USD weaker, EUR resilient, JPY supported, CHF pressure

August 30, 2011 — Mitul Kotecha

Why has the USD come under pressure even after Fed Chairman Bernanke failed to signal more QE? The answer is that Bernanke offered hope of more stimulus and gave a shot in the arm to risk trades even if QE3 was not on the cards. Consequently the USD has looked vulnerable at the turn of this week but we suspect that a likely batch of soft US data releases over coming days including the August jobs report at the end of the week, ISM manufacturing survey on Thursday and consumer confidence today, will erase some of the market’s optimism and leave the USD in better position. The FOMC minutes today may also give some further guidance to the USD as more details emerge on the potential tools the Fed has up its sleeve.

The EUR’s ability to retain a firm tone despite the intensification of bad news in the eurozone has been impressive. Uncertainty on various fronts in Germany including but not limited to concerns about the outcome of the German Bundestag vote on the revamped EFSF on September 30, German commitment to Greece’s bailout plan and German opposition party proposals for changes to bailout terms including the possibility of exiting the eurozone, have so far gone unnoticed by EUR/USD as it easily broke above 1.4500. EUR was given some support from news of a merger between Greece’s second and third largest banks. Likely weak economic data today in the form of August eurozone sentiment surveys may bring a dose of reality back to FX markets, however.

The lack of reaction of the JPY to the news that Japan’s former Finance Minister Noda won the DPJ leadership and will become the country’s new Prime Minister came as no surprise. The JPY has become somewhat used to Japan’s many political gyrations over recent years and while Noda is seen as somewhat of a fiscal hawk his victory is unlikely to have any implications for JPY policy. Instead the JPY‘s direction against both the USD and EUR continues to be driven by relative yield and in this respect the JPY is likely to remain firmly supported. Both US and European 2-year differentials versus Japan are at historic lows, with the US yield advantage close to disappearing completely. Until this picture changes USD/JPY is set to languish around current levels below 77.00.

EUR/CHF has rebounded smartly over recent weeks, the latest bounce following speculation of a fee on CHF cash balances, with the currency pair reaching a high of 1.1972 overnight. The pressure to weaken the CHF has become all the more acute following the much bigger than anticipated drop in the August KOF Swiss leading indicator last week and its implications for weaker Swiss growth ahead. The ‘risk on’ tone to markets following Bernanke’s speech has provided a helping hand to the Swiss authorities as safe haven demand for CHF lessens but given the likely weak slate of economic releases this week his speech may be soon forgotten. Nonetheless, the momentum remains for more EUR/CHF upside in the short term, at least until risk aversion rears its head again.

Posted in central banks, Currencies, Economics, Economy, Europe, eurozone, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Germany, Greece, Japan, Monetary Policy, Switzerland, US, US administration. Tags: , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Japan FX Measures Underwhelm

August 24, 2011 — Mitul Kotecha

Currencies continue to show remarkable stability in the face of elevated risk aversion which has prompted huge volatility in other asset markets. Although FX volatility has risen over recent weeks its rise is nothing compared to the jump in the VIX ‘fear gauge’ equity volatility measure. FX markets are in some form of limbo where there are conflicting forces at play and where there is no obvious currency to play. The lack of clarity in markets suggests that this situation will not change quickly.

The USD (index) is trading at the lower end of its recent ranges and verging on a retest of its July 27 low around 73.421, with the currency perhaps suffering from expectations that Fed Chairman Bernanke will announce a desire to embark on more quantitative easing at Friday’s Jackson Hole symposium. Its losses could quickly reverse as such expectations are quickly dashed.

Indeed, while Bernanke will likely keep all options open any hint at QE3 is unlikely as the Fed maintains a high hurdle before any prospect of further quantitative easing is entertained. One option on the table is ‘sterilised’ large scale asset purchases which would not result in an increase in the size of the Fed’s balance sheet. This would be far less negative for the USD than a fresh round of QE and may even prompt a rally in the currency as markets shift away from the idea of QE3.

The USD will benefit from high risk aversion except against safe havens such as the CHF and JPY. In this respect the USD remains a better bet than the EUR which has failed to garner much benefit from renewed ECB peripheral bond buying. Nonetheless, data yesterday failed to feed into negative EUR sentiment despite mixed manufacturing surveys and a sharp drop in the German ZEW investor confidence survey. EUR/USD remains trapped in a broad 1.42-1.45 range.

