Greek Saga Rumbles On – Does Anybody Care?

March 24, 2010 — Mitul Kotecha

The debate over Greece continues to rumble on. France and Spain requested a separate summit meeting of the 16 heads of eurozone countries immediately before the full 27-member EU summit starting tomorrow but this was met with resistance. Meanwhile, Germany has called for “a substantial contribution” from the IMF towards a Greek aid package, whilst maintaining that no EU deal will be reached for Greece at the summit.

Frankly, the whole Greek saga has become extremely boring, with the lack of agreement about how to fix it doing little to inspire confidence. In particular the fractured opinion amongst EU leaders highlights the difficulties in reaching an agreement in a union made up of so many conflicting interests. At most the summit may agree on the conditions for a rescue package for Greece rather than a package itself. This will leave markets unimpressed,

US new home sales data today is likely to paint a slightly better picture with a small gain expected, albeit following the 11.2% plunge in the previous month. Sales will be helped by the extension of the home buyer tax credit. The US February durable goods orders report is also released today, with a small increase expected. A smaller gain in transport orders suggests that the 2.6% jump last month will not be repeated.

In Europe, the key release is the March German IFO business climate survey and a rebound is likely following February’s decline, helped by warmer weather and a weaker EUR. Flash readings of Eurozone March purchasing managers indices (PMIs) are also released but these are unlikely to extend gains from the previous month. Despite expectations of firmer data the EUR/USD is vulnerable to a further decline, with support around 1.3432 in sight for an imminent test.

Attention in the UK will turn to the pre-election Budget and particularly the government’s plans to cut spending and reduce the fiscal deficit. Failure to provide a credible blue print to restore fiscal credibility will damage confidence, heightening the risks of an eventual sovereign ratings downgrade and more pressure on GBP which appears destined for another drop below 1.50 versus USD.

Most currencies have remained within ranges and the most interesting currency pair is EUR/CHF having failed to react to verbal warnings from the Swiss National Bank (SNB) about excessive CHF strength. EUR/CHF looks vulnerable to a further decline unless the SNB follows up rhetoric with action. Even if there is FX intervention by the SNB it may prove to be a temporary barrier to a market with an eye on the psychologically important 1.4000 level.

Despite the pressure on the Japanese government and Bank of Japan (BoJ) to engineer a weaker JPY, export performance has proven resilient, with exports jumping 45.3% on the year in February, helped by the strength of demand from Asia. Unfortunately this is doing little to end Japan’s deflation problem and even if there is less urgency for a weaker JPY to boost exports, JPY weakness will certainly help to reduce deflationary pressures in the economy. USD/JPY is stubbornly clinging to the 90.00 level, with little inclination to move in either direction.

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Disappointments Galore

February 24, 2010 — Mitul Kotecha

Well the calm at the beginning of the week did not last very long.  Although the overnight price action can hardly be labelled as panic given both FX and equity volatility remain relatively well behaved, there is no doubt that worries are creeping back into the market psyche.  It seems that markets are once again trading on each piece of news and for the most part the news is not encouraging.  

A plethora of disappointments will set a negative tone for markets today.   Risk has come off the table in the wake of the worse than expected February German IFO business confidence survey and US Conference Board consumer confidence.   Cautious comments by Bank of England Governor King in which he kept the door open to further quantitative easing and a ratings downgrade of four of the largest Greek banks has added to the damage.

The German IFO was likely dealt a temporary blow by severe weather conditions.   The 10.5 point fall in US consumer confidence from an already relatively low level had no mitigating factors however, and revealed a deterioration in job market conditions, which combined with renewed weakness in jobless claims, does not bode well for next week’s US payrolls report, pointing to a decline of around 40k in February payrolls.

Overall, the market mood has darkened and there is little to turn sentiment around in the near term.  In prospect of likely weak reading for US payrolls next week and continuing worries about European fiscal/debt problems any improvement in risk appetite is likely to be limited.  This will help bond markets, the USD and JPY but most risk trades will face pressure. 

