Bad news is good

October 28, 2013 — Mitul Kotecha

Risk assets retained their positive performance into the end of last week, with US equities closing the week higher and the VIX ‘fear gauge” closing lower while 10 year US Treasury yields continued to pivot around 2.5%. Meanwhile the USD remains on the back foot finding little help from data releases especially last week’s September employment report. Friday’s release of September US durable goods orders similarly disappointed, with core orders coming in weaker than anticipated. The bad news is good philosophy of markets means that weaker data is helping to aid expectations that Fed tapering may be delayed, in turn boosting risk assets.

This week will bring much of the same. There are a plethora of US data releases on tap including September industrial production today, retail sales, CPI inflation and October consumer confidence and ISM manufacturing. Additionally there is a Fed FOMC meeting this week although no surprises are expected at this meeting. US data releases will look relatively soft but given the market mood this will bode well for risk assets. The jury is out with regard to the timing of tapering but increasingly many are looking for it take place in Mar/Apr 2014.

Europe has a more limited data calendar including the Bank Lending Survey of credit conditions and economic sentiment indicators. These will look a bit more positive than previous months. In Japan September jobs data and industrial production are on tap. Additionally two central bank meetings from the Bank of Japan and RBNZ will not result in any surprises, with policy set to remain unchanged.

It is difficult to see the USD achieving much of a recovery against the background of relatively weaker US data releases although it does appear that a lot of bad news is already priced in. The fact that US Treasury (10 year) yields have stabilised around 2.5% will help to limit any further downside pressure on the USD. Moreover, even if US data are softer this week, much of the market has already pared back tapering expectations into next year, suggesting little scope for expectations of a further tapering delay.

USD/JPY is finding some support around its 200 day moving average at 97.38 and given the stability in US yields will find some support in the near term. EUR/USD remains supported and will likely benefit from more encouraging Eurozone data releases this week but gains above 1.3800 are beginning to look increasingly stretched. GBP/USD pulled back from its highs around 1.6248 last week despite a reasonably good 0.8% QoQ Q3 GDP reading. This week’s UK data is likely to be little softer, with manufacturing confidence (PMI) likely to edge lower for a second straight month, a factor that could undermine GBP further.

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Consolidating ahead of payrolls

October 22, 2013 — Mitul Kotecha

Ahead of the belated release of the US September jobs report markets are set to remain range bound, with most assets consolidating recent moves. For instance, the VIX “fear gauge” edged higher following steep declines while US Treasury yields gained a few basis points helping the USD index to push slightly higher. Equity investors will have one eye on earnings reports hoping that the recent run of positive Q3 US earnings surprises continues.

The consensus for US September non farm payrolls is 180k, with a low of 100k and high of 256k according to Bloomberg and unemployment rate likely to remain 7.3%. The data will have important implications for Fed tapering expectations, with the outcome likely to help support expectations that the Fed will not begin tapering until early next year.

Like other asset classes little movement is expected in FX markets ahead of the release of the US jobs report. A payrolls outcome around the consensus will have little market impact but it appears that the consensus is skewed towards a weaker outcome, suggesting a bigger FX reaction should there be an above consensus outcome (around 200k+).

Both the EUR and JPY are struggling to make further headway against the USD. There is nothing of note on the data front from the Eurozone or Japan today suggesting that attention will be mainly centred on US data. Stabilisation in US bond yields leaves the USD in better form against both currencies and given that a lot of bad news is now priced into the USD its downside looks more limited although much will depend on today’s jobs data.

The AUD is the outright winner in terms of gains versus the USD so far this month alongside other commodity currencies, NOK and NZD. AUD has benefitted from receding expectations of interest rate cuts, and firmer Chinese data alongside improving risk appetite. While I have been far more bullish than the consensus on AUD, it may be worth taking profits on recent gains versus USD as consolidation is likely in the short term. I see more scope for gains in AUD versus NZD over coming weeks, however.

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Little respite for the dollar

October 8, 2013 — Mitul Kotecha

Given that the government shutdown has reduced the number of market moving US data releases on tap, tensions surrounding the US budget and likely debt ceiling impasse continue to weigh on sentiment. Signs that senior Republicans are becoming less focussed on defunding Obamacare hint at potential for a compromise. However, a deal looks a long way off and nervousness is set to grow ahead of the October 17 debt ceiling deadline.

Reflecting this, risk measures rose overnight, with the VIX “fear gauge” spiking higher and equity markets lower. Safe haven currencies including CHF and JPY remain well supported against this background although gold prices have been range bound. Giving some relief from politics markets will be able to focus on the onset of the US Q3 earnings season this week.

The USD is susceptible to further slippage as traction towards a US budget deal remains out of reach. The USD index has now dropped by over 5% in the last three months, undermined more recently by a potential delay in Fed tapering and lower US Treasury yields. Uncertainty about the economic impact of the budget delay and prospective failure to raise the debt ceiling over coming weeks suggests that any upside traction for the USD will be extremely limited.

