EUR/JPY ascent shows no sign of stopping

February 4, 2013 — Mitul Kotecha

Data releases globally continue to show that economic conditions are strengthening. The latest indicator to lend support to this view was the January US jobs report, which taken together with past revisions revealed that job market conditions were better than previously thought over recent months. The report labelled as a “goldilocks” outcome also revealed a slight rise in the unemployment report, implying that there is little chance of any consequent shift in the Fed’s highly accommodative stance.

More broadly global manufacturing confidence indices also revealed gains (albeit with some divergence in Europe) and point to expansion in output in the months ahead in many countries. The data also suggest that weakening in economic indicators in Q4 last year including the surprise drop in US Q4 GDP was merely a setback rather than a renewed slide into recession. All of this leaves markets in rather buoyant mood as reflected in the ongoing gains in risk assets over the past few weeks and positive end to last week.

All is not rosy however, and politicians may yet ruin the day as political frictions in the US over spending cuts and a new budget have yet to be resolved. Meanwhile, elections in Italy on 24/25 February will provoke more nervousness as they approach. The EU Summit on 7/8 February will also be in focus as politicians attempt to salvage a deal on the EU budget after talks broke down in November 2012.

A light data calendar this week will mean that central bank decisions will garner most attention over coming days although I expect no change in policy from the European Central Bank, Bank of England and Reserve Bank of Australia. Risk assets will therefore not find any support from central banks this week. In particular the ECB’s stance of contracting its balance sheet continues to run counter to the more aggressive easing from other central banks, with the pain on an already weak Eurozone economy accentuated by a stronger EUR. Indeed, commercial banks’ LTRO repayments to the ECB may have helped to propel the EUR even higher.

Despite the ongoing upward momentum of USD/JPY the USD looks set to remain under downward pressure in general although there was notably some short covering according to the latest CFTC IMM report. The JPY shows no sign of reversing its losses as a combination of official rhetoric, improving risk appetite and growing use as a funding currency intensify the pressure on the currency. In particular, EUR/JPY’s ascent shows not sign of stalling into this week, with speculative longs in this currency pair at their highest level since May 2007.

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JPY and GBP to slip further

January 29, 2013 — Mitul Kotecha

Market gyrations were relatively limited overnight, with a rise in the VIX fear gauge and rise in Chinese equities the most notable market moves overnight. US data was mixed, with enthusiasm over a solid gain in December durable goods orders tempered by a drop in pending home sales. Notably the Baltic Dry Index has extended its decline over recent days, suggesting that the risk rally is losing some steam.

Nonetheless, core debt yields continue to test important psychological levels, with the 2% barrier in sight for 10 year US Treasuries. Data and events today include a US consumer confidence, for which we expect a slight decline in January, and various European Central Bank speakers. Additionally, the ECB’s main refinancing operation (MRO) will be scrutinised to determine bank’s health following last week’s LTRO payback. Overall, direction looks limited ahead of this week’s Fed FOMC decision and US jobs report.

The JPY’s drop has proven to be relentless. Despite being blamed for instigating a currency war Japanese officials are showing little let up in their push for JPY weakness. Although there has been some widening in the US Treasury and German bunds yield advantage over Japanese JGBs it does not fully account for the sharp JPY move. Interestingly speculative JPY short positions have actually lessened, implying that the drop in the JPY is attributable to other investor classes.

Additionally Japan has registered net portfolio inflows over recent weeks and so cannot explain the JPY’s drop. One factor that is weighing on the JPY is the improvement in risk appetite; USD/JPY is the most correlated currency with our risk barometer over the past 3 months. As risk and yield appetite has picked up JPY has effectively regained its mantle as funding currency. USD/JPY will face some tough resistance levels from around the 91.48 level, but so far the currency pair has made short work of breaking through resistance.

In one respect GBP’s drop against the USD and EUR reflects a reversal of safe haven flows similar to JPY. Notably however, GBP has not been correlated with the JPY. Its decline is more associated with renewed UK economic worries and in turn expectations of further Bank of England asset purchases, especially under the helm of a new governor. Moreover, speculation of a credit ratings downgrade has not been helpful to GBP. The net result is a reduction in speculative interest and further selling pressure.

Fortunately for the UK economy a weaker currency is no bad thing unless it provokes growing inflationary pressures. Given the dovish noises from incoming BoE Governor Carney, it looks as though there is little concern on this front. Manufacturing confidence data at the end of this week is unlikely to dispel economic concerns, leaving GBP vulnerable to further slippage.

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USD under pressure, except versus JPY

January 14, 2013 — Mitul Kotecha

Following another positive week for risk assets where equities in particular benefitted from substantial capital inflows this week is unlikely to look much different. A host of earnings, especially from financials will help dictate the equity market and in turn risk tone over coming days. There will also be plenty of focus on speeches by various Fed and European Central Bank (ECB) officials including Fed Chairman Bernanke today.

