EUR falls, JPY retraces after intervention

November 1, 2011 — Mitul Kotecha

Risk aversion has come back in full force, with various concerns weighing on markets. Once again attention is firmly fixed on the eurozone and worryingly last week’s European Union (EU) rescue agreement has failed to prevent a further widening in eurozone peripheral bond spreads. This will come as a blow to eurozone officials as the agreement was aimed to prevent exactly this.

A lack of detail in the plans announced last week has come back to haunt markets. Moreover, given the event risk of the RBA, ECB and Fed central bank meetings this week plus the US October jobs report at the end of the week, nerves will likely remain frayed over coming days. Overall, the tone will likely be on of selling risk assets on rallies over the short term.

The EUR has unwound a significant part of its gains from last week as various doubts about the eurozone rescue package have surfaced. The measures announced by EU officials have failed to prevent a jump in Italian and Spanish bond yields. News that MF Global has filed for bankruptcy while the Greek Prime Minister has called for a referendum on the EU’s debt deal dealt markets a blow overnight.

As it was doubts had been creeping in due to the lack of detail in the rescue package including but not limited to the lack of specifics on the leveraging of the EFSF bailout fund. The pattern appears to have followed the reaction to previous EU announcements to stem the crisis, namely short lived euphoria followed by a sell off in risk assets. The EUR is likely to struggle further over the near term, with the current pull back likely to extend to around the 21 October low of 1.3705.

Japanese officials had blamed the strength of the JPY on speculative flows and have threatened more FX intervention following yesterday’s Judging by the price action this morning the threat has been followed up by action. In order for USD/JPY to sustain a move higher it will require both a widening in yield differentials and easing risk aversion. Neither are guaranteed to happen any time soon as was evident overnight with risk aversion rising. US data has improved but it is insufficient to provoke a sharp back up in US bond yields.

Consequently in the coming weeks USD/JPY topside momentum will be limited. A break above USD/JPY’s 200 day moving average level of 79.89 could prove decisive in terms of JPY long capitulation and once above this level USD/JPY will target the 11 July high of 80.83. However, this will require further intervention otherwise the underlying trend in JPY will continue to remain positive.

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European agreement at last

October 27, 2011 — Mitul Kotecha

Following a drawn out period of discussions European officials have finally agreed on a haircut or debt write off of around 50% of Greek debt versus 21% agreed in July. In addition the EFSF bailout fund will be leveraged up to about EUR 1.4 trillion, with the new EFSF scheduled to be in place next month. The haircut for Greek debt is aimed at ensuring that Greece’s debt to GDP ratio drops to 120% by 2012.

The reaction of markets was initially favourable with EUR/USD breaching 1.40 and risk / high beta currencies bouncing. I doubt that the upward momentum in EUR can be sustained, however, with plenty of questions on the mechanics of the deal, especially about leveraging the EFSF fund, remaining. I suspect that the EUR may have already priced in some of the good news.

Data releases, especially in the US are offering markets more positive news. Following on from firm readings for US durable goods orders and new home sales, today’s US Q3 GDP expected to reveal an acceleration in growth to a 2.5% annual rate, will help to alleviate recession fears to some extent. The USD may benefit if the data reduces expectations of further Fed quantitative easing especially given the recent comments from some Fed officials indicating that the door is open to more QE.

In Japan attention was firmly fixed on the Bank of Japan policy meeting and the prospects for FX intervention to weaken the JPY. In the event the BoJ kept its overnight rate unchanged at 0.1% as expected and expanded its credit program by JPY 5 trillion and asset purchase fund to JPY 20 trillion.

The measures are aimed to easing deflation pressure but the real focus in the FX market is whether there is any attempt to the weaken the JPY. I am currently in Tokyo and here there is plenty of nervousness about possible FX intervention being imminent. Speculation of such intervention will likely help to prevent USD/JPY sustaining a drop below the 75.00 over coming days.

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SNB shakes up FX markets – Pressure now on Japan?

September 7, 2011 — Mitul Kotecha

The action by the Swiss National Bank yesterday rippled through FX markets fuelling sharp moves across major currencies. In case you missed it the SNB introduced a currency floor in EUR/CHF at 1.20 and committed itself to buy FX in unlimited amounts. The last time the SNB did something similar was in 1978 when a ceiling was set against the Deutsche Mark. The sharp initial reaction to the news saw EUR/CHF jump by around 8.5% largely as a result of the shock from the announcement.

The SNB will not need to worry about the inflationary implications of pumping CHF into the market while it is clear that the currency is highly overvalued, supporting their cause. However, the real test will be evident over coming days and weeks in the commitment to hold the 1.20 level at a time when the situation in the eurozone periphery continues to deteriorate and demand for CHF remains strong. The risk is that the SNB may have simply set up a target for markets to attack. One other implication of the SNB’s move is that it could be a trigger for an intensification of ‘currency wars’.

The onus is now on the Japanese authorities to act more aggressively especially if safe haven flows focus increasingly on the JPY and less on the CHF given the new EUR/CHF floor. So far FX interventions have clearly not worked as was the case in Switzerland and Japan’s new Prime Minister is likely to want to prove his credentials. Japan has had a tendency to underwhelm with regard to JPY measures in the past and unless there is a major announcement today USD/JPY is likely to move lower again below 77.00.