What is clear is that the longer the delay in reaching a deal the bigger hit on the economy and in turn the bigger the pressure on the USD. A delay in the release of trade data originally scheduled for release today will mean that market angst over the political impasse will be the bigger driver of the USD today. The USD index is set to edge further below the 80.00 level over coming days.

JPY is a clear beneficiary of the malaise in the US over recent days and looks set to strengthen further in the short term especially as risk aversion continues to increase and US yields remain constrained. The day’s ahead will be particularly important for the JPY from a domestic policy perspective too. Japan’s parliament meets from October 15 to December 16, marking a crucial period to pass legislation on Prime Minister Abe’s “growth strategy”.

Given past disappointment with Abe’s “third arrow” markets will look for strong evidence that reforms will move Japan to a higher and non deflationary growth trajectory. This is by no means guaranteed. Further disappointment would imply a firmer JPY. Having tested its 200 day moving average around 96.72 near term technical support for USD/JPY is seen around 95.92.

Posted in Bank of Japan, Japan, US administration. Tags: , , . Leave a Comment »

Watch to watch this week

September 9, 2013 — Mitul Kotecha

While the world awaits US Congress’ vote on military action in Syria there is at least some distraction on the data front. Friday’s US August employment report contributed a further layer of uncertainty to the Fed tapering debate. Payrolls came in lower than forecast, with downward revisions to previous months. The unemployment rate dropped 7.3% but this was largely due to less people looking for jobs, something that the Fed will take into consideration.

It is doubtful that the jobs data will prevent tapering beginning at the September 17-18 FOMC meeting but it does support the view of a smaller (USD 10 billion) taper. In any case, data this week will if anything reinforce expectations that the Fed will commence tapering asset purchases this month, with a solid August retail sales reading forecast. Consequently the USD is set to maintain a firm tone into this week.

Eurozone markets may be dented by ongoing political issues, with Italian politics in particular legal action against former PM Berlusconi in focus. Meanwhile, worried that its forward guidance is having less impact than hoped for as core bond yields rise the Eurozone Central Bank sounded decidedly dovish at its policy meeting last week. The dovish cause will be supported by a contraction in Eurozone industrial production. As a result, the EUR will remain capped over the coming days.

Similarly the Bank of England has had little success in containing the rise in gilt yields with its forward guidance given the positive run of UK data releases over recent weeks and a likely firm UK September jobs report will make the job even more difficult. Outperformance of UK data continues to support relative GBP strength especially against EUR.

Elsewhere news that Japan has been awarded the rights to host the 2020 Olympics has boosted growth expectations and hit the JPY even as the debate over whether to increase the consumption tax grow. An upward revision to Japanese Q2 GDP releases this morning supports the view that the economy will be able to withstand the tax hike.

Meanwhile Australian markets will be buoyed by the election victory of Tony Abbott’s Liberal-National Coalition although notably it will have to deal with a host of minority parties to pass legislation through the Senate. AUD will likely see a post election boost in the short term.

Posted in Bank of England, ECB, Economics, Federal Reserve, Japan. Tags: , , , . Leave a Comment »

Central banks in focus

September 5, 2013 — Mitul Kotecha

All the action will come from central banks today, with the Bank of Japan, European Central Bank, Bank of England, Riksbank and in Malaysia Bank Negara set to deliver policy decisions today. None are likely to alter policy settings but accompanying press statements will be under scrutiny. The policy decisions take place against the background of relatively calmer market conditions ahead of the August US jobs report at the end of the week and vote by the US Congress on limited military actions against Syria.

Among the several central banks deliberating on policy today the ECB will be among the most closely watched. Although no policy change is expected EUR direction will be determined the tone of the press conference. Modest upward revisions to staff growth forecasts will bode well for the EUR. Additionally in the wake of recent better data it is possible that the ECB shifts the balance of risks upwards to “broadly balanced” which could also help to stem the EUR’s recent decline. However, the ECB is unlikely to want to give markets the impression that it is turning more hawkish, with “forward guidance” set to be repeated.

While the BoE is highly unlikely to deliver any surprises today GBP is finding ongoing support from relatively positive data surprises including a series of purchasing managers’ indices released this week. Although the BoE will attempt to limit the rise in gilt yields via the use of forward guidance markets will find it difficult to ignore the better data. Given that positioning in GBP is generally short the currency is likely to remain supported both against the EUR and USD.

The BoJ is not likely to act on policy at its meeting today given that recent economic data both on the growth and inflation front are moving in line with expectations. However, there are still plenty of risks that higher inflation will not be sustained, implying potential fore more aggressive policy action in the months ahead. This, combined with relatively higher US bond yields relative to JGBs, will maintain upside pressure on USD/JPY over the coming weeks and months. In the near term USD/JPY may struggle around the 100 level but this is likely to prove to be a temporary barrier.

Posted in Bank of England, Bank of Japan, ECB. Tags: , , , . Leave a Comment »
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