It is still worth being selective in FX markets.  The EUR remains the weak link and is set to struggle to make any headway, with upside likely to be restricted to resistance around 1.3747.  Similarly GBP is set to struggle in the wake of King’s comments as well as ongoing economic and deficit concerns, with GBP/USD vulnerable to a drop to around 1.5293.   In contrast, Asian currencies and commodity currencies look far more resilient.

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Risk Appetite Puts Dollar On The Back Foot

February 22, 2010 — Mitul Kotecha

Markets look somewhat calmer going into this week helped by comments by Fed members who noted that the discount rate hike did not signal a shift in monetary policy, something which is likely to be repeated by Fed Chairman Bernanke in his testimony to Congress on Wednesday and Thursday.  A tame US January CPI report last Friday helped too, giving further support to the view that the Fed will not hike the Fed Funds rate for some time yet; a rate hike this year seems highly unlikely in my view.  

Data this week will be conducive to a further improvement in risk appetite and despite the lingering concerns about Greece the EUR may find itself in a position to extend gains.  In Europe all eyes will be on the February German IFO survey and eurozone sentiment indicators, which following the surprising strength in the manufacturing Purchasing Managers Indices (PMIs), are likely to reveal solid gains. 

The main highlights in Japan this week includes January trade data and industrial production. The trade numbers will be particularly important to determine whether the rebound in exports due in large part to robust Asian demand, has continued whilst the bounce back in exports will be a key factor in fuelling a further gain in industrial output. 

In the US aside from the testimonies by Fed Chairman Bernanke there are plenty of releases on tap including consumer confidence, new and existing home sales, durable goods orders and a likely upward revision to Q4 GDP.  For the most part the data will show improvement and play for a further improvement in risk appetite. 

FX direction will depend on whether markets focus on the potentially positive USD impact of a reduction in USD liquidity or on the likely firmer tone to risk appetite this week.  Given expectations of firmer data and the soothing tone of the Fed, risk currencies will likely perform better, with crosses such as AUD/JPY favoured.  The USD will likely be placed on the back foot, especially given the very long market positioning in the currency.

The EUR will be helped by the fact that speculative market, according to the CFTC IMM data, holds record short positions in the EUR (as of the week ended 16 February) giving plenty of potential for short-covering.   The more timely Tokyo Financial Exchange (TFX) data also reveals that positioning in EUR/JPY has continued to be scaled back.  

CFTC Commitment of Traders (IMM) data – Net EUR speculative positioning

EUR/USD bounced smartly from its lows around 1.3444 on Friday, partly reflecting some short covering and the drop in FX volatility suggests the market is more comfortable with EUR/USD around these levels.  A positive IFO survey and improved risk appetite could see EUR/USD test resistance around 1.3774, its 20 day moving average, over coming days.  Ongoing Greek concerns suggest that any EUR bounce will be limited, however. 

USD/JPY looks well supported and although data this week will suggest that exports are improving despite JPY strength, the relatively more aggressive stance of the Fed compared to the BoJ, long JPY positioning, and improved risk appetite, give plenty of scope for the JPY to extend losses, with technical USD/JPY support seen around 91.28.

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Optimism dissipates

January 23, 2010 — Mitul Kotecha

Markets have been highly fickle so far this year. Optimism about strong recovery led by China – recall the fact that disappointment from the surprisingly weak US non-farm payrolls report in December was outweighed by strong Chinese trade data – has dissipated. Instead of rejoicing at China’s robust GDP report last week, which revealed a 10.7% rise in the fourth quarter of 2009, investors began to fret about whether China would have to move more aggressively to tighten monetary policy. Fuelling these fears was the release of Consumer price data which showed inflation rising above expectations to 1.9% YoY in China.

If such fears were not sufficient to hit risk appetite, US President Obama’s plan to limit the size and trading activities of financial institutions dealt another blow to financial stocks. The plan followed quickly after the Democrats lost the state of Massachusetts to the Republicans and managed to shake confidence in bank stocks whilst fuelling increased risk aversion. Meanwhile, rumblings about Greece continue to weigh on markets and Greek debt spreads continued to widen even as global bond markets rallied.

