AUD helpd by RBA, JPY slipping, GBP buoyed

September 3, 2013 — Mitul Kotecha

Firm August purchasing managers’ confidence indices from China to Europe have helped to maintain a positive bias to risk assets overnight although the Labor Day holiday limited trading activity. Attention centred on China’s service sector PMI, with a slight decline revealed to 53.9 in August. Elsewhere Australia’s central unsurprisingly kept monetary policy on hold. Later on the US ISM manufacturing survey is set to add to a run of negative US data surprises, with a decline expected in August, albeit with the index remaining in expansion territory. The employment component will be scrutinised for clues to Friday’s August non-farm payrolls report.

AUD faced today’s RBA policy meeting having bounced in the wake of an improvement in risk appetite, a jump in July building approvals and a rise in Chinese manufacturing confidence. Ahead of the RBA meeting July retail sales data disappointed versus expectations but weakness in AUD was reversed following the unchanged RBA decision and neutral statement. Indeed, the fact that the statement was not more dovish comes as a relief to AUD bulls. As a cut in the cash rate was not priced in nor expected by analysts the impact overall should be limited, however. While the door is kept open to further rate cuts the prospects of further easing are declining. AUD looks well supported, with the next resistance seen around 0.9070.

USD/JPY is finding some upside traction as risk appetite improves and prospects of the implementation of a sales tax in Japan gathers steam. “Abenomics” got a shot in the arm as consultative panels favoured moving ahead with the 5% sales tax in April. Additionally, the yield differential between the US and Japanese 10 year bonds remains above 200bps, sufficient in my view to spur capital outflows from Japan and a weaker JPY. The high level of speculative net JPY shorts may frustrate the move lower in the JPY although it’s worth noting that there is a long way to go before short positions hit their all time extreme levels. USD/JPY may find some near term resistance around the 2 August high at 99.95 but gains are likely to be sustained over coming weeks.

GBP is finding support on a number of fronts ahead of this week’s Bank of England policy meeting. Firstly on the data front, the trend has remained positive, with the August manufacturing PMI beating expectations (57.2 versus 55.0 consensus), with data in the form of PMI construction and Halifax house prices likely to be positive for GBP today too. News that the UK’s Vodafone is planning to sell its US mobile phone business to Verizon Communications will also act as a boost to GBP given the large cash element involved in the sale. I prefer to play long GBP versus EUR in the short term, especially given the outperformance of UK data and relative positioning in the currency pair.

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USD edges higher

August 29, 2013 — Mitul Kotecha

There appears to be some prevarication over possible military strikes on Syria resulting in less angst in markets over an imminent strike. Consequently risk appetite edged higher overnight while US Treasury yields also rose. Potential military strikes have also led to firming oil prices. Pressure on vulnerable emerging market assets has continued unabated however, with tapering worries and domestic vulnerabilities resulting in ongoing capital outflows.

In Asia the INR and IDR remain under considerable pressure. However, INR forwards recovered somewhat overnight and the spot rate strengthened in the wake of the introduction of a forex swap window for Indian oil firms. The measure will help to alleviate some of the demand/supply pressures for USDs but is however, unlikely to arrest the decline in the INR for long. In Indonesia the central bank may increase policy rates by 50bps today which ought to help the IDR in the short term.

The USD gained a little ground as US yields rose. The USD may benefit as markets fret about possible military action against Syria resulting in an attendant rise in risk aversion. Nonetheless, a series of negative data surprises over recent days contrasting with positive surprises in Europe leaves the USD rather vulnerable against major currencies. In contrast the USD is set to continue to remain firm against many emerging market currencies given the ongoing outflow of capital in the wake of higher US yields and tapering fears.

