USD weaker, EUR resilient, JPY supported, CHF pressure

August 30, 2011 — Mitul Kotecha

Why has the USD come under pressure even after Fed Chairman Bernanke failed to signal more QE? The answer is that Bernanke offered hope of more stimulus and gave a shot in the arm to risk trades even if QE3 was not on the cards. Consequently the USD has looked vulnerable at the turn of this week but we suspect that a likely batch of soft US data releases over coming days including the August jobs report at the end of the week, ISM manufacturing survey on Thursday and consumer confidence today, will erase some of the market’s optimism and leave the USD in better position. The FOMC minutes today may also give some further guidance to the USD as more details emerge on the potential tools the Fed has up its sleeve.

The EUR’s ability to retain a firm tone despite the intensification of bad news in the eurozone has been impressive. Uncertainty on various fronts in Germany including but not limited to concerns about the outcome of the German Bundestag vote on the revamped EFSF on September 30, German commitment to Greece’s bailout plan and German opposition party proposals for changes to bailout terms including the possibility of exiting the eurozone, have so far gone unnoticed by EUR/USD as it easily broke above 1.4500. EUR was given some support from news of a merger between Greece’s second and third largest banks. Likely weak economic data today in the form of August eurozone sentiment surveys may bring a dose of reality back to FX markets, however.

The lack of reaction of the JPY to the news that Japan’s former Finance Minister Noda won the DPJ leadership and will become the country’s new Prime Minister came as no surprise. The JPY has become somewhat used to Japan’s many political gyrations over recent years and while Noda is seen as somewhat of a fiscal hawk his victory is unlikely to have any implications for JPY policy. Instead the JPY‘s direction against both the USD and EUR continues to be driven by relative yield and in this respect the JPY is likely to remain firmly supported. Both US and European 2-year differentials versus Japan are at historic lows, with the US yield advantage close to disappearing completely. Until this picture changes USD/JPY is set to languish around current levels below 77.00.

EUR/CHF has rebounded smartly over recent weeks, the latest bounce following speculation of a fee on CHF cash balances, with the currency pair reaching a high of 1.1972 overnight. The pressure to weaken the CHF has become all the more acute following the much bigger than anticipated drop in the August KOF Swiss leading indicator last week and its implications for weaker Swiss growth ahead. The ‘risk on’ tone to markets following Bernanke’s speech has provided a helping hand to the Swiss authorities as safe haven demand for CHF lessens but given the likely weak slate of economic releases this week his speech may be soon forgotten. Nonetheless, the momentum remains for more EUR/CHF upside in the short term, at least until risk aversion rears its head again.

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No QE3 but Bernanke gives some hope

August 29, 2011 — Mitul Kotecha

Not only did Federal Reserve Chairman Bernanke not discuss the potential for more quantitatiive easing QE3 but he also did not discuss many other options for Fed policy at Jackson Hole last Friday. The onus has now shifted to the 2-day Fed FOMC meeting on September 21 where markets are looking (hoping) for fresh policy measures. Such hopes helped US equity markets bounce back after initially reacting negatively to Bernanke’s speech.

Bernanke provided some hope to markets that the US economy wasn’t sliding into the abyss while offering the potential for further Fed stimulus even if QE3 wasn’t quite on the cards. This hope was sufficient to spur markets higher. However, importantly Bernanke noted the limitations of monetary policy in stimulating growth over the medium term.

In this respect there will be plenty of attention on President Obama’s speech on September 5 in which markets will be looking for a response from the administration at a time when the economy is becoming an increasingly important issue for the electorate.

In the meantime there are plenty of data releases to contend with this week including the August US jobs report, ISM manufacturing survey, US consumer confidence and various confidence surveys in Europe. Unfortunately the news will not be positive as the data releases are set to reinforce concerns of economic slowdown. The US jobs report is likely to reveal a limited, around 75k increase in non-farm payrolls according to consensus while the ISM manufacturing survey is set to drop into contraction territory.

Consequently markets may start the week in risk on mood but this is unlikely to last given renewed economic worries. Moreover, Eurozone peripheral country travails continue to exasperate markets, with concerns that some members of German Chancellor Merkel’s coalition plan to vote against the revamped EFSF bailout fund and news that two German banks have yet to commit on Greece’s bailout plan. Against this background the EUR continues to defy gravity around the 1.45 level versus USD but may yet come down to earth with a bang.

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

Euro crisis intensifies

July 12, 2011 — Mitul Kotecha

The blowout in eurozone non-core debt has intensified and unlike in past months the EUR has been a clear casualty. The lack of a concrete agreement over a solution given divergent views of EU officials, the European Central Bank (ECB) and private sector participants threatens a further ratcheting higher of pressure on markets over coming weeks.

The only real progress overnight as revealed in the Eurogroup statement appeared to be in the renewing the option of buying back Greek debt via the eurozone bailout fund, extending maturities and lowering interest rates on loans. This will be insufficient to stem the pressure on the EUR, with the currency verging on a sharp drop below 1.40.

The USD continues to take advantage of the EUR’s woes and has actually staged a break above its 100-day moving average yesterday after several attempts previously. This sends a bullish signal and the USD is set to remain supported given that there is little in sight of a resolution to the problems festering in the eurozone.

Today’s release of the June 22 Fed FOMC minutes will give some clues to Fed Chairman Bernanke’s testimony to the House of Representatives tomorrow, but as long as the minutes do not indicate a greater willingness to embark on more asset purchases, the USD is set to remain resilient.