Following the US administration’s plans to restrict banks’ activities the fact that the rise in risk aversion was US led rather than broad based led to an eventual pull back in the dollar which helped EUR/USD to avoid a break below 1.40. Risk trades including the AUD came under pressure as risk appetite pulled back. A drop in commodity prices did not help. The AUD was also hit by news that Australia’s Henry Tax Review would look to tax miners in the country. As a result AUD/USD dropped below 0.90 though this level is likely to provide good buying levels for those wanted to take medium term AUD long positions. The one currency that did benefit was the JPY which managed to drop below sub 90 levels.

The aftermath of the “Volker Plan” will reverberate around markets this week keeping a lid on equity sentiment. Meanwhile Greece will be in the spotlight especially its bond syndication. A bad outcome could be the trigger for EUR/USD to sustain a move below 1.40 though it looks as though it may find a bottom around current levels, with strong support seen around 1.4029. The German IFO business survey for January will be important to provide some direction for EUR and could be a factor that weighs on the currency if as expected it reveals some loss of momentum in the economy.

Aside from the Fed the other G3 central bank to meet this week is the Bank of Japan but unless the Bank is seen to be serious about fighting deflation, USD/JPY may remain under downward pressure against the background of elevated risk aversion. Below 90.0 there does appear to be plenty of USD/JPY buyers however, suggesting that further upside for the JPY will be limited. USD/JPY will find strong support around 88.84.

Much will depend on the key events in the US this week including the Fed FOMC meeting and the President’s State of the Union speech. USD bulls will look for some indication that the US government is serious about cutting the burgeoning budget deficit. Also watch out for the confirmation vote on the renomination of Bernanke as Fed Chairman which could end up being close. There is a heavy slate of data to contend with including new and existing home sales, consumer confidence, durable goods orders, the first glance at Q4 GDP and Chicago PMI.

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What’s driving FX – Interest rates or risk?

December 13, 2009 — Mitul Kotecha

The November US retail sales report has really set the cat amongst the pigeons. For so long we have become accustomed to judging the move in the USD based on daily gyrations in risk aversion. Well, that may all be about to change. There was an inkling that all did not look right following the release of the November jobs report which unsurprisingly helped to boost risk appetite but surprisingly boosted the USD too.

It was easy to dismiss the USD reaction to year end position adjustment, markets getting caught short USDs etc. What’s more the shift in interest rate expectations following the jobs report in which markets began to price in an earlier rate hike in the US was quickly reversed in the wake of Fed Chairman Bernanke’s speech highlighting risks to the economy and reiterating the Fed’s “extended period” stance.

However, it all has happened again following the release of the November retail sales data, which if you missed it, came in stronger than expected alongside a similarly better than forecast reading for December Michigan confidence. The USD reaction was to register a broad based rally as markets once again moved to believe that the “extended period” may not be so extended after all.

Interest rates will become increasingly important in driving currencies over the course of the next few months but if anyone thinks that the Fed will shift its stance at this week’s FOMC meeting, they are likely to be off the mark. No doubt the Fed will note the recent improvement in economic data but this is highly unlikely to result in a change in the overall stance towards policy.

Further improvements in US data this week including industrial production, housing starts, Philly Fed and Empire manufacturing may lead markets to doubt this but the Fed calls the shots and a potentially dovish statement may act to restrain the USD this week. Also, it’s probably not a good idea to rule out the influence of risk appetite on currencies just yet and with a generally positive slate of data expected, firmer risk appetite will similarly act as a cap on the USD this week.

Other than the US events there is plenty of other potentially market moving data to digest this week. More central banks meet this week including the Riksbank, Norges Bank and Bank of Japan. No change is expected from all three but whilst the Riksbank is set to maintain a dovish stance the Norges Bank meeting is a closer call. So soon after the emergency BoJ meeting, a shift in policy appears unlikely but the pressure to increase Rinban (outright JGB buying) operations could throw up some surprises for markets.

Europe also has its fair share of releases this week including the two biggest data for markets out of the eurozone, namely, the German ZEW and IFO surveys as well as the flash December PMI readings. The biggest risk is for the ZEW survey which could suffer proportionately more in the wake of recent sovereign concerns in the Eurozone. Sovereign names may still lurk to protect the downside on EUR/USD and if the USD finds it tougher going as noted above, the EUR may be able to claw back some of its recent losses.

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