USD firms, JPY bears in the ascendency, RBA weighs on AUD

December 3, 2013 — Mitul Kotecha

Despite some encouraging economic news from manufacturing surveys globally equity markets and risk assets in general failed to benefit overnight, with stocks showing a little fatigue following recent gains. The US ISM manufacturing confidence survey beat expectations rising to its highest level since April 2011 while its components looked upbeat, especially the employment component.

This was echoed in the UK and even in the Eurozone the final manufacturing purchasing managers index was slightly higher than forecast. Consequently core bond yields and the USD continued to push higher while gold came under further pressure. The US data also has put the spectre of a December tapering on the table although the November employment report will be scrutinised for further clues.

While JPY bears have been encouraged by the rise in Japanese inflation revealed last week (which was not only energy price led) there’s a long way to go before claiming success in hitting the BoJ’s 2% inflation target. The good news is that the higher real yield differential between the US and Japan is consistent with USD/JPY upside.

The bad news is that more BoJ policy easing is likely to sustain the move and we suspect the central bank will oblige early next year. Indeed, BoJ Governor Kuroda alluded to this yesterday, and his comments were taken at face value by markets, pushing the JPY even lower, with USD/JPY breaching 103 overnight. We keep open our trade idea to buy USD/JPY initiated on 28 October at 97.64 targeting 103.74.

AUD/USD has lost close to 6% since its high around 0.9759 on 23rd October but has found some respite recently from short covering over recent days. The Reserve Bank of Australia however, continues to do its best to weaken the currency. Unsurprisingly left policy rates unchanged today but the accompanying statement noted that the currency remained “uncomfortably high”.

The AUD has been particularly sensitive to a renewed rise in US Treasury yields, being one of the most correlated currencies over recent months and in this respect remains vulnerable to any increase in US yield. Given that we expect US yields to continue to push higher into next year this suggest only a limited AUD recovery over the coming months. In the near term AUD/USD has found some solid technical support around 0.9038.

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Plenty of data and events before winding down

December 2, 2013 — Mitul Kotecha

Although markets already appear to be in wind down mode ahead of the year end holidays there is plenty of data and events over coming days that could change the complexity of market activity. To begin the week news that that China’s official November purchasing managers’ index remained at an 18 month high will bode well for markets, especially in Asia.

Elsewhere it is still too early to gauge how well the four day spending over the US Thanksgiving holiday fared for US retailers although initial indications suggest that spending will be down on last year. Over coming days there will be plenty of evidence to finalise opinions about what the Federal Reserve will do at its December 17-18 FOMC meeting. US data releases this week include the November ISM manufacturing survey, home sales, Fed’s Beige, US Q3 GDP revision and the November jobs report.

Ahead of the Fed meeting other central banks will be in focus this week including the European Central Bank, the Bank of England and the Reserve Bank of Australia. No change in policy is expected from any of them leaving all the attention on the US jobs report. This ought to ensure that the asset allocation shift from bonds to equities will leave equities around record highs while core bond yields continue to edge higher.

The USD has failed to benefit versus EUR despite higher US yields but has made gains against the JPY and many commodity and EM currencies. I look for the USD to move higher over coming weeks. Overall risk appetite is likely to remain supported into year end although much will depend on the plethora of data releases and central bank meetings this week.

EUR is looking increasing stretched around current levels, especially given the likelihood that the ECB will sound relatively dovish this week, with staff growth forecasts likely to be revised lower and inflation forecasts remaining below target. The strength of the EUR is clearly acting as a counterweight to efforts to ease policy but efforts to sell the currency continue to face renewed buying interest. Technical resistance around EUR/USD 1.3627 ought to provide a short term cap.

GBP has made somewhat better progress against the EUR and there appears to be little to stop its upward progress at present. Meanwhile USD/JPY remains under upward pressure, with last week’s inflation data highlighting that there has been some progress on ending deflation although the likelihood of more Bank of Japan easing in the months ahead suggests that further JPY downside is in store.

Aside from the JPY last month’s biggest underperformers in Asia were the IDR and THB. There is little sign of this pattern changing. Indeed, in terms of Asian FX relative value in terms of North versus South East Asia continues to pay dividends. Both Indonesia and Thailand registered outflows of equity capital last month compounding the pressure on the currencies.

THB has taken another leg lower in the wake of escalating protests over the weekend and looks set to test its 6 September USD/THB high at 32.480. As noted by the BoT governor the protests are affecting the economic outlook. In Indonesia questions about the external balance remain a weight on the currency An expected widening in the October deficit and higher November inflation will not help the IDR today.

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Gyrating expectations for Fed tapering

November 18, 2013 — Mitul Kotecha

Gyrating expectations for Fed tapering have left FX markets in somewhat of a limbo. Just as markets had shifted expectations for Fed tapering to next month or January 2014 Fed Chairman nominee Yellen managed to add a dovish spin on things by indicating strong support for ongoing Fed quantitative easing. The USD hasn’t been harmed too much as policy expectations in Japan and the Eurozone has also taken a more dovish slant leaving the EUR and JPY exposed to downside pressure. In contrast, GBP has benefitted from the Bank of England’s revisions to growth and employment expectations.

