Shaping up to be a “risk on” week

April 15, 2010 — Mitul Kotecha

It’s most definitely turning into a “risk on” week. On the earnings front both JP Morgan Chase and Intel beat forecasts whilst data releases did not disappoint either. In particular, US retail sales came in much stronger than expected. The Fed’s Beige Book also gave markets some good news to chew on. The reports from the twelve Federal Reserve Districts noted that economic activity “increased somewhat” since the March 3rd report.

The positive tone will continue today with the release of the March industrial production data, expected to show a strong gain over the month (consensus 0.7%), whilst both the Empire State and Philly Fed manufacturing surveys are set to post small gains in April, consistent with strengthening manufacturing activity in the months ahead.

Fed speakers have also been helpful for market sentiment. Fed Chairman Bernanke sounded a little more upbeat on the economy but highlighted the “significant restraints” remaining in the US economy. Bernanke maintained the “extended period” of low rates statement despite some speculation that the Fed was verging on removing this. The net impact of the testimony, improved data and earnings and firmer risk appetite is to keep the USD on pressure. In contrast, commodity currencies including AUD, NZD and CAD, will benefit, both from firmer risk appetite and an upturn in commodity prices.

Despite the positive reception to Greece’s debt auction there is not a lot of faith in the ability of Greece to weather the storm. Reports that Greece will need far more funding than has been initially promised by the EU/IMF – potentially as high as EUR 90 billion over coming years – together with worries about selling the loan package to the public in Germany and other eurozone countries, as well EU comments that Portugal will need further fiscal consolidation, have not done much good for confidence. Technically EUR/USD will see plenty of resistance around 1.3692.

After Singapore’s move to tighten monetary policy via the SGD revaluation, and following close on the heels of India, Malaysia and Vietnam, attention has turned to who’s next in line. South Korea must be a prime candidate, especially following data yesterday revealing a drop in the unemployment rate. Of course, China is very much in the spotlight and is set to embark on monetary tightening measures as well as CNY revaluation soon.

India is set to move again as early as next week, with inflation data today likely to seal the case for another hike (consensus 10.37% in March). The risk remains however, that many Asian central banks are moving too slowly to curb building inflation pressures and may find that they ultimately need to tighten more than they otherwise would have done.

China’s heavy slate of data released will if anything fuel greater expectations of an imminent CNY revaluation as well as monetary tightening. China’s economy grew a very strong 11.9% in Q1, above already strong consensus expectations, whilst CPI rose 2.4% YoY in March.

The growth data alongside further evidence of accelerating real estate prices highlight the risks of overheating in the economy and the need to act quickly to curb inflation threats. Given this expectation, firm risk appetite, and more follow through from Singapore’s FX move, the outlook for other Asian currencies remains positive.

Posted in Asia, central banks, China, Commodities, Currencies, Economics, Economy, emerging markets, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Germany, Greece, IMF, India, Interest rates, Monetary Policy, Singapore, South Korea, US. Tags: , , , , , , , , , , , , , , , , , , , , , . 1 Comment »

Greek Aid Boosts Euro

April 12, 2010 — Mitul Kotecha

Greece is never far from the headlines and the big news over the weekend was once again centred on this small (in terms of economy size) eurozone Country, with the agreement by Eurozone members to provide up to EUR 30 billion in loans to Greece. This will be supplemented by additional contributions from the IMF to the tune of around EUR 15 billion. The rate of around 5% for the three-year fixed loan is well below that yielding on Greek debt but above the International Monetary Fund (IMF) standard lending rate. In other words, the terms of the loan are far more favourable than they would currently face in the market.

After weeks of haggling the decision to detail the amount and terms of a loan for Greece will help reassure markets and likely result in a narrowing in Greek spreads over the near term. Further details will be finalised early in the week including conditions imposed on Greece as well as the exact amount of the IMF contribution but the real test of confidence will be the reception to Greece’s EUR 1.2 billion sale of 3 and 6-month paper at the beginning of the week.

