Euro fails too hold on to gains

September 19, 2011 — Mitul Kotecha

Any improvement in sentiment following the USD liquidity support announcement by various central banks last week is already filtering away against the background of European Union (EU) officials’ failure to make any headway at the Ecofin meeting over the weekend, a delay in the approval of the next bailout tranche for Greece and ongoing collateral dispute between Greece and Finland. On top of all of this German Chancellor Merkel suffered a further setback in regional elections over the weekend.

Greece will remain in focus this week and markets will look for signs that the country is back on track on its austerity plans and its next loan tranche. Prime Minister Papandreou cancelled a trip to the US while the Greek cabinet are apparently deciding on new fiscal measures. Attention will turn to a teleconference today from the Greek Finance Minister with EU and IMF officials.

Speculative sentiment for the EUR has already soured further and according to the latest CFTC IMM report, positioning in EUR is at its lowest since the end of June 2010. EUR/USD will continue to look very vulnerable having already dropped sharply from a high of around 1.3899 in Asian morning trading as the bad weekend news hit the currency. EUR/USD will find some technical support just below 1.3500 this week but any upside is set to prove limited unless some concrete announcements are delivered relating to Greece over coming days.

In contrast to the EUR, USD speculative appetite has turned net long for the first time since July 2010. The extended Fed FOMC meeting will help to dictate USD sentiment as markets wait for further measures to stimulate the economy. The Federal Reserve has already committed to hold rates steady until at least mid 2013 and the extended two day meeting this week will likely discuss further options. However, more quantitative easing (QE3) appears unlikely at this stage while an ‘Operation Twist’ type approach is more probable. The USD will benefit from a lack of further quantitative easing but this is largely already priced in.

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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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Awaiting US jobs data

September 1, 2011 — Mitul Kotecha

The USD continues to languish as market hopes/expectations of further US Federal Reserve stimulus including possibly more quantitative easing or QE3 weigh on the currency. There may also be some hesitation to buy USDs ahead of tomorrow’s August jobs report. The omens from the US ADP jobs data yesterday were not particularly positive, with a below consensus 91k private jobs reported.

As the Fed FOMC minutes earlier this week highlighted there are a few in the FOMC who are prepared to take more aggressive action which would equate to an even weaker USD. Ahead of the jobs data today’s August ISM manufacturing survey will offer some direction for markets but if our forecast of a sub 50 outcome proves correct it will only play into expectations of more Fed stimulus leaving the USD on the back foot.

EUR/USD struggled to sustain any move above 1.45 this week but has continued to withstand various peripheral bond concerns without too much difficulty, an ability it has managed to maintain for the past several months. Although it has pulled back EUR/USD may struggle to sustain a drop below its 100-day moving average at 1.4362.

Although there have been various fresh worries over recent days such as the collateral issues between Greece and Finland as well as well as questions about German demands for Greece’s bailout, the EUR is likely to remain unperturbed. Whether the EUR will be able to withstand growing evidence of slowing growth in the eurozone is another question altogether, especially as it is leading to a reassessment of European Central Bank (ECB) policy expectations, something that will likely be confirmed at next week’s ECB meeting.

GBP has had problems of its own to deal with and has failed to capitalise on any USD tone while losing ground against the EUR. Data yesterday did not help, with consumer sentiment falling for a third straight month according to the GfK confidence index. It appears that speculation of further Fed monetary stimulus may also be rubbing off on GBP, with potential for more UK QE likely to act as a weight on the currency.

Bank of England MPC member Posen added fuel to the fire in comments that he made supporting the need for central banks to undertake more QE. GBP looks destined for more weakness in the short term, with support around GBP/USD likely 1.6111 likely to be tested. A below 50 reading for the August manufacturing PMI today, will only add to downside pressure.

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