Yellen’s comments last week and some likely softer economic data releases this week including subdued CPI inflation, declines in retail sales and existing home sales, will likely cap US Treasury bond yields and the USD. Fed FOMC meeting minutes will have some bearing on market direction. Nonetheless, as noted above any pressure on the USD is set to be limited given the relatively dovish policy stances in other countries. Indeed, weak Eurozone and Japan Q3 GDP released last week have led to expectations of more monetary policy action from both the Eurozone Central Bank and Bank of Japan. Consequently EUR/USD will struggle to sustain any recovery above 1.3500 and USD/JPY will find a stronger footing above 100.

GBP/USD has retained a degree of composure but GBP bulls are better taking a long position against EUR where further GBP gains are likely given revelations in the BoE quarterly inflation report that the unemployment threshold will be hit sooner than expected, indicating higher policy rates earlier than forecast. Although the EUR may find some solace from better data this week in the form of flash manufacturing surveys and increases in the German ZEW investor confidence and IFO business confidence surveys any EUR upside will likely remain limited given expectations of further monetary easing by the ECB in the wake of very subdued inflation pressures.

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JPY, AUD and Asian FX

November 12, 2013 — Mitul Kotecha

Risk appetite remains relatively well supported, with US and Asian equities edging higher and the VIX ‘fear gauge’ moving lower. There is a lack of first tier data releases today, with only German and UK CPI inflation data on tap as well as the US NFIB small business optimism index. Attention will instead centre on various Fed and ECB speakers for further policy clues.

Indeed, markets will look for any hints of reinforced forward guidance by ECB speakers and further insight into the timing of tapering from Fed officials. ECB speakers include Angeloni, Weidmann, Nowotny and Asmussen while Kocherlakota and Lockhart are scheduled to speak from the Fed. There will also be plenty of interest in speeches by the Fed’s Yellen and Bernanke on Thursday.

The JPY appears to be finally succumbing to the pressure of a generally firmer USD and higher US yields although the currency has yet to break out of its recent ranges and correlations suggest that the JPY has not been as sensitive as other currencies to either factor. I remain bearish on the JPY.

While the JPY has not been as sensitive as other currencies to yield lately it has still faced some pressure and will continue to do so if we are correct in our view that US yields will push even higher against Japanese JGBs. Firmer US data has helped to shift expectations of Fed tapering to around December or January. In contrast the BoJ is showing no sign of pulling back from its balance sheet expansion and in our view could even extend asset purchases next year in order to sustain its inflation around its 2% inflation target. This remains a recipe for more USD/JPY upside.

Having rallied by around 9% since its end August low AUD has been unable to hold onto gains. Fortunately for AUD the recent rise in Australian bond yields has acted to mitigate against some of the potential pressure from rising US bond yields; since the USD began its recent rally around 28 October Australia’s yield advantage has narrowed by only 3 basis points. However, the strengthening in the USD has wreaked havoc on many currencies and the AUD has not escaped.

While AUD may face headwinds from a firmer USD, Australia’s relative yield attraction will give it some scope for recovery into year end. Indeed, if yield appetite continues to strengthen in an environment of improving risk appetite and low volatility AUD should prove to be a key beneficiary. In the near term AUD/USD will find some technical support around 0.9280.

Asian currencies have gained a little respite from general USD strength but remain vulnerable to a stronger USD over the coming weeks. Deficit currencies have renewed their position as the biggest underperformers over recent weeks, with the IDR and INR under most pressure followed by MYR. The least vulnerable to USD strength and higher US yields are North East Asian currencies especially TWD and KRW.

Reflecting renewed tapering fears most Asian countries have experienced renewed equity portfolio outflows month to date. The RMB continues to buck the trend although its relative strength may reflect the timing of China’s 3rd plenum which ends today.

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US dollar stable, yen primed for weakness, Aussie dollar slips

October 29, 2013 — Mitul Kotecha

The USD index looks to have settled at a relatively weak level around 79.00 aided by the stabilisation of US Treasury yields (10 year around 2.5%). Upside for the USD will be restricted given a likely run of softer economic releases this week including September retail sales, and October consumer confidence today.

The data may help to support expectations that Fed tapering may not take place until March / April next year although the Fed FOMC decision later this week will hopefully give more clues on this front. In any case the USD may already have priced in softer data and delayed tapering expectations, suggesting that the risk / reward will increasingly turn more USD positive over the coming weeks.

USD/JPY looks set to move higher over coming weeks breaking out of its recent range. Relatively higher US Treasury yields versus Japanese JGBs yields, improving risk appetite and improving technicals (USD/JPY remaining above its 200 day moving average) will be supportive for renewed upside in the currency pair.

While the Bank of Japan is unlikely to act this week on policy the risks of further action will only increase over the coming months as it becomes apparent that reaching and sticking to its 2% inflation target will not be possible given current settings. In turn, the JPY is set for further downward pressure.

Does the slippage in AUD over recent days presage a strengthening in the USD? AUD and USD (index) have registered a strong negative correlation over the past three months, with the former benefitting from weakness in the latter. Over recent days the USD appears to have stabilised while AUD has lost steam, with pressure intensifying in the wake of comments by RBA Governor Stevens who attempted to talk the currency down.

I doubt the AUD will fall much from current levels but the absence of key domestic data (only private sector credit growth and building approvals on tap this week) will focus attention on external factors, namely the Fed FOMC outcome and in particular Chinese manufacturing confidence at the end of the week.

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