Green light for a break of USD/JPY 100

April 22, 2013 — Mitul Kotecha

Growth concerns came back to the fore in the wake of disappointing releases in the US and China as well as a downward revision to global growth forecasts by the International Monetary Fund. Data releases this week will not do much to allay growth fears. Although the advance reading of Q1 US GDP is likely to reveal a firm 3% QoQ annualised outcome the momentum in the US economy clearly tailed off towards the end of the quarter as more forward looking data releases attest to. The US and global economy is likely to pick up steam as the year progresses but admittedly recent data releases point to a similar pattern as recent years of firm Q1 activity followed by weakness later.

Meanwhile in Europe, purchasing managers’ indices and the German IFO business sentiment survey will show some further moderation, while credit conditions remain constrained indicating a downbeat outlook over the rest of the year. Consequently pressure for a policy rate cut from the European Central Bank is likely to intensify, with a cut likely by the end of this quarter. EUR/USD continues to trade above its 1.3001 technical support level but momentum is fading. Weaker economic data this week will likely undermine the EUR further.
gold
Following last week’s strong volatility in commodity and gold prices in particular some stability is likely over coming days, with gold retracing some of its losses and regaining the USD 1400 level. Equity markets finished the week in firmer mood after falls earlier in the week but the plethora of US Q1 earnings scheduled over coming days will help to determine whether the gains can be held. So far earnings have beaten expectations on balance, but notably expectations have been fairly low in the first place.

There was plenty of attention on currencies at the G20 meeting but the final outcome left the door open to further JPY weakness while the communiqué highlighted the “unintended negative side effects” for easier monetary policy. Although this was a veiled warning about potential build up of asset price bubbles as central banks ease policy, it is unlikely to sway the Bank of Japan from accelerating its balance sheet expansion. Aside from a probable breach of USD/JPY 100 there is unlikely to be much follow through from the G20 meeting this week.

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Gold stabilizes, euro drops

April 18, 2013 — Mitul Kotecha

The FX world has become somewhat more disturbing over 2013. Implied currency volatility has risen relatively sharply over recent months breaking its relationship with the VIX ‘fear gauge’ in large part due to the sharp drop in the JPY. Additionally the trend of improving risk appetite that was conducive to lower FX volatility has come to an end.

The inability of risk appetite to improve further has led to a declining correlation between various assets including currencies. This opens the door to other factors driving FX markets, with investor discrimination based on relative yield and growth differentials expected to take increasing prominence over coming months.

A big mover overnight was the EUR which slid on comments from European Central Bank official Weidmann that Europe’s recovery from the debt crisis may take years he hinting at a rate cut. He was joined by the ECB’s Smaghi who noted that the ECB must find ways to avoid EUR gains. EUR is likely to remain under pressure over the short term, especially on the crosses against the likes of GBP. Eventually I expect its ECB Outright monetary Transactions (OMT) threat led resilience to fade as Europe’s weak growth trajectory weighs on the currency, leading to an eventual move to EUR/USD 1.25 by end 2013.

The CHF and JPY languish at the bottom of our forecast grid in the medium term as would be expected given both their low yield and relatively lack of sensitivity to global growth. Both currencies will face pressure from relatively higher yields elsewhere given the growing attraction of yield and they are set to regain their lustre as funding currencies. In this respect the USD will begin to lose its allure as a funding currency especially as markets become increasingly nervous of a tapering off of Fed asset purchases later in the year.

The price of gold has stabilized over recent days in a USD 1365-1395 per ounce range following its sharp fall, with buyers creeping back in especially from jewelry demand, with strong purchases from India and China reported over recent days. My quantitative model suggests that the recent decline in gold prices is overdone and it may bounce back slightly. Nonetheless, the prospects for gold prices in the months ahead are still downbeat as expected strength in the USD, higher US bond yields, and expectations of a paring back in the Fed’s asset purchases weigh on the commodity.

News that Cyprus proposes selling its gold reserves over coming weeks will also fuel nervousness that other peripheral Eurozone central banks will follow suit. Finally, exchange trade funds (ETF) and speculative demand according to the CFTC IMM data continue to show a decline in investor demand. Consequently I we have revised down our forecasts for gold prices to reach USD 1350 per ounce by end 2013

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Growth fears intensify

April 16, 2013 — Mitul Kotecha

A bad day for risk assets yesterday threatens to extend further. Weaker than forecast data releases in China and the US weighed heavily on market sentiment supporting the theory that the global economy is repeating the pattern of Q1 strength followed by weakness over the remainder of the year. Growth worries helped to exacerbate the fall in gold prices with the precious metal dropping by 15.5% this month alone while dragging down other commodity prices.

There are plenty of data releases today including CPI inflation in the US, Eurozone and UK as well as the German ZEW investor confidence survey, US industrial production and housing starts. Given market sensitivity to weak data any disappointment will reinforce the risk off tone but this seems unlikely as the data in general is likely to be somewhat better.

AUD was thumped by weaker Chinese data releases and a deterioration in risk appetite. Although the drop has been steep over recent days AUD is unlikely to fall much further, with plenty of appetite for the currency around 1.0300. Nonetheless, AUD/USD has dropped below its 100 day moving average level 1.0414 a breach of which threatens to mark a stronger down move.