Markets were already embarking on a short covering exercise in EUR/USD early last week according to the latest CFTC IMM report which showed a reduction in net EUR short speculative positions. As a result of the weekend’s agreement the EUR looks set to consolidate its gains into the beginning of this week. Further out, there are still plenty of risks ahead and sellers are likely to emerge around EUR/USD resistance at 1.3696.


Data releases this week will be conducive to maintaining further support for risk appetite whilst shoring up recovery expectations. In particular US March retail sales are set to jump on the back of strong autos spending (consensus 1.2% monthly gain). March industrial production is also likely to record a healthy reading (consensus 0.7% month-on-month), whilst gains in both manufacturing (Empire manufacturing and Philadelphia Fed) and consumer confidence (Michigan confidence) for April are likely.

There will also be plenty of attention on Chinese data this week with a plethora of releases over coming days including FX reserves, GDP, loans data, inflation, retail sales and industrial production. In short, the data will continue to reveal a robust economic performance, which will be good for risk appetite and Asian currencies, but will also add to the pressure to revalue the Chinese currency, CNY, soon.

The USD impact will depend on whether the market reacts to firmer risk appetite or signs of stronger US growth. I suspect the former will apply for now, likely keeping the USD on the back foot early in the week. The main beneficiaries include risk currencies such as AUD, NZD and CAD as well as most Asian currencies. AUD/USD is set to target technical resistance around 0.9407 whilst NZD/USD will set its sights on resistance around 0.7252 over the next few days.

Posted in Asia, Bond markets, China, Commodities, Currencies, Economics, Economy, emerging markets, Europe, eurozone, Fiscal/Budget, FX, Greece, IMF, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Q1 Economic Review: Elections, Recovery and Underemployment

April 10, 2010 — Mitul Kotecha

I was recently interview by Sital Ruparelia for his website dedicated to “Career & Talent Management Solutions“, on my views on Q1 Economic Review: Elections, Recovery and Underemployment.

Sital is a regular guest on BBC Radio offering career advice and job search tips to listeners. Being a regular contributor and specialist for several leading on line resources including eFinancial Careers and Career Hub (voted number 1 blog by ‘HR World’), Sital’s career advice has also been featured in BusinessWeek online.

As you’ll see from the transcript of the interview below, I’m still cautiously optimistic about the prospects for 2010 and predicts a slow drawn out recovery with plenty of hiccups along the way.

Sital: Mitul, when we spoke in December to look at your predictions for 2010, you were cautiously optimistic about economic recovery in 2010. What’s your take on things after the first quarter?

Click here to read the rest…

Posted in Asia, bank rescue, Bond markets, central banks, China, Currencies, Economics, Economy, emerging markets, equity markets, Europe, Financial crisis, Fiscal/Budget, FX, Greece, Interest rates, Japan, Middle East, Monetary Policy, Politics, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Is EUR/USD Parity Inevitable?

February 26, 2010 — Mitul Kotecha

Reading this article in the WSJ “Hedge Funds Try ‘Career Trade’ Against Euro“, it would seem that there is an increasing amount of investors, especially hedge funds, looking for the EUR to fall to parity against the USD.  It is hard to believe that only a few months ago it looked as though the EUR was heading back towards its previous highs around 1.60 hit in April 2008. 

Following the surge in the USD during the financial crisis EUR/USD dropped to below 1.25 in November 2008 and then managed to eek out some gains as risk appetite improved and the USD came under pressure during most of 2009.

The picture towards the end of 2009 reversed as initially investors covered short USD positions and then bought USDs on rising risk aversion and growing problems in Greece.  The trend looks well set now and a move even lower beckons for EUR/USD.  

So how low will it go?  It is tempting to say that record short speculative positioning in EUR/USD means that the market is already stretched and like an elastic band pulled too far the EUR could rebound sharply.  On the other hand the band could also snap and in the case of EUR/USD this would imply a collapse in the currency as other investors join the bandwagon of selling EUR.

It is difficult to see any quick resolution to the problems in Europe at present.  Growing social/ labour unrest in the wake of austerity measures to cut burgeoning fiscal deficits highlight that implementing budget cuts mean tough political choices.   Greece has borne the brunt of this unrest but it appears to be spreading across Europe.   

