Contagion spreading like wildfire

November 16, 2011 — Mitul Kotecha

EUR continues to head lower and is is destined to test support around 1.3484 versus USD where it came close overnight. Contagion in eurozone debt markets is spreading quickly, with various countries’ sovereign spreads widening to record levels against German bunds including Italy, Spain, France, Belgium and Austria. Poor T-bill auctions in Spain and Belgium, speculation of downgrades to French, Italian and Austrian debt, and a weak reading for the November German ZEW investor confidence index added to the pressure.

A bill auction in Portugal today will provide further direction but the precedent so far this week is not good. The fact that markets have settled back into the now usual scepticism over the ability of authorities in Europe to get their act together highlights the continued downside risks to EUR/USD. Although there is likely to be significant buying around the 1.3500 level, one has to question how long the EUR will continue to skate on thin ice.

The Bank of Japan is widely expected to leave policy unchanged today but the bigger focus is on the Japanese authorities’ stance on the JPY. Finance Minister Azumi noted yesterday that there was no change in his stance on fighting JPY speculators. To some extent the fight against speculators is being won given that IMM speculative positions and TFX margin positioning in JPY has dropped back sharply since the last FX intervention to weaken the JPY.

However, this has done little to prevent further JPY appreciation, with USD/JPY continuing to drift lower over recent days having already covered around half the ground lost in the wake of the October 31 intervention. Markets are likely therefore to take Azumi’s threats with a pinch of salt and will only balk at driving the JPY higher if further intervention takes place. Meanwhile, USD/JPY looks set to grind lower.

GBP will take its direction from the Bank of England Quarterly Inflation Report and October jobs data today. There will be particular attention on the willingness of the BoE to implement further quantitative easing. A likely dovish report should by rights play negatively for GBP but the reaction is not so obvious. Since the announcement of GBP 75 billion in asset purchases a month ago GBP has fared well especially against the EUR, with the currency perhaps being rewarded for the proactive stance of the BoE.

Moreover, the simple fact that GBP is not the EUR has given it a quasi safe haven quality, which has helped it to remain relatively resilient. Nonetheless, GBP will find it difficult to avoid detaching from the coat tails of a weaker EUR and in this respect looks set to test strong support around GBP/USD 1.5630 over the short term.

Posted in Bond markets, central banks, Currencies, ECB, Economics, Economy, Europe, eurozone, Federal Reserve, Financial crisis, Fiscal/Budget, France, FX, Germany, Greece, Italy, Japan, Monetary Policy, Portugal, Spain, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

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 »

FX Winners and Losers

February 16, 2011 — Mitul Kotecha

There has been a sense of mean reversion in FX markets so far this year as some of last year’s winners have become losers. Namely NZD, CHF, JPY and AUD have all lost ground whilst EUR and GBP have gained ground. The odd one out is the SEK which has strengthened over 2010 and in 2011 versus USD. I expect this pattern to change and the likely winners over the next 3- months are NZD, AUD and CAD, with CHF and JPY the likely losers.

EUR held up reasonably well in the wake of slightly disappointing growth data, with eurozone GDP rising less than expected in Q4, and a smaller than expected gain in the February German ZEW investor confidence survey (economic sentiment component). My sense is that the net long EUR speculative position has already been pared back somewhat over recent days reducing the potential selling pressure on the currency in the near term.

Given that EUR/USD is one of the only major currency pairs being influenced by interest rate differentials, its direction will hinge more on policy expectations but in the near the announcement by the German Finance Minister this morning of a restructuring plan for WestLB may give the currency some support.

Perhaps one explanation for the stability of EUR/USD around the 1.3500 level is that US data was also disappointing yesterday. January retail sales rose less than forecast whilst revisions to back months suggest less momentum in Q4 consumer spending than previously envisaged. As with the eurozone data weather likely played a role in contributing to the outcome.

The net impact on currencies is that they are largely stuck within tight ranges. Further direction will come from the release of the Fed FOMC minutes for the January 26th meeting. The minutes may undermine the USD if a likely dovish slant continues to be expressed but given that the FOMC decision at that meeting to hold policy setting unchanged had no dissenters this should not come as a surprise.

Whilst the battle between the USD and EUR ended in a stalemate GBP outperformed in the wake of the increase in UK January CPI inflation and in particular the letter from the BoE governor to the Chancellor keeping open the door to a rate hike. The Quarterly Inflation Report (QIR) today will be particularly important to determine whether the bounce in GBP is justified.

I remain hesitant to build on long GBP positions given the net long speculative overhang in the currency. The risks following yesterday’s jump in GBP are asymmetric, with a hawkish QIR likely to have less impact on the currency than the negative impact from a more dovish than expected report.

Econometer.org has been nominated in FXstreet.com’s Forex Best Awards 2011 in the “Best Fundamental Analysis” category. The survey is available at http://www.surveymonkey.com/s/fx_awards_2011

Posted in Australia, central banks, Currencies, Economics, Economy, Europe, eurozone, Federal Reserve, FX, Germany, Interest rates, Japan, Monetary Policy, Sweden, Switzerland, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »