chagrin of the Swiss and Japanese authorities. Indeed, in reaction to unwanted CHF strength the Swiss central bank, SNB unexpectedly cut interest rates and said it will increase CHF liquidity to the money markets. The CHF fell in the wake of the announcement but the impact may prove short lived.

Both the JPY and CHF have registered a strong correlation with risk aversion over the last 3-months, strengthening as risk aversion has intensified. In particular, the CHF has been the best performing major currency this year and shows no sign of turning around despite the fact that it has already strengthened by around 21% against the USD and over 12% against the EUR. The Swiss National Bank had even ceased from intervening in the currency markets given the lack of success and pain on the SNB’s balance sheet.

The Japanese authorities last intervened in the FX market in March 2011 following the devastating earthquake in the country. However, despite the fact that the JPY has strengthened after a brief period of success, the authorities have been reluctant to intervene since. The major explanation for a lack of intervention is that the Japanese authorities blame the drop in USD/JPY on USD weakness rather than inherent JPY strength. A more accurate reason is that the yield differential between the US and Japan has narrowed, leading to JPY strength versus USD while more recently rising risk aversion has pushed the JPY higher.

I am bearish on both the CHF and JPY over the medium term but clearly any drop in these currencies is taking longer than initially anticipated. Higher relative yields taken together with some normalisation in risk appetite will help but the risks at present are still skewed for further CHF and JPY strength in the short term given that risk aversion remains elevated. The fact that peripheral bond spreads in Europe have continued to widen will only raise the attraction of the CHF as a safe haven currency so despite the SNB’s new measures, it may do little to prevent further strength in the currency.

Posted in central banks, Currencies, Economics, Economy, Europe, eurozone, FX, Interest rates, Japan, Switzerland, US. Tags: , , , , , , , , , , . 3 Comments »

CHF and JPY remain on top

August 2, 2011 — Mitul Kotecha

It’s been a tumultuous few week for global markets. First a debt deal in Europe and then a debt ceiling agreement in the US. In both cases any boost to sentiment has and will be limited. Europe’s debt deal, while comprehensive, left quite a few questions in terms of implementation, scope and mutual country agreements.

In the US the deal to raise the US debt ceiling by $1.2 trillion hammered out between Republican and Democrat party leaders helps to stave off a debt default but is far smaller and less comprehensive in terms of deficit reduction measures than had been hoped for and may still be insufficient to prevent a credit ratings downgrade by S&P and/or more ratings agencies. The deal will prove a disappointment to USD bulls.

Markets in the US have failed to find much to rally them despite the debt deal. Indeed, all that has happened is that attention has shifted back towards economic growth worries in the wake of a disappointing ISM manufacturing index in the US (50.9 in July, a reading which is just about in expansion territory) which follows on from a run of soft data in the US including the Q2 GDP report. Unfortunately data elsewhere is no better as a series of weak manufacturing surveys have highlighted this week.

Weak data and the US debt deal have pushed Treasury yields lower but despite this the USD has rallied, especially against the EUR, which is not only suffering from renewed peripheral debt concerns and weaker growth, but also from a run of disappointing earnings releases in contrast to the US where earnings have on the whole beaten forecasts. The USD may have benefited from a renewed increase in risk aversion and in this respect further US equity weakness may provide the USD with further support.

Whether EUR/USD will extend its recent losses is doubtful, however. Much will depend on Friday’s US July jobs report and if there is another weak outcome as looks likely, speculation of another round of Fed asset purchases could dent USD sentiment. The currencies that remain on top in this environment are the CHF and to a lesser extent the JPY much to the chagrin of the Swiss and Japanese authorities

Posted in Economics, Economy, Europe, eurozone, Financial crisis, Fiscal/Budget, FX, Greece, US, US administration. Tags: , , , , , , , , , , , , , , , , , , , . Leave a Comment »
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