Euro weaker despite hawkish ECB

June 10, 2011 — Mitul Kotecha

The bounce in EUR/USD following the European Central Bank (ECB) press statement following its unchanged rate decision proved short-lived with the currency dropping sharply as longs were quickly unwound, with EUR/USD hitting a low around 1.4478. The sell off occurred despite the fact that the ECB delivered on expectations that it would flag a July rate hike, with the insertion of “strong vigilance” in the press statement.

The reaction was a classic ‘buy on rumour, sell on fact’ outcome and highlights just how long EUR the market was ahead of the ECB meeting. Interestingly the interest rate differential (2nd futures contract) has not widened versus the USD despite the hawkish ECB message and in any case interest rate differentials are not driving EUR/USD at present as reflected in low correlations.

This leaves the EUR susceptible to Greek developments and the news on this front is less positive. ECB President Trichet ruled out any direct participation (ie no rollover of ECB Greek debt holdings) in a second Greek bailout whilst potentially accepting a plan of voluntary private participation in any debt rollover. The ECB’s stance is at odds with that put forward by German Finance Minister Schaeuble pressuring investors to accept longer maturities on their Greek debt holdings.

In contrast the USD appears to be finding growing relief from the fact that the Federal Reserve is putting up a high hurdle before QE3 is considered. As highlighted by Fed Chairman Bernanke earlier this week the Fed is not considering QE3 despite a spate of weak US data. This was echoed overnight by the Fed’s Lockhart and Plosser, with the former noting that there would need to be a substantially weaker economy and the latter noting that there would have to be a “pretty extraordinary” deterioration in the economy to support QE3.

Posted in central banks, Currencies, ECB, Economics, Economy, Europe, eurozone, Federal Reserve, FX, Germany, Greece, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

EUR Supported, AUD dives, NZD jumps

June 9, 2011 — Mitul Kotecha

Today is probably not the best day to sell EUR given that the ECB policy decision looms on the horizon. Whilst there is a risk of a ‘buy on rumour, sell on fact’ impact on the EUR following the European Central Bank (ECB) decision later today the relatively high probability that the ECB flags a rate hike in July will likely give further support to the EUR especially as it is not fully priced in by the market.

Of course should ECB President Trichet fail to mention “strong vigilance” in his press conference the EUR could suffer but this is likely to be a lower probability event. Some justification for higher rates will come from an upward revision in the ECB’s inflation forecasts. Consequently EUR/USD looks well supported around 1.4450.

The Bank of England is unlikely to deliver any surprises today, with an unchanged policy rate outcome and asset purchases target likely. The outcome will keep GBP restrained versus USD but given the likely contrast with the ECB, EUR/GBP could head higher as the currency pair continues to set its sights on the 0.90 level.

Even against the USD, GBP is unlikely to extend its gains, with 1.6474 likely providing a near term technical cap. The dichotomy of weaker activity and higher inflation is clearly causing a problem for policy makers but we still believe a rate hike is likely later in the year. In the meantime GBP remains vulnerable to further data disappointments over coming weeks.

There was more bad news for the AUD today in the form of a weak than forecast May employment report. The data will reinforce expectations that the RBA will not hike interest rates over coming months, with July and August effectively ruled out, though a hike in September remains probable.

The data had major impact on AUD which dropped sharply below the 1.0600 handle versus USD. Clearly the combination of the RBA statement and weak jobs data has resulted in a major headwind against further near term AUD appreciation. AUD will remain under downward pressure in the short-term, with technical support seen at 1.0440.

Unlike the RBA the Reserve Bank of New Zealand (RBNZ) opened the door for higher interest rates following its unchanged policy decision today, with the Bank stating that “a gradual increase in the overnight cash rate over the next two years will be required”. Despite noting some caution about the strength of the NZD and its impact on the economy the Kiwi strengthened versus the USD

Posted in Australia, central banks, Currencies, ECB, Economics, Economy, Europe, eurozone, Federal Reserve, FX, Interest rates, Monetary Policy, New Zealand, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

EUR Becomes The Anti USD

June 8, 2011 — Mitul Kotecha

The USD is close to giving back the full extent of the gains it made during May. The USD index hit a low of around 72.696 on 4th May and looks on track to re-test this level.

It would be easy to say that the USD is being undermined by low US bond yields but whilst this is partly true only USD/JPY has had a significant correlation with bond yield differentials over the past 3-months.

The reality is that the EUR has become the anti USD at present. Whilst the EUR composes 57.6% of the USD index which would imply a high correlation between the USD index and EUR, it does not explain the fact that the correlation over the past 3-months is at an extremely high 0.98.

It is probably a relief for USD bulls that the currency is not being particularly influenced by yield differentials at present as it would be even weaker if it was so. US bond yields continue to be depressed by growth concerns, following a spate of weaker US data releases, culminating in the May jobs report last week.

Speculation about QE3 is similarly unhelpful for the USD but the prospects of this occurring are still very slim and notably whilst Bernanke highlighted the “frustrating slow” economic recovery in a speech last night he did not indicate a desire to embark on QE3.

Nonetheless, any clues about Fed policy will be closely scrutinised and this includes today’s Beige Book of regional economic conditions. Our expectation of a relatively downbeat report suggests that the USD will find no support from this source.