In the past countries could devalue their way out of their debt problems but this solution is not available to individual countries in the eurozone.  Another option is to inflate your way out of the debt but again this is something that the European Central Bank (ECB) will not tolerate and could do much greater long term damage.  

So the only viable solution is to cut spending, raise taxes, implement reforms and raise retirement ages, all of which will fuel plenty of tensions in the countries concerned.  The difficulty of raising taxes was highlighted by the fact that even Greek tax inspectors have gone on strike, a fact which makes a mockery out of the government’s plans.  

Assuming that austerity measures are actually carried out it will mean that growth in Greece and many of the other bigger countries in Europe that carry out these measures will weaken further, making a “double-dip” scenario for the eurozone economy more likely.  

The bottom line is that it is extremely difficult to see the EUR make a sustainable recovery against this background.  Yes, the market is positioned short but so what? We may see short positioning increase further before any stability in the EUR is achieved.   

The last time EUR/USD was at parity was in December 2002.  Given the lack of alternatives in Europe at present another test of parity does not look as inconceivable as it did only a few months ago.

Posted in central banks, Currencies, Economics, Economy, Europe, Financial crisis, Fiscal/Budget, FX, Germany, Greece, Monetary Policy. Tags: , , , , , , , . 1 Comment »

Risk Appetite Puts Dollar On The Back Foot

February 22, 2010 — Mitul Kotecha

Markets look somewhat calmer going into this week helped by comments by Fed members who noted that the discount rate hike did not signal a shift in monetary policy, something which is likely to be repeated by Fed Chairman Bernanke in his testimony to Congress on Wednesday and Thursday.  A tame US January CPI report last Friday helped too, giving further support to the view that the Fed will not hike the Fed Funds rate for some time yet; a rate hike this year seems highly unlikely in my view.  

Data this week will be conducive to a further improvement in risk appetite and despite the lingering concerns about Greece the EUR may find itself in a position to extend gains.  In Europe all eyes will be on the February German IFO survey and eurozone sentiment indicators, which following the surprising strength in the manufacturing Purchasing Managers Indices (PMIs), are likely to reveal solid gains. 

The main highlights in Japan this week includes January trade data and industrial production. The trade numbers will be particularly important to determine whether the rebound in exports due in large part to robust Asian demand, has continued whilst the bounce back in exports will be a key factor in fuelling a further gain in industrial output. 

In the US aside from the testimonies by Fed Chairman Bernanke there are plenty of releases on tap including consumer confidence, new and existing home sales, durable goods orders and a likely upward revision to Q4 GDP.  For the most part the data will show improvement and play for a further improvement in risk appetite. 

FX direction will depend on whether markets focus on the potentially positive USD impact of a reduction in USD liquidity or on the likely firmer tone to risk appetite this week.  Given expectations of firmer data and the soothing tone of the Fed, risk currencies will likely perform better, with crosses such as AUD/JPY favoured.  The USD will likely be placed on the back foot, especially given the very long market positioning in the currency.

The EUR will be helped by the fact that speculative market, according to the CFTC IMM data, holds record short positions in the EUR (as of the week ended 16 February) giving plenty of potential for short-covering.   The more timely Tokyo Financial Exchange (TFX) data also reveals that positioning in EUR/JPY has continued to be scaled back.  

CFTC Commitment of Traders (IMM) data – Net EUR speculative positioning

EUR/USD bounced smartly from its lows around 1.3444 on Friday, partly reflecting some short covering and the drop in FX volatility suggests the market is more comfortable with EUR/USD around these levels.  A positive IFO survey and improved risk appetite could see EUR/USD test resistance around 1.3774, its 20 day moving average, over coming days.  Ongoing Greek concerns suggest that any EUR bounce will be limited, however. 

USD/JPY looks well supported and although data this week will suggest that exports are improving despite JPY strength, the relatively more aggressive stance of the Fed compared to the BoJ, long JPY positioning, and improved risk appetite, give plenty of scope for the JPY to extend losses, with technical USD/JPY support seen around 91.28.

Posted in central banks, Currencies, Economics, Economy, equity markets, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Germany, Greece, Interest rates, Japan, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »
« Older posts
Newer posts »