GBP has also benefitted from the EUR’s weakness, and unlike the EUR has only drifted rather than dived versus the USD. However, the UK economy is not without its own problems as revealed in a further drop in retail sales overnight, albeit less negative than feared, with the British Retail Consortium (BRC) like for like sales falling 0.6% in June.

A likely increase in June CPI inflation in data today to a 4.8% annual rate will once again highlight the dichotomy between weak growth and high inflation. In turn, such data will only provoke further divisions within the Bank of England MPC. While further gains against the beleaguered EUR are likely, with a test of EUR/GBP 0.8721 on the cards in the short term, GBP will struggle to sustain any gain above 1.6000 versus USD.

Both AUD and NZD are vulnerable against the background of rising risk aversion and a firmer USD in general. However, both currencies are not particularly sensitive to risk aversion. Interestingly the major currency most sensitive to higher risk aversion in the past 3-months is the CAD and in this respect it may be worth considering playing relative CAD underperformance versus other currencies.

As for the AUD it is more sensitive to general USD strength, suggesting that it will be restrained over coming sessions too and given that market positioning is still very long AUD, there is scope for further downside pressure to around 1.0520 versus USD.

Posted in Australia, central banks, Currencies, ECB, Economics, Economy, Europe, eurozone, Federal Reserve, Financial crisis, Fiscal/Budget, FX, IMF, Interest rates, Italy, Monetary Policy, New Zealand, Portugal, Spain, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

US dollar on the rise

June 27, 2011 — Mitul Kotecha

Risk aversion is on the rise as uncertainties about Greece and worries about weaker economic data weigh on sentiment. A number of key events rather than data will be the main drivers this week. First and foremost amongst these is the vote in the Greek parliament on the country’s budget reform plan, which if passed will pave the way for the way for a disbursement of EUR 12 billion from the European Union / IMF and a new bailout package.

Meanwhile in the US talks on raising the debt ceiling are likely to resume in earnest, with the market likely to become increasingly nervous about the lack of resolution on the issue. Nonetheless, it is Europe that will dominate the headlines and on this front even if the reform plan is passed any market relief is likely to be limited given the ongoing uncertainty about private sector participation in any Greek debt roll over. This suggests that the EUR will remain under pressure over the week despite reassuring comments from Chinese Premier Wen.

Data releases will be relegated to background noise but what there is will not help sentiment. Signs of slowing activity remain evident as revealed in disappointing eurozone manufacturing surveys last week and this will be echoed in the US ISM manufacturing survey at the end of this week. Economic sentiment gauges in Europe are also set to reveal a decline. Given the lack of ammunition and/or unwillingness to risk using further stimulus from the Fed, the sensitivity of markets to weak data will be high, keeping risk aversion elevated.

Indeed, although well flagged the end of the Fed’s QE2 this week will mark a major shift in market dynamics, especially in currency markets where the USD will finally see a massive weight lifted from its shoulders. As indicated by Fed Chairman Bernanke following the FOMC meeting the Fed is not considering a further round of asset purchases, a fact that will help the USD to find firmer support.

Notably the USD index moved has above its 100-day moving average providing a positive technical signal given that it has failed on its last two attempts. The USD index now looks set to break its April high around 76.610.

Posted in China, Currencies, Economics, Economy, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Greece, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , . Leave a Comment »

Euro unimpressed by Greek confidence vote

June 22, 2011 — Mitul Kotecha

News that the Greek government won a confidence vote has left the EUR unimpressed and gains will be limited ahead of the June 28 vote on the country’s 5-year austerity plan. The EUR was in any case rallying ahead of the vote, which the government won by 155-143 votes, and has actually lost a little ground following the vote.

EUR sentiment is likely to remain somewhat fragile given the ongoing uncertainties, but now that the first hurdle has been passed markets there is at least a better prospect of Greece receiving the next EUR 12 billion aid tranche before the July 15 “do or default” deadline. Over the near term EUR/USD upside is likely to remain capped around the 1.4451 resistance level (15 June high).

The next key event for markets is the Fed FOMC meeting outcome and press conference. This is unlikely to bode particularly well for the USD given that the Fed is set to downgrade its growth forecasts, with the comments on the economy likely to sound a little more downbeat given the loss of momentum recently as reflected in a string of disappointing data releases.

Nonetheless, monetary settings are unlikely to be changed, with the Fed committed to ending QE2 by the end of June. I remain positive on the USD’s prospects but its recovery is fragile due to the fact that US bond yields remain at ultra low levels.

Whilst only AUD/USD and USD/JPY have maintained significant correlations with bond yield differentials over the past three months, it will eventually require US bond yields to move higher in relative terms for the USD to find its legs again on a more sustainable basis.

In the meantime the approach of the end of QE2 by the end of June will on balance play positively for the USD as at least the Fed’s balance sheet will no longer be expanding even if the reinvestment of principle from its holdings of US Treasuries suggest that there will not be a quick or immediate reduction in the size of the balance sheet anytime soon.

There is little appetite to intervene to weaken the JPY at present, with the Japanese authorities blaming the strengthening in the JPY versus USD on the latter’s weakness rather than the former’s strength. Until yield differentials widen, USD/JPY will continue to languish at current levels or even lower.

GBP will garner direction from the release of the Bank of England Monetary Policy Committee meeting minutes. Whilst GBP has edged higher against the USD it has remained vulnerable against EUR. A likely dovish set of minutes reflecting some weak activity data, easing core inflation and soft wage growth, suggests little support for GBP over the short term.

Posted in Australia, Currencies, Economics, Economy, eurozone, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Greece, Japan, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »
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