AUD’s tentative recovery in early August has proven to be an abject failure. Like many other high beta currencies AUD has suffered as risk aversion has intensified recently. Additionally speculation of further policy easing has also dampened the AUD. Consequently speculative sentiment remains weak. In reality, further rate cuts may depend on whether the AUD can rally following an over 15% fall since April. Any failure for the AUD to gain ground may stay the hand of the RBA. Although it has found some support today, further downside pressure is likely with a breach of the 5 August low at 0.8848 expected.

GBP underwent some volatility in the wake of BoE governor Carney’s speech. Initial weakness was bought into as shorts were covered however, leaving the currency back where it started. Carney’s speech was interpreted as dovish, with the governor noting that the BoE was read to loosen policy if higher market rates impacted the economy. Nonetheless, there was little immediate implication for policy. Overall GBP is likely to be constrained around resistance at 1.5590, with gains limited ahead of the BoE policy meeting next week.

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USD softens on Bernanke, GBP firm, AUD oversold

July 18, 2013 — Mitul Kotecha

Fed Chairman Bernanke did not deliver anything particular new in his testimony yesterday but still managed to provide further reassurance to markets. The Fed chief noted that asset purchases are not on a preset course while highlighting that ‘tapering’ will only occur if economic data warrants it. His concerns about high unemployment and very low inflation emphasized the Fed’s commitment to easy policy settings.

Assisted by a weaker than expected housing starts report bonds liked what they heard, with 10 year Treasury yields dropping below 2.5% while equities rallied and the USD softened. Gold struggled however, failing again to break above USD 1300 and settling back into its USD 1270-1300 range.

Overall, Bernanke’s comments remain consistent with tapering beginning later this year, most likely in September. He will repeat the testimony to the Senate Banking Committee today but markets will look for further clues in the Q&A session.

The positive tone will likely creep into Asian trading today in the absence of other key market drivers, with the USD likely to be restrained against both major and Asian currencies although Asian currencies may struggle given the IMF’s more cautious comments on Chinese growth in which they highlighted the growing downside risks to their growth forecast.

GBP/USD has registered a solid recovery since its recent low just above 1.48. Helped by a hawkish surprise in the Bank of England MPC minutes in which the vote was 9-0 to maintain current monetary settings as new governor Carney managed to unite the MPC view, GBP looks well supported in the days ahead.

What’s surprising is the lack of GBP progress against the EUR especially given the relative outperformance of UK economic data recently and prospects of strengthening momentum into H2 13. Given the potential for alternative monetary policy instruments in the months ahead some caution on GBP may be warranted.

Nonetheless, as GBP is positioned short versus both EUR and USD, its downside looks limited and if anything it will register gains versus EUR. Today’s retail sales may be a risk, but any set back to GBP is likely to prove temporary.

A lot of bad news is already priced into the AUD and sentiment has become overly bearish even if Australia’s government and central bank would prefer to see further currency weakness. There is a risk of an AUD rally in the event of better economic news given that market positioning has become extremely short (close to the all-time low).

A combination of improving risk appetite, renewed search for carry, stabilization in commodity prices and reasonably strong growth in China will eventually help to spur the AUD higher. Clearly there are risks to AUD as the transition process to Fed tapering and higher US yields takes effect but assuming that US yields move gradually as opposed to rapidly higher it is unlikely to stand in the way of an AUD recovery.

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Markets taking their cue from China data and Bernanke

July 15, 2013 — Mitul Kotecha

After having been on the road visiting clients across Asia over the last two weeks the overall tone to markets feels slightly better than when I left. Risk appetite is improving as central banks attempt to dampen the spike in yields, by initiating “forward guidance”. On balance, markets appear to be making the volatile transition to Fed tapering with less angst than a couple of weeks back.

Despite the confusion over China’s GDP growth target the tone at the start of the week is positive. China’s Q2 GDP slowed compared to Q1 coming in at 7.5% YoY from 7.7% previously but arguably last week’s comments by China’s Finance Minister that China was targeting growth of 7% (later revised in to 7.5%) had arguably done a good job in guiding market expectations lower. In the event the market reaction to the Q2 GDP release was limited.