Ultimately USD recovery will require EUR weakness but the European currency appears to have regained its ‘Teflon’ coating as its resistance to bad news grows once again. The EUR was helped yesterday by a stronger than expected April retail sales report and will undoubtedly find further solace from confirmation of a strong start to the year in terms of Q1 GDP today.

Overall direction continues to come from news in the eurozone periphery, however. The fact that officials appear to be inching towards an agreement in Greece has clearly been appreciated by the EUR. Moreover, potential ECB backing for debt rollovers by private investors will alleviate some concerns.

Nonetheless, at current levels, with EUR/USD on the path to its 4th May high around 1.4940 it appears that a lot is already priced in and the scope for disappointment is high.

Posted in Bond markets, Currencies, ECB, Economics, Economy, Europe, eurozone, Federal Reserve, FX, Greece, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , . 4 Comments »

Asia Helps The Euro Again

May 26, 2011 — Mitul Kotecha

Following the pressure on markets over recent days there is some relief filtering through markets today although sentiment remains fickle. Weaker than expected US April durable goods orders data failed to dent confidence with equity markets ending in positive territory overnight even though the data added to a plethora of global data disappointments over recent weeks.

Once again the EUR has been saved by Asian demand, this time not directly for the EUR itself but by reports that China and other Asian investors will purchases EFSF bailout bonds, with China apparently reported to be “clearly interested” in the mid June sales of Portuguese bailout bonds, with Asian investors representing a “strong proportion” of the buyers.

Despite the reassuring news about Asian official interest in eurozone debt, problems in the periphery remain a major drag on the EUR. Developments at the two day G8 heads of governments meeting in Deauville and various speeches by officials from the European Financial Stability Facility (EFSF), European Union (EU) and European Central Bank (ECB) regarding Greece’s travails will be particularly important for EUR direction.

The various speakers are likely to maintain the pressure on peripheral countries to continue their austerity programmes in order to gain external support. Nonetheless, there still appears to be conflicting comments about what Greece will do with regard to its debt burden. Whilst some EU officials have espoused the benefits of extending Greek debt maturities on a voluntary basis, the ECB has steadfastly stood against any form of restructuring.

Other than the events above, in the US the second reading of Q1 GDP will be released. The consensus looks for an upward revision to a 2.1% annual rate from an initial estimate of 1.8% due mainly to an upward revision to inventories. US weekly jobless claims will also be of interest especially as the recent increase in the 4-week average for jobless claims has provoked renewed fears about the jobs market recovery.

Posted in Asia, central banks, China, Currencies, ECB, Economics, Economy, Europe, eurozone, FX, Greece, Portugal, US. Tags: , , , , , , , , , , , , , , , . Leave a Comment »

Risk off mood

May 23, 2011 — Mitul Kotecha

A ‘risk off’ tone is quickly permeating its way through the market psyche as tensions surrounding the eurozone periphery reach fever pitch. This is reflected in the sharp jump in equity volatility as indicated by the VIX ‘fear’ gauge. Equity markets and risk trades in general look set to remain under pressure in the current climate.

Moreover, the EUR which is finally succumbing to bad news about the periphery will continue to face pressure over the short-term. Against this background economic data will likely be relegated to the background this week but it worth noting that what data there is on tap, is likely to send a weaker message, with data such as durable goods orders in the US as well as various purchasing managers indices (PMI) data in the eurozone today likely to show some slippage.

The Greek saga remains at the forefront of market attention, with restructuring speculation remaining high despite various denials over the weekend by Greek and European Central Bank (ECB) officials. News that Norway has frozen payments to Greece, whilst Fitch ratings agency’s downgrades of Greece’s ratings by 3 notches and S&P’s downgrade of Italy’s ratings outlook to negative, have all contributed to the malaise afflicting the periphery.

This weekend’s local election in Spain in which Prime Minister Zapatero and his Socialist Party suffered its worst defeat in more than 30 years leading to a transfer of power in the Spanish regions, will lead to concerns about the ability of the government to carry out much needed legislative changes.

It is difficult to see any improvement in sentiment towards the peripheral Europe and consequently the EUR over the short-term. In Greece, Prime Minister Papandreou will attempt to push through further unpopular austerity measures through parliament this week in advance of a 5th bailout tranche of EUR 12 billion scheduled for next month. This comes at a time when opinion polls show the government losing more support and 80% of those surveyed saying they would not accept more austerity measures.

The deterioration in sentiment for the EUR has been rapid as reflected in the CFTC IMM data, with net long speculative positions now at their lowest since 15 February and heading further downhill. Conversely, USD short covering has been significant though there is still a hefty USD short overhang, which points to more USD short covering as EUR sentiment sours.

Nonetheless, the USD still has plenty of risks hanging over it including the fact that it still suffers from an adverse yield differential (note that 2-year Treasury yields have fallen to the lowest since 6 December 2010). Safe haven currencies in particular CHF are the key beneficiaries and notably EUR/CHF touched a record low around 1.2354 and is showing little sign of any rebound.

Posted in Bond markets, central banks, Currencies, ECB, Economics, Economy, equity markets, Europe, eurozone, Financial crisis, Fiscal/Budget, FX, Greece, Monetary Policy, Spain, Switzerland, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »
« Older posts
Newer posts »