USD bounces back, JPY to strengthen, AUD rallies

November 8, 2012 — Mitul Kotecha

To put it mildly there was plenty of volatility in the wake of the US elections. Equities reacted badly as the prospects of higher taxes as part of a solution to resolving the fiscal cliff in the US came back into the frame. worries outweighed any positive impact from the potential for Fed QE to continue in its current form without the risk of being curtailed by Republican President.

Poor data out of Europe contributed to the market malaise as the growth trajectory into Q4 continued to worsen. The passage of Greek austerity measures through parliament failed to undo the damage. German industrial production fell sharply, down 1.8% MoM while downward growth revisions / upward deficit revisions from the European Commission dealt another blow to sentiment.

Growing pressure on the German economy may at the least prompt a more dovish stance at the European Central Bank (ECB) meeting today while the Bank of England (BoE) is set to increase its asset purchases today although it will be a close call on this front.

The USD came under pressure in the immediate aftermath of US President Obama’s victory. However, it didn’t take long for the usual higher risk aversion, stronger USD relationship to kick in, with the USD subsequently reversing all its losses and more. With elections out of the way markets are waking up to the reality of the considerable challenge ahead in resolving the fiscal cliff. Risk assets clearly don’t like what they see.

As only September US trade data and November Michigan confidence are left on the US calendar this week risk gyrations will continue to drive the USD though I suspect that gains will be restricted in the wake of lower US bond yields.

Most currencies except the JPY took advantage of a weaker USD but finally USD/JPY dropped on the back of the jump in risk aversion. The drop in US bond yields and the output of my quantitative models both suggest that the JPY should be firmer against the USD. The recently more aggressive stance of the Bank of Japan taken together with warnings of FX intervention may be helping to keep the JPY on the back foot, however.

Given that speculative JPY positioning has turned negative over recent weeks the BoJ’s stance maybe having some impact in shifting FX expectations especially as it has fuelled some portfolio outflows from Japan over recent weeks. Nonetheless, it won’t take long for JPY bears to become frustrated with the lack of downside traction in the currency, with USD/JPY subsequently set to edge back towards the 79.00 level

Stronger than expected Australian jobs numbers helped to boost the AUD this morning. Jobs were up 18.7k in October much more than consensus. Even better was the details of the report, with full time jobs up 18.7k and part time down 8k. The unemployment rate was at 5.4%, lower than expected. Overall, a solid report and in stark contrast to NZ jobs data this morning. The data will certainly give more juice to AUD/NZD and corresponds with my quant models looking for NZD downside and AUD resilience. The data will also likely dampen further expectations of another rate cut by the RBA in December which in any case looks like a close call.

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EUR to struggle to extend gains

July 5, 2011 — Mitul Kotecha

Once again the USD index failed to break above its 100-day moving average, its third failure to do so over recent weeks. The USD is now trading below its 20- and 50- day moving averages and looks vulnerable to further weakness. However, much will depend on the travails of the EUR and how quickly the boost to this currency fades following last week’s Greek austerity plan approval.

The USD was helped last week by the relative move higher in US bond yields, which saw 2-year yield differentials between the Eurozone and US drop below 100bps for the first time since the beginning of April. Given that the six-month correlation between 2-year bond yield differentials and EUR/USD is at a very high level, it is reasonable to assume that this will remain an important factor driving the currency pair going forward.

The yield differential narrowing seen last week has reversed as German yields have moved sharply higher this week, however. This is in large part attributed to more positive developments in Greece but nonetheless, it has helped to push the EUR higher.

Ratings agencies may yet spoil the party for the EUR, with S&P’s warning that Greece’s debt rollover plans may put the country’s ratings into select default, fuelling some caution. Should ratings agencies downgrade Greek debt to junk it will not only be international investors that will re-think their exposure to the country but the European Central Bank (ECB) could also stop holding Greek debt as collateral for loans although an official from the Bank noted that this would happen only if all the major ratings agencies downgrade Greek debt to default.

Attention is now turning to the implementation risks of austerity measures and asset sales. While Greece’s contribution to eurozone GDP is small, the pain of implanting more budget cuts will push the economy deeper into recession and reveal the stark divergences in growth in the eurozone at a time when the ECB is hiking interest rates.

In reaction to such concerns there is likely to be a series of measures announced over coming days and weeks to boost growth according to Greece’s finance minister. As the S&P comments and implementation/growth concerns suggest, the EUR may struggle to extend gains, especially as the currency is looking increasingly stretched at current levels, with this week’s ECB rate hike largely in the price. Top side resistance for EUR/USD is seen around 1.4598.

Posted in Bond markets, central banks, Currencies, ECB, Economics, Economy, Europe, eurozone, Fiscal/Budget, FX, Greece, Interest rates, US. Tags: , , , , , , , , , , , , , , , , , , , , . Leave a Comment »