For those investors wanting to re-enter long AUD positions I prefer to play the currency on the crosses, especially versus NZD which has also suffered recently. My quantitative model of AUD/NZD suggests some upside scope in the currency pair, with short term fair value seen around 1.24.

USD/JPY’s pull back has extended further as Bank of Japan governor Kuroda’s policy announcement effect has faded and risk aversion has picked up. I look for any slippage in USD/JPY to be limited however, with my quantitative model suggesting that short term fair value for USD/JPY is around 95.68. The currency pair has been undermined by the drop in US Treasury yields over recent weeks resulting in a reduced US yield advantage over Japan.

Moreover, the upcoming G20 meeting this week has also provoked some hesitancy among JPY bears given expected comments aimed at Japan not to engineer a competitive devaluation of its currency. Technical indicators suggest that the primary trend remains higher for USD/JPY, with a break below 96.07 required to signal a change in short term trend.

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USD undermined by data, Gold under pressure

April 15, 2013 — Mitul Kotecha

Risk measures remain generally well supported, with markets remaining fairly resilient to Eurozone concerns as the European Central Bank (ECB) OMT threat continues to do its work to deflate tail risks. Even the EUR continues to sit stubbornly around 1.31 versus USD while Eurozone peripheral bonds remain supported.

The Eurogroup and Ecofin announcement of an extension of Irish and Portuguese loans and the revelation that Cyprus will need even more funds than previous estimates (EUR 23 billion compared to EUR 17.5 billion previously) has been taken in its stride by markets. Eurozone inflation and the April German ZEW investor confidence survey will be the highlights of the calendar in the region this week although neither should dent the generally supportive tone.

Firm risk appetite is contributing to some of the pressure on commodity prices, with the CRB commodities index losing further ground as precious metals slide. Gold prices have now entered a bear market given the more than 20% fall since September 2011 as ETF and speculative investors continue to exit. There is little sign that investors are about to let up the selling pressure, with the trend continuing to be lower.

Data releases this week in the US will be of particular focus to determine whether the economy is entering into renewed downward lurch or is facing a mere blip along the way to recovery. Indeed, the recent run of softer data including weaker than expected March retail sales and April consumer confidence data released at the end of last week have reinforced growth concerns while supporting US Treasuries and undermining the USD.

The Fed’s Beige Book will help give some indication of how growth is faring across the US while industrial production and housing starts ought to show some gains. Q1 13 earnings reports will also be in focus. The weakness in US data over recent weeks is likely to be merely a blip on the path to recovery but nonetheless the impact of the Sequester may be accentuating the softening in the growth indicators.

Elsewhere Japanese FX policy will come under scrutiny at the G20 meeting this week, with officials likely to press Japan to refrain from competitive currency devaluation echoing the message from the US Treasury’s semi-annual currency report to Congress at the end of last week. USD/JPY has lost some upside momentum as a result and is set to slip further, with support seen around 96.71.

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US dollar finding some support

September 25, 2012 — Mitul Kotecha

Global growth concerns are contributing to undermine commodity prices, with most commodities dropping overnight. Gold was the biggest loser. Risk measures continue to creep higher as a host of worries especially the lack of traction in the Eurozone towards a Spanish agreement on a bailout and inability of Greece to agree on deficit cuts, afflicted markets.

The near term outlook is likely to remain one of caution until some progress in the Eurozone is in evidence. However, growth concerns suggest any improvement in sentiment will be tenuous at best.

On a more positive note, there at least appears to be some movement in the US towards finding a solution towards avoiding the fiscal cliff from taking effect as a bipartisan group of senators have agreed to formulate a deficit reduction plan.

The USD index has rallied over recent days despite expectations for weakness in the wake of the Fed;s announcement of QE3. It almost appears to be a case of sell on rumour, buy on fact. Admittedly the USD usually does weaken following QE with the USD index falling during the full periods of both QE1 and QE2 (-4.6% and -2.9%, respectively).

The counter argument in support of a firmer USD which we believe is supported by the massive deterioration in USD positioning over recent weeks and over 5% drop in the USD since 24 July is that the market has already priced in a lot of QE expectations into the currency.

Another factor that will likely play positive for the USD is the fact that the Fed is not alone in expanding its balance sheet. Many central banks are vying to maintain very easy monetary policy. The implication of this is that there is a battle of the balance sheets in progress that does not necessarily involve the USD being the loser.

EUR/USD has fallen well off its recent highs around 1.3173, with sentiment for the currency souring due to inaction by the authorities in Spain on requesting a bailout and disagreements over how to proceed on various issues including banking supervision. The drop in the September German IFO business climate survey, the fifth in a row, did little to help the EUR, with the survey adding to Eurozone growth worries.

Increasingly it looks as though EUR short covering is running its course and while there may yet be a further bounce in the EUR should the ECB begin its bond purchase programme, the near term outlook is more fragile. Business and consumer confidence surveys in Germany and France today will echo the weakness of the IFO in contrast to a likely firming in September US consumer confidence, contributing to a weaker EUR. A test of support around 1.2848 looms

Posted in eurozone, Greece, Spain, US. Tags: , , , , . Leave a Comment »
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