The week will start off in more subdued fashion however, with a Japanese holiday and little fresh news to digest over the weekend. Hope and faith in global economic recovery helped by data releases in the US and China in particular, have helped to calm markets while there is little angst as yet about the looming debt ceiling / spending cut negotiations in the US.

Despite the rush into equities, core bond yields appear to have hit a short term ceiling. Meanwhile, the USD is likely to maintain a weaker tone over the short term except versus JPY where the currency pair has broken through key technical barriers on the top side and is verging on a break of 90.00 helped by more comments over the weekend by Japanese Prime Minister Abe pushing for a 2% inflation target to be implemented.

Data releases this week will maintain the growth recovery story in the US while the Eurozone will continue to show a weaker trajectory. In the US there are plenty of releases to chew on including December retail sales, inflation, industrial production, manufacturing surveys, housing starts, Michigan confidence, and the Fed’s Beige Book. Overall, US releases will help paint a picture of steady and gradual recovery.

In contrast the Eurozone data slate is more limited and what there is (German GDP, Eurozone industrial production) will be less impressive supporting the view of Eurozone economic underperformance over coming months. Admittedly this has yet to affect the EUR which continue to benefit from peripheral bond yield compression and receding crisis fears although EUR/USD will likely run into resistance around 1.3385 which if broken will open the door for a test of 1.3486.

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EUR and GBP slipping, JPY lower

January 10, 2013 — Mitul Kotecha

Slightly better market sentiment allowed equity markets in the US to close higher in the wake of earnings helped too boost sentiment but overall direction remains limited ahead of a plethora of earnings releases over coming days and more immediately the European Central Bank and Bank of England meetings today.

Fed speakers will also be watched closely, while bond auctions in Spain and Italy will be another key influence for Eurozone markets. Meanwhile, the VIX ‘fear gauge’ rebounded slightly but remains at a low level while the USD index continued its ascent and is likely to continue to remain firm.

The ECB and BoE are set to leave policy unchanged today but this will not prevent both EUR and GBP from losing ground against the USD. The principle risk to GBP revolves around the UK economy. Weaker data releases have restrained GBP both against the USD and EUR.

Given the likelihood that growth will not recover quickly this will continue to act as a weight on GBP in the months ahead. Only the fact that the Eurozone economy will look even weaker will allow GBP to appreciate versus EUR while relative US economic outperformance will ensure a relatively softer GBP versus USD.

The breach of GBP/USD’s 100 day moving average level around 1.6061 is a trigger for a steeper decline. Conversely EUR/GBP may register some further short term upside but technical indicators suggest a relatively flat picture for the currency pair over coming weeks.

It is clear that the Japanese authorities have a fresh determinism to weaken the JPY as reflected by the news that Japan purchased bonds issued by the European Stability Mechanism. Additionally pressure on the Bank of Japan to implement a 2% inflation target has not eased, with Prime Minister Abe continuing to highlight the prospects of a joint accord between the government and BoJ.

Reflecting these factors and the higher starting point for USD/JPY I have revised my forecast and now look for the currency pair to end 2013 at 92.00 versus 85.00 previously. It will not be a one way bet for the JPY, however. Its drop against the USD looks excessive especially as it has largely been driven by expectations rather than actual policy change. There is scope for disappointment should policy be less aggressive than hoped for.

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Sell USD / Asia FX on rallies

January 9, 2013 — Mitul Kotecha

The biggest move this year appears to have come from the VIX ‘fear gauge’ which has dropped sharply contributing to an overall improvement in risk appetite. Although the VIX dropped further overnight equity sentiment overall continues to sour as fiscal cliff euphoria faded further and markets brace for the reality of likely protracted negotiations to raise the debt ceiling and avert huge spending cuts.

Caution over a plethora of fourth quarter earnings reports over coming weeks is also limiting upside for risk assets. Economic drivers were thin on the ground overnight but weak German exports data (which likely contributes to an overall decline in GDP in Q4) an increase in Eurozone unemployment and rumours of a French ratings downgrade did not help.

In the US the news was a little better as small business confidence reversed its sharp November drop. A limited data slate today will leave markets focussed on upcoming earnings, with consensus estimates for Q4 at a relatively low 2.9% QoQ.

Asian currencies have registered mixed performances so far this year. Resistance from some Asian central banks, notably Korea, has limited the appreciation of currencies. The incentive to prevent further strength has increased especially as a key competitor the JPY has weakened.

Maintaining its robust performance over 2012 the PHP has been the best Asian FX performer so far in 2013 followed by the THB. Similarly the IDR has maintained its negative performance registered last year. SGD is also likely to underperform further as the currency finds itself being increasingly used as a funding currency for taking long positions in other Asian FX.

We note that risk appetite has a limited correlation with Asian currencies at present but firm capital inflows will continue to provide support, with a sell USD / Asia FX on rallies environment set to persist.

Posted in Asian currencies, Japan, Singapore, South Korea, US administration. Tags: , , , , , . Leave a Comment »
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