What To Watch This Week

March 13, 2010 — Mitul Kotecha

A “crisis over” mode is being adopted across markets as worries about Greece wane and economic data provides support to recovery hopes, whilst importantly allaying fears of a “double-dip”. Equities, bonds and currencies are reacting accordingly; equities are close to year highs, bond yields have risen and spreads have narrowed, whilst the USD and JPY are weaker, and conversely risk currencies are stronger. Even EUR/USD pushed higher on its way to 1.3800 as a number of stops were cleared and shorts were squeezed.

The coming weeks will be important to determine whether there is any staying power in the upward move in risk assets. A lot of the February data in the US will likely be obscured by bad weather however, including industrial production figures this week, leaving markets with little to go on. In Europe, the key release is the March German ZEW investor confidence survey, and better news in Greece, will likely prevent a sharper decline in confidence.

After both the Swish National Bank (SNB) and Reserve Bank of New Zealand (RBNZ) unsurprisingly left policy unchanged last week this week sees the turn of the US Federal Reserve and Bank of Japan (BoJ). Neither central bank is likely to shift policy but the Fed statement will be looked upon for guidance on the timing of rate hikes. The comment in the FOMC statement that the Fed Funds rate is expected to remain low for an “extended period” is set to be retained, even if some FOMC members are itching to remove it soon.

The BoJ meeting will be particularly interesting. I have just returned from a week long trip in Japan and on the ground there is plenty of speculation that the BoJ will take extra action to combat deflation and weaken the JPY. Additionally comments by Japan’s Prime Minister and Deputy PM have highlighted the potential for action to weaken the JPY although the usual market hesitation to sell JPY into fiscal year end and repatriation talk may mean a weaker JPY path is not straightforward.

Greece will not move too far from the spotlight, with EU officials likely to give the official stamp of approval on Greece’s deficit cutting measures and plenty of discussion at the Eurogroup Finance Minister’s meeting and Ecofin meeting early in the week. Moreover, weekend press reports suggest that a bailout up to EUR 25 billion is close to being agreed. Other topics of conversation will include the possible formation of a European Monetary Fund, though this looks like it will be a non-starter given the many objections to it.

Overall, risk appetite is set to continue its upward trajectory, likely keeping the USD on the back foot. Some deterioration in USD sentiment was reflected in the fact that net long aggregate USD speculation positioning has turned negative again according to the latest CFTC Commitment of Traders (IMM) report. Much in terms of FX direction will depend on what the FOMC says rather than does tomorrow.

EUR/USD may take a crack at resistance around 1.3840 on improving Greek news but it is difficult to see much upside from current levels. The one to watch will be the JPY, especially if the BoJ embarks on aggressive actions at this week’s meeting, leaving USD/JPY plenty of scope to test resistance around 92.16.

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

Disappointments Galore

February 24, 2010 — Mitul Kotecha

Well the calm at the beginning of the week did not last very long.  Although the overnight price action can hardly be labelled as panic given both FX and equity volatility remain relatively well behaved, there is no doubt that worries are creeping back into the market psyche.  It seems that markets are once again trading on each piece of news and for the most part the news is not encouraging.  

A plethora of disappointments will set a negative tone for markets today.   Risk has come off the table in the wake of the worse than expected February German IFO business confidence survey and US Conference Board consumer confidence.   Cautious comments by Bank of England Governor King in which he kept the door open to further quantitative easing and a ratings downgrade of four of the largest Greek banks has added to the damage.

The German IFO was likely dealt a temporary blow by severe weather conditions.   The 10.5 point fall in US consumer confidence from an already relatively low level had no mitigating factors however, and revealed a deterioration in job market conditions, which combined with renewed weakness in jobless claims, does not bode well for next week’s US payrolls report, pointing to a decline of around 40k in February payrolls.

Overall, the market mood has darkened and there is little to turn sentiment around in the near term.  In prospect of likely weak reading for US payrolls next week and continuing worries about European fiscal/debt problems any improvement in risk appetite is likely to be limited.  This will help bond markets, the USD and JPY but most risk trades will face pressure. 

It is still worth being selective in FX markets.  The EUR remains the weak link and is set to struggle to make any headway, with upside likely to be restricted to resistance around 1.3747.  Similarly GBP is set to struggle in the wake of King’s comments as well as ongoing economic and deficit concerns, with GBP/USD vulnerable to a drop to around 1.5293.   In contrast, Asian currencies and commodity currencies look far more resilient.

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

What To Watch This Week

February 7, 2010 — Mitul Kotecha

As usual the G7 meeting will leave markets with little to chew on. G7 officials maintained their commitment to stimulus measures and timely exit strategies but there was little of note for FX markets aside from the usual comments about wanting to avoid excess FX volatility. There was certainly know step up in pressure on China to strengthen though a report prepared for the meeting did push for countries with inflexible currencies to make adjustments. Meanwhile US officials mouthed the usual “strong dollar” mantra.

Where does this leave markets this week? Well I must admit my bullish view on risk currencies is clearly suffering after a positive start to the year. The pullback in high beta currencies (those with the highest sensitivity to risk aversion) has been dramatic. I have highlighted many of the factors weighing on sentiment in previous posts and whilst I still think the US dollar will find itself under renewed pressure over coming months the current environment remains conducive to more USD and JPY buying and selling of currencies such as the AUD, NZD, CAD, GBP, NOK, SEK, ZAR etc.

Ironically the US and Japan have arguably more severe deficit/debt concerns than some of the European countries under pressure but as most of Japan’s debt is held domestically there is little worry of a collapse in JGBs. Unlike Japan foreign investors hold over half of US debt but are not yet losing confidence with US Treasuries though this may not last unless there is some tangible sign that the burgeoning US budget deficit is being reduced. For now, attention remains firmly focussed on Greece, Spain, Portugal and to a lesser extent Italy.

Like the G7 meeting the US January jobs report released at the end of last week will give little direction for markets. Although the 20k drop in payrolls and revisions to past months were slightly disappointing the surprise drop in the unemployment rate was better news. This week’s data highlights include the January US retail sales report and December trade balance. The sales data is likely to help allay some concerns about faltering economic recovery, with retail sales forecast to rise over the month despite a likely pull back in autos spending.

How will this play out for currencies this week? Overall, the risk off tone is set to continue though the moves are looking increasingly stretched. The USD, JPY and CHF will remain on the front foot whilst risk currencies will remain under pressure. The EUR is set to continue to struggle against the background of eurozone deficit concerns and after its dive through 1.40 last week 1.35 now looms large. Meanwhile, the AUD may also struggle following the recent reassessment of interest rate expectations after the recent Reserve Bank of Australia (RBA) meeting in which interest rates were left unchanged.

UK markets will focus on the Quarterly Inflation Report from the Bank of England though the political situation may hold some interesting implications for GBP if polls continue to show that the gap between the governing Labour party and Conservative opposition continues to narrow. Prospects of a hung parliament will hardly hold any positive implications for GBP, a prospect which could limit any potential for GBP to recover ahead of May elections. The drop below 1.60 for Cable (GBP/USD) could extend further, especially as the BoE has kept the door open to further asset purchases if needed.

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Central banks in the spotlight

February 1, 2010 — Mitul Kotecha

The market mood continues to be weighed down by a combination of worries including monetary tightening in China and Greece’s debt woes. Consequently, risk aversion has taken a turn for the worse over the last couple of weeks. Measures of currency and equity market volatility have also spiked. Meanwhile, risk currencies have remained under pressure, especially those that are most sensitive to risk aversion including AUD, NZD, CAD, and a long list of emerging market currencies.

Greece’s problems remain a major drag on the EUR, with speculative sentiment for the currency dropping close to the all time low recorded in September 2008, according to the CFTC IMM data. Further developments including news that the European Commission will officially recommend that Greece should implement more severe cuts on public sector spending are unlikely to help to reverse negative sentiment for the currency. A lack of confidence and scepticism over Greece’s ability to cut its budget deficit suggest little respite for the EUR in the weeks ahead.

Markets will have plenty of other things to focus on this week, with various manufacturing and service sector PMIs, four major central bank decisions, and the January US non-farm payrolls report, due for release. The PMIs are likely to confirm that output in both manufacturing and service industries remains expansionary but only consistent with limited growth rather than the rapid rebound in activity seen following past recessions.

The most interesting central bank decision this week is likely to be that of the Reserve Bank of Australia. Recent data has if anything given more reason for the central bank to raise interest rates, including the latest release which was the TD Securities inflation gauge, which jumped 0.8% in January, the biggest increase in 6-months. Although a hike is now largely discounted, some hawkish rhetoric from the RBA could be sufficient to give the AUD some support.

Although the UK Bank of England is unlikely to shift policy at its meeting on Thursday the statement will be scrutinized for clues as to whether quantitative easing is over. Any indication that there will be no further QE measures will play positively for GBP given that it has been restrained by speculation that the BoE will increase asset purchases. No change is also expected by the ECB but once again Greece will likely dominate the press conference. Meanwhile Norway’s Norges Bank is likely to pause in its policy of gradual tightening.

Clearly the funding currency of choice, the USD, has been one of the main beneficiaries of higher risk aversion and this has been reflected in the latest CFTC Commitment of Traders report, which shows that net short aggregate USD speculative positions have dropped sharply, with USD positioning close to flat again. Similarly, the other beneficiary, namely the JPY, has also seen a significant shift in positioning as shorts have been covered. Expect more to come.

Appetite for carry trades was not be helped by the news that the UK’s Lord Turner has signalled a regulatory crackdown on FX carry trades. The report in the UK press fuelled a sell of in JPY crosses but is unlikely to have more than a short term market impact given the practical difficulties in regulating carry trades. Nonetheless, the fact that speculative positioning is still quite long in the AUD, NZD and CAD suggest scope for more downside in such currencies in the current risk averse environment.

Posted in Asia, Australia, central banks, China, Currencies, Economics, Economy, emerging markets, Europe, Financial crisis, Fiscal/Budget, FX, Greece, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

PIIGS fears fuelling risk aversion

January 29, 2010 — Mitul Kotecha

Risk aversion has come back with a vengeance over the last 10 days driven by a host of concerns that continue to damage market sentiment. As has been evident over the past year the USD and JPY remain the best currency plays against the background of rising risk aversion and both currencies look well supported.

Market concerns are not going away quickly but some of the fears plaguing markets have at least receded especially on the US political front, with Obama’s State of the Union address, Geithner’s testimony on AIG and Bernanke’s reappointment all passing without too much incident, at least from a market perspective. I still believe that market fears are overblown but it is clearly evident that the market is not in the mood to concur. More pain is likely in the weeks ahead.

Euro-sovereign spreads continue to suffer from the ongoing Greek saga whilst the other major fear remains further monetary tightening in China. Rumours that China is about to imminently revalue the CNY are also running rife. The bigger than expected hike in the reserve ratio in India reflects the fact that Asia is on a faster track to tighten policy than Western economies.

As regular readers probably noticed, my articles on econometer.org have been sporadic recently. This is due to the fact that I have been on the road for the last two weeks giving client seminars across several countries in Asia. Without giving too much away it is evident that pessimism is pervasive and most investors I polled are looking for a “W” or “double dip” profile for economic growth in the G7 economies over coming months. Hardly anyone looked for a “V”.

The other casualty emanating from Greece’s woes, as well as worries that other European PIIGS (Portugal, Italy, Ireland, Greece, Spain) face ratings downgrades, is the EUR. EUR/USD slipped below the psychologically important level of 1.40 this week and is showing no sign of turning around. Warnings by S&P ratings that Portugal faces challenges on the fiscal front show that these sovereign concerns will be with us for a long while yet.

After letting investors believe that the European Commission would offer no support for Greece, there appears to be a growing realization that Greece is not simply a local problem but a Euro wide problem, as noted by European Commission President Barroso. Whilst this may be good for Greek debt the path to recovery is still likely to be a massively painful one, and the EUR may gain little support from this news.

The UK has not escaped the clutches of ratings agencies and warnings by S&P that UK banks are no longer among the “most stable and low-risk” in the world highlights the headwinds faced by GBP at present. The weaker than expected out-turn for Q4 GDP (0.1%) highlights the fact that UK economic recovery is fragile, which in turn plays negatively for the banking sector. This news has put a break on GBP but there appears to be plenty of demand for GBP above 1.600 vs USD.

Posted in Asia, Bond markets, central banks, China, Currencies, Economics, Economy, emerging markets, Europe, Financial crisis, Fiscal/Budget, FX, Greece, India, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »
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