News that Moody’s ratings agency has downgraded Japan’s sovereign ratings by one notch to Aa3 is unlikely to have much impact on the JPY. Moody’s left the outlook stable while unlike the US and Europe around 95% of Japanese debt is held domestically, suggesting little FX and JGB impact. USD/JPY continues to garner some influence from yield differentials and given that the US bond yield advantage versus Japan has continued to narrow, USD/JPY continues to face downward pressure.

Japan announced measures to deal with JPY strength including the creation of a $100 billion emergency credit facility. However, the main impact on the JPY could come from increased monitoring of FX transactions with firms having to report on FX positions held by dealers. The statement made no comment on FX intervention and this is where there will be most disappointment for JPY bears. Overall, the actions are somewhat underwhelming and are unlikely to have much impact on the JPY. If anything, the JPY may actually strengthen given the lack of comment on FX intervention. USD/JPY downside could face strong technical support around 75.93, however.

Posted in central banks, Currencies, Economics, Economy, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Germany, Japan, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Pressure, panic and carnage

August 8, 2011 — Mitul Kotecha

Pressure, panic and carnage doesn’t even begin to describe the volatility and movements in markets last week. If worries about global economic growth and the eurozone debt crisis were not enough to roil markets the downgrade of the US sovereign credit rating after the market close on Friday sets the background for a very shaky coming few days. All of this at a time when many top policy makers are on holiday and market liquidity has thinned over the summer holiday period.

The downgrade of US credit ratings from the top AAA rating should not be entirely surprising. After all, S&P have warned of a possible downgrade for months and the smaller than hoped for $2.1 trillion planned cuts in the US fiscal deficit effectively opened the door for a ratings downgrade. Some solace will come from the fact that the other two main ratings agencies Moody’s and Fitch have so far maintained the top tier rating for the US although Fitch will make it’s decision by the end of the month.

Comparisons to 2008 are being made but there is a clear difference time this time around. While in 2008 policy makers were able to switch on the monetary and fiscal taps the ammunition has all but finished. The room for more government spending in western economies has now been totally used up while interest rates are already at rock bottom. Admittedly the US Federal Reserve could embark on another round of asset purchases but the efficacy of more quantitative easing is arguably very limited.

Confidence is shattered so what can be done to turn things around? European policy makers had hoped that their agreement to provide a second bailout for Greece and beef up the EFSF bailout fund would have stemmed the bleeding but given the failure to prevent the spreading of contagion to Italy and Spain it is difficult to see what else they can do to stem the crisis.

Current attempts can be likened to sticking a plaster on a grevious wound. Although I still do not believe that the eurozone will fall apart (more for political rather than economic reasons) eventually there may have to be sizeable fiscal transfers from the richer countries to the more highly indebted eurozone countries otherwise the whole of the region will be dragged even further down.

Where does this leave FX markets? The USD will probably take a hit on the US credit ratings downgrade but I suspect that risk aversion will play a strong counter-balancing role, limiting any USD fallout. I also don’t believe that there will be a major impact on US Treasury yields which if anything may drop further given growth worries and elevated risk aversion. It is difficult for EUR to take advantage of the USDs woes given that it has its own problems to deal with.

Despite last week’s actions by the Swiss and Japanese authorities to weaken their respective currencies, CHF and JPY will remain in strong demand. Any attempt to weaken these currencies is doomed to failure at a time when risk aversion remains highly elevated, a factor that is highly supportive for such safe haven currencies. From a medium term perspective both currencies are a sell but I wouldn’t initiate short positions just yet.

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

Swiss franc to remain strong

August 3, 2011 — Mitul Kotecha

Given the uncertainties enveloping both the US and Europe safe haven and various emerging market currencies have looked increasingly attractive. Currencies that remain on top in the current environment are the CHF and to a lesser extent the JPY, much to the chagrin of the Swiss and Japanese authorities. Indeed, in reaction to unwanted CHF strength the Swiss central bank, SNB unexpectedly cut interest rates and said it will increase CHF liquidity to the money markets. The CHF fell in the wake of the announcement but the impact may prove short lived.

