USD under broad based pressure

December 5, 2012 — Mitul Kotecha

There remains a great deal of angst in markets due to the lack of resolution to the US fiscal cliff, which is putting pressure on overall market sentiment as reflected in the multi day rise in the VIX fear gauge over recent days. The fact that both the US administration and senior Republicans are giving little ground in discussions suggests a deal is not in sight although the pressure for compromise will intensify as year end approaches.

The news in Europe is a little better as reflected in the narrowing in peripheral bond yields. There will be little directional influence on markets today, with trading likely to be subdued ahead of the US jobs report on Friday, with any news on the fiscal cliff also closely watched.

The USD continues to come under broad based pressure, with the USD index having lost around 2% of its value since 16 November. The lack of traction in terms of resolving the fiscal cliff and the weaker US data this week, namely the November ISM manufacturing index have weighed on the currency.

How much of the USD move is due to position adjustments as year end approaches fast or renewed confidence in the EUR is debatable but it is clear that the USD looks like it will end the year in a bad state. The ADP jobs report today may give further direction but it seems unlikely that pressure on the USD will abate ahead of the November payrolls data on Friday.

While the EUR’s gains are beginning to look overdone, the momentum for the currency continues to be to the topside as short positions continue to be covered into year end. The EUR’s appreciation is taking place hand in hand with the drop in peripheral bond yields. A positive reception for Greece’s debt buy back as well as Spain’s request for aid for its banking sector has also helped the currency.

Rumours of a German debt downgrade have done little to diminish the EUR’s appeal. An upcoming meeting of EU finance ministers next week ahead of the EU leaders’ summit to try and make some progress towards banking supervision is also hoped to deliver some good news. A test of sentiment will come from a Spanish bond auction today but this is unlikely to be much of an obstacle to the EUR. Near term EUR/USD resistance is seen around 1.3172.

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Putting the brakes on the CNY

November 29, 2012 — Mitul Kotecha

Markets are becoming increasingly headline driven, with risk appetite gyrating on any fresh lead on fiscal cliff developments. Initially risk assets dropped in the wake of weaker than expected US new home sales data and renewed fiscal cliff concerns but reversed course following more encouraging comments from US House speaker Boehner and President Obama who both indicated that a deal was moving closer to fruition. The comments also sparked a drop in the USD while gold prices came under pressure.

Meanwhile, Eurozone peripheral bond spreads continue to tighten in the wake of the Greek debt deal as tail risks continue to decline. An Italian debt auction may test the market’s new found confidence today. Incidentally the deal will be put to the vote tomorrow in Germany. Data releases are generally taking a back seat to fiscal cliff developments but once again there will be stark contrasts between Europe and the US, with weakening economic sentiment indicators in Europe on the one hand and an upward revision to US Q3 GDP on the other.

Currencies will continue to track the gyrations in risk, but in large part remain in well defined ranges. EUR/USD reversed its losses as fiscal cliff resolution hopes grew but will struggle on the top side. Comments by Moody’s in its credit review on Greece released this morning will also dent EUR sentiment with the ratings agency noting that Greek debt remains unsustainable even after the country’s debt deal. EUR/USD resistance is seen around 1.3023 while support around 1.2870 is expected to hold over the near term.

USD/JPY pushed back above the 80.00 level overnight but I would prefer to sell the currency pair on any run up to 82.50. While weak data such as the bigger than expected decline in October retail sales (-1.2% YoY) highlight the need for more aggressive policy, the “Abe” effect has largely been discounted and markets may wait for elections on December 16 before deliberating on further JPY direction. Ultimately I remain JPY bears but in the near term the up move looks overextended.

China has put the brakes on the CNY as fixings have been less strong over recent days. Given the strong correlation with many other Asian currencies this is resulting in more restraint across the Asian FX spectrum. The most impacted currencies will be the KRW and TWD, as they possess the highest sensitivities to CNY. A slowing in the pace of portfolio inflows, with notably South Korea and Indonesia seeing outflows of equity capital over the month, will also restrain Asian currencies.

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USD pressured, limited gains for Asian currencies

November 26, 2012 — Mitul Kotecha

Risk assets registered a positive performance over the past week despite the plethora of events / issues that remain unresolved. However, it’s back to business today with talks over Greek’s debt sustainability and resolution towards distribution of its next loan tranche set to resume.

Meanwhile, markets will digest the results of elections in the Spanish region of Catalonia which have fuelled greater uncertainty in the wake of the gains in seats for pro-referendum parties who won 87 of the Catalan parliament’s 135 seats. However, the results did not provide the strength of support for pro independence parties as had initially been feared, suggesting some relief for the EUR.

Together with the failure to make any progress on the EU budget it is clear that there are still many layers of uncertainty lying ahead for European markets. Nonetheless, optimism appears to be winning the day as the EUR and peripheral bonds shake off such concerns. The risk going forward is that the market is hoping for too much, with the risk / reward dynamic skewed asymmetrically in the wake of any failure to reach agreement especially regarding Greece.

News of healthy US Thanksgiving spending will be followed by data releases this week that are set to provide further signs of improvement although markets will remain focussed on any progress towards resolving the fiscal cliff. An upward revision to US Q3 GDP, gains in durable goods orders, and new home sales in October will provide encouraging news contributing to a tone of firmer risk appetite. This will be echoed by the Fed’s Beige Book.