Scandinavian currencies are also set to be beneficiaries of the SNB’s decision. EUR/SEK has come under increasing downside pressure over recent weeks even as risk aversion has intensified and it appears that safe haven flows out of Europe are now targeting Scandinavian currencies. As the CHF is now less attractive in this respect, the SEK as well as NOK will find themselves under further upside pressure over coming days and weeks. Both NOK and SEK versus EUR and USD have had insignificant correlations with risk over recent months, highlighting their appeal as anti-EUR currencies.

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Japan FX Measures Underwhelm

August 24, 2011 — Mitul Kotecha

Currencies continue to show remarkable stability in the face of elevated risk aversion which has prompted huge volatility in other asset markets. Although FX volatility has risen over recent weeks its rise is nothing compared to the jump in the VIX ‘fear gauge’ equity volatility measure. FX markets are in some form of limbo where there are conflicting forces at play and where there is no obvious currency to play. The lack of clarity in markets suggests that this situation will not change quickly.

The USD (index) is trading at the lower end of its recent ranges and verging on a retest of its July 27 low around 73.421, with the currency perhaps suffering from expectations that Fed Chairman Bernanke will announce a desire to embark on more quantitative easing at Friday’s Jackson Hole symposium. Its losses could quickly reverse as such expectations are quickly dashed.

Indeed, while Bernanke will likely keep all options open any hint at QE3 is unlikely as the Fed maintains a high hurdle before any prospect of further quantitative easing is entertained. One option on the table is ‘sterilised’ large scale asset purchases which would not result in an increase in the size of the Fed’s balance sheet. This would be far less negative for the USD than a fresh round of QE and may even prompt a rally in the currency as markets shift away from the idea of QE3.

The USD will benefit from high risk aversion except against safe havens such as the CHF and JPY. In this respect the USD remains a better bet than the EUR which has failed to garner much benefit from renewed ECB peripheral bond buying. Nonetheless, data yesterday failed to feed into negative EUR sentiment despite mixed manufacturing surveys and a sharp drop in the German ZEW investor confidence survey. EUR/USD remains trapped in a broad 1.42-1.45 range.

News that Moody’s ratings agency has downgraded Japan’s sovereign ratings by one notch to Aa3 is unlikely to have much impact on the JPY. Moody’s left the outlook stable while unlike the US and Europe around 95% of Japanese debt is held domestically, suggesting little FX and JGB impact. USD/JPY continues to garner some influence from yield differentials and given that the US bond yield advantage versus Japan has continued to narrow, USD/JPY continues to face downward pressure.

Japan announced measures to deal with JPY strength including the creation of a $100 billion emergency credit facility. However, the main impact on the JPY could come from increased monitoring of FX transactions with firms having to report on FX positions held by dealers. The statement made no comment on FX intervention and this is where there will be most disappointment for JPY bears. Overall, the actions are somewhat underwhelming and are unlikely to have much impact on the JPY. If anything, the JPY may actually strengthen given the lack of comment on FX intervention. USD/JPY downside could face strong technical support around 75.93, however.

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Contest of the uglies

June 21, 2011 — Mitul Kotecha

Although there is plenty of event risk in the form of the Greek confidence motion today market sentiment has taken a turn for the better as a ‘risk on’ mood has filtered through. There was little justification in the turn in sentiment aside from some reassuring comments from the EU’s Juncker but clearly markets are hoping for the best.

The contest of the ugly currencies continues and recently the EUR is running neck and neck with the USD. News that a final decision on a further tranche of aid for Greece and a second bailout package will not take place until early July was not digested well by European markets, although EUR/USD managed to show its resilience once again overnight.

EUR/USD looks like it will settle into a range over the short-term, with support around the 100 day moving average of 1.4170 and resistance around the 15 June high of 1.4451. A weak German June ZEW investor confidence survey may result in the EUR facing some resistance but the data is likely to be overshadowed by events in Greece.

Although Greece continues to dominate the headlines, the looming Fed FOMC meeting and press briefing tomorrow may just keep USD bulls in check especially given the likelihood of downward growth revisions by the Fed and no change in policy settings. Ahead of this news on the housing market is likely to remain bleak, with a likely drop in May existing home sales as indicated by pending home sales data.

USD/JPY continues to flirt with the 80 level but as yet it has failed to sustain a breach below this level. Contrary to speculation the JPY is not particularly reactive to risk aversion at present but instead continues to be driven higher by narrowing US – Japan bond yield differentials. This is pretty much all due to declining US Treasury yields rather than any increase in Japanese bond (JGB) yields.

However, while Japanese officials continue to back off the idea of FX intervention, even at current levels, data releases such as the May trade balance yesterday continue to build a strong case for weakening the JPY. Even economy minister Yosano sounded worried on the trade front in his comments yesterday. Despite such concerns, it will take a renewed widening in bond yield differentials to result in renewed JPY weakness which will need an improvement in US data to be forthcoming.

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