Both the JPY and CHF have registered a strong correlation with risk aversion over the last 3-months, strengthening as risk aversion has intensified. In particular, the CHF has been the best performing major currency this year and shows no sign of turning around despite the fact that it has already strengthened by around 21% against the USD and over 12% against the EUR. The Swiss National Bank had even ceased from intervening in the currency markets given the lack of success and pain on the SNB’s balance sheet.

The Japanese authorities last intervened in the FX market in March 2011 following the devastating earthquake in the country. However, despite the fact that the JPY has strengthened after a brief period of success, the authorities have been reluctant to intervene since. The major explanation for a lack of intervention is that the Japanese authorities blame the drop in USD/JPY on USD weakness rather than inherent JPY strength. A more accurate reason is that the yield differential between the US and Japan has narrowed, leading to JPY strength versus USD while more recently rising risk aversion has pushed the JPY higher.

I am bearish on both the CHF and JPY over the medium term but clearly any drop in these currencies is taking longer than initially anticipated. Higher relative yields taken together with some normalisation in risk appetite will help but the risks at present are still skewed for further CHF and JPY strength in the short term given that risk aversion remains elevated. The fact that peripheral bond spreads in Europe have continued to widen will only raise the attraction of the CHF as a safe haven currency so despite the SNB’s new measures, it may do little to prevent further strength in the currency.

Posted in central banks, Currencies, Economics, Economy, Europe, eurozone, FX, Interest rates, Japan, Switzerland, US. Tags: , , , , , , , , , , . 3 Comments »

Edging Towards A European Deal For Greece

July 21, 2011 — Mitul Kotecha

The momentum towards some form of agreement at the Special EU Summit today is growing, with French and German leaders reaching a “joint position on Greece’s debt situation”. Details of this position are still unknown, however. EUR has found support as expectations of a positive outcome intensify.

However, given that positive news is increasingly being priced in, and the market is becoming increasingly long, upside EUR potential will be limited even in the wake of a comprehensive agreement. A break above EUR/USD resistance around 1.4282 would bring in sight the next key resistance level around 1.4375 but this where the rally in EUR/USD is set to be capped.

Prospects of a major US debt default or at the least a government shutdown appear to be receding as the US administration has indicated some willingness to opt for a short term increase in the US borrowing limit to give more time for a bigger deficit reduction deal to be passed by Congress. Meanwhile, there will be further news on the deficit reduction plans put forward by the “gang of six” US senators, with a press conference scheduled for later today.

Debt ceiling negotiations are likely to be the main focus of market attention, with the Philly Fed manufacturing survey and weekly jobless claims relegated to the background. A speech by Fed Chairman Bernanke is unlikely to deliver anything new today. The USD is likely to be on the back foot given expectations of a deal in Europe and improved risk appetite but we expect losses to be limited.

The JPY continues to defy my bearish expectations. Over recent days the US yield advantage over Japan in terms of 2Y bonds dropped to multi-year lows below 20bps. Given the high correlation between USD/JPY and yield differentials, this has corresponded with the fall below 80.00.

Expectations of JPY weakness versus USD is highly dependent on the US – Japan yield gap widening over coming months. For this to happen it will need concerns about the US economy and expectations of more Fed asset purchases to dissipate, something that may not happen quickly given the rash of disappointing US data releases lately.

GBP found itself on the front foot following the release of the Bank of England Monetary Policy Committee minutes, which were less dovish than anticipated. They also revealed that the BoE expects inflation to peak higher and sooner than previously expected. However, the fact that the overall tone was similar to the last set of minutes meant there was little follow through in terms of GBP.

Further direction will come from June retail sales data today and forecasts of a bounce in sales will likely help allay concerns about a downturn in consumer spending. Nonetheless, GBP is still likely to struggle to break through resistance around 1.6230 versus USD.

Posted in central banks, Currencies, ECB, Economics, Economy, Europe, eurozone, Federal Reserve, Financial crisis, Fiscal/Budget, France, FX, Germany, Greece, Interest rates, Japan, Monetary Policy, New Zealand, UK, US, US administration. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »
« Older posts
Newer posts »