Aside from China’s data, markets have taken their cue from Fed Chairman Bernanke’s dovish comments last week when he noted that policy will remain “highly accommodative” for the “foreseeable future”. Discomfort at the sharp rise in US Treasury yields will have played a part in spurring such comments, with the net impact being one of improved risk appetite.

Further clarification from Bernanke will be sought during his semi-annual monetary policy report to Congress mid week although he is unlikely to diverge from his recent comments. Nonetheless, US yields and the USD will likely creep higher over coming days helped by firmer data including the June retail sales report today.

Eurozone markets will have little on the data front to digest aside from the German July ZEW survey this week, leaving the fragile state of Portuguese politics in the spotlight. Potential for fresh elections remains a distinct possibility although discussions over forming a new government will continue this week. Overall, this would suggest some underperformance of Eurozone markets and the EUR over the coming days.

In the UK the release of CPI inflation data in June and Bank of England MPC minutes will garner most attention. Inflation is likely to have pushed through the 3% threshold, requiring new governor Carney to write a letter to the UK Chancellor Osborne explaining the reasons for the rise in inflation pressures. Meanwhile the MPC minutes will take a slightly more hawkish stance, with a 7-2 vote expected as Carney will most likely have sided with the majority unlike his predecessor. Against this background GBP is set to gain some ground, especially against the EUR.

Asian currencies made up some ground following the Bernanke inspired drop in the USD last week but given that the region continues to suffer from equity portfolio outflows gains will be difficult to hold over coming days. Nonetheless, the good news is that the haemorrhaging in capital flows to the region has diminished, with only USD 73.6 million in equity outflows from Asia registered month to date.

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“Feral hogs” beware

June 25, 2013 — Mitul Kotecha

Bond and equity selling has been sustained as worries both about Federal Reserve tapering and liquidity in China’s banking sector continues to roil markets. Fed comments overnight did little to soothe market angst, with the Fed’s Fisher and Kocherlakota both revealing little concern about the market reaction to prospects of Fed tapering. However, both Fed officials were keen to point out that policy will remain accommodative even after the end of quantitative easing which helped to allay some of the pain on markets in overnight trading.

Reinforcing market volatility is the approach of month and quarter end. Several other Fed speakers will be on tap over coming days while 2, 5 and 7 year Treasury auctions will also be under scrutiny but ahead of the speeches and auctions markets will look to today’s US data releases including May durable goods orders, June consumer confidence and May new home sales for further direction.

EUR/USD failed to get much of lift from the rise in the German IFO business confidence survey in June and looks set to extend declines over coming sessions. Despite its drop from its high around 1.3420 EUR/USD has not been particularly sensitive to higher US yields over recent weeks but this may be changing. As revealed in the latest CFTC IMM report net speculative positioning in EUR/USD became positive for the first time in four months.

Now that the room for EUR short covering has disappeared EUR’s sensitivity to yield is likely to grow. The fact that the 10 year US Treasury yield differential with bunds has widened sharply will be difficult for EUR/USD to ignore, with attendant negative consequences for the currency. The lack of key Eurozone data releases over coming days will leave the EUR/USD increasingly at the mercy of US yield movements.

Another currency having to deal with a relatively thin data slate is GBP. Only the government’s Spending Review, Bank of England Financial Stability Report and second estimate of Q1 GDP are scheduled for release this week but none of these are likely to prove to be market movers. Having been hit by a firmer USD, GBP/USD has fallen well off its recent highs around 1.5752. On the crosses GBP looks a little healthier but is notably failing to make any headway against the EUR.

While the USD has rallied on higher US yields markets are not looking for a similar policy moves in the UK, especially given that some BoE MPC members are still inclined to increase asset purchases. Indeed, the recent rise in UK gilt yields may embolden the doves on the MPC. Although net speculative short GBP positions have not fully evaporated, the room for GBP upside is now very limited, with a firm USD in general set to continue to push GBP lower.

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