Economic news in Europe (expected lower economic sentiment index) and in Japan (fourth consecutive decline in industrial production) will highlight the comparative outperformance of the US economy while adding pressure for more aggressive policy measures elsewhere.

The net FX impact of the market’s optimism is to sell USDs leaving it vulnerable in an environment of improving risk appetite. Nonetheless, given that the market is now pricing in a resolution to several of the issues noted above, USD weakness may prove limited from current levels. EUR/USD is set to face resistance around the 1.3023 level while USD/JPY will face strong resistance around 83.20.

Asian currencies have benefitted from the firmer tone to risk appetite (most except IDR and INR are strongly correlated to risk) but gains have been limited over the past week as central banks in the region increasingly resist further strength. The lack of upward trajectory in the CNY has been a key driver for the slower pace of appreciation of Asian currencies over recent days and I expect this trend to continue.

China may even countenance some softening in the CNY into year end suggests limited upside for Asian currencies into year end despite a firmer risk tone. The INR remains the major underperformer, with the currency continuing to suffer from domestic considerations, and benefitting the least from any improvement in risk appetite.

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Edging away from the cliff

November 20, 2012 — Mitul Kotecha

Risk appetite was decidedly firmer overnight as hopes of a US budget deal grew. Talks between President Obama and Congressional leaders have been labelled as ‘constructive’ implying some sign of compromise although there is a long way to go before a deal is likely. Sentiment was boosted further by encouraging housing news out the US, with home builders’ confidence and existing home sales beating expectations. Unfortunately housing starts data today will not be as upbeat.

News that France’s credit ratings were cut by Moody’s dampened the mood, ahead of a meeting by Eurozone officials to decide on the fate of Greece’s EUR 31.5 billion loan tranche. The French downgrade may cast a shadow over markets this morning but hopes of progress towards a solution to the fiscal cliff will keep markets buoyed.

Data releases in the Eurozone will do little to help the EUR given expectations of weak purchasing managers’ indices and a yet another drop in the German IFO business confidence survey over coming days. News on the Greek front might be a little better if the country’s loan tranche is approved today. However, any boost to EUR sentiment will be short lived as discussions about Greece’s sustainability and disagreements among its creditors hog the limelight.

My quantitative models suggest little directional bias, with EUR/USD close to its short term fair value. While all of this suggests that the EUR will fail to find much momentum its worth highlighting that EUR short speculative positioning is at its highest since 11 September and a great deal of bad news is already priced in.

While the Bank of Japan is set to deliver more easing over coming months today’s meeting will likely mark a pause in policy. I do not expect any surprises from the Bank of Japan today but the JPY remains on the back foot in the wake of calls for “unlimited easing” by the opposition LDP party. However, the outcome of elections is by no means clear cut and although the LDP will likely garner the lion’s share of the vote its policies may be constrained by coalition partners.

I remain cautious of calling the JPY higher from current levels, especially given that USD/JPY will be undermined somewhat by the drop in US bond yields. Moreover, my quantitative model shows a sell signal for USD/JPY. Technical resistance around 87.78 will likely cap any up move in the currency in the neat term.

Posted in Bank of Japan, Greece, Japan, US administration. Tags: , , , . 2 Comments »

Sell into the USD/JPY rally, EUR bottoming out, GBP vulnerable

November 19, 2012 — Mitul Kotecha

Following a week when risk measures continued to worsen there may not be much respite over coming days. The usual suspects will continue to direct sentiment including US fiscal cliff discussions, Greece’s next loan tranche and debt sustainability, the timing of any possible Spanish bailout request, and the conflict between Israel and Hamas in the Gaza strip. Added to this list are worries about economic growth.

Data releases this week are expected to be soft in general, with US existing home sales set to slip in October, weak readings for Eurozone flash purchasing managers’ indices and an eight consecutive drop in the German IFO business climate survey in November. Trading conditions will likely thin over coming days as the US Thanksgiving holiday on Thursday approaches.

Events over coming days will at least give further clues on the monetary policy front, with Fed Chairman Bernanke scheduled to give a speech at the Economics Club of New York, an event which may shed some light on Fed policy once Operation Twist ends. In the UK Bank of England minutes will also be scrutinised for clues on more QE, with a likely split decision set to be revealed. GBP continues to suffer from a bad combination of weak activity and higher inflation, leaving the currency vulnerable to further selling, especially against EUR.

Additionally, the Bank of Japan will decide on policy although a pause is expected this week given that easing measures were only announced at the last meeting at the end of October. The general election on December 16 may also complicate BoJ policy. USD/JPY’s upside potential looks limited from current levels and a lack of action from the BoJ tomorrow will likely undermine the current pair further. USD/JPY will find strong resistance around 81.78.

In Europe policy decisions will focus on developments in Greece, with the next loan tranche for the country to be decided and discussions on the 2014-2015 EU budget set to take place. The loan Greek aid discussions tomorrow ought to lead to an agreement to distribute EUR 31.5 billion in aid to Greece. The decision may help the EUR to edge higher, although EUR/USD will need to break above its 200 day moving average around 1.2807 before it can register more concrete signs of recovery.

Posted in Bank of England, Bank of Japan, Federal Reserve, Greece, US. Tags: , , , . Leave a Comment »
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