Speculative data points to USD struggle

December 29, 2009 — Mitul Kotecha

The latest CFTC Commitment of Traders (IMM) data shows just how massive the shift in speculative USD positioning has been over recent weeks.  Net aggregate USD short positions (vs. EUR, JPY, GBP, AUD, NZD, CAD, CHF) have shifted from -172k at the beginning of December to -11k in the week ending Dec 22nd.   This corresponds with the sharp rally in the USD versus various currencies over the same period.  

The net speculative USD position is now at its highest since May 2009 and at this pace of improvement the market will be net long USD very quickly.  However, the data also suggests that there should be a degree of cautiousness in buying the USD from here.  The USD may simply be repeating the pattern seen in 2006 and 2007 when the USD strengthened into year end only to drop sharply in the weeks after. 

If the rally in the USD has largely been due to short covering into year end then this source of support for the USD is looking exhausted. Indeed it is difficult to argue that interest rate moves have helped the USD as correlations are still low between the USD index and US rate futures. The shift in USD speculative positioning may explain the inability of the USD to make much further headway over recent days and suggests difficulty for the USD in the days ahead, with the USD index likely to struggle to get above last week’s high o 78.449.

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Caution ahead of US payrolls

December 4, 2009 — Mitul Kotecha

The weaker than forecast November US ISM non-manufacturing, a negative UK press report about the problems in Dubai and caution ahead of the US jobs report have dampened risk appetite overnight though there is expected to be little action until the release of the US jobs report today, with some USD short covering likely ahead of the release.  The jobs data could add to disappoint, with data this week including the ADP jobs report, and the employment components of the ISM surveys consistent with a worse than consensus (-125k) reading.  

It was encouraging however, that jobless claims revealed a further decline (457k) to its lowest since November 2008 indicating further improvement in the jobs market, though the data will have little bearing on today’s payrolls data which as noted above will likely disappoint expectations.  A below consensus may fuel some increase in risk aversion and a slightly firmer USD though markets are most likely to settle into ranges in the near term. 

The JPY may make up some lost ground against the background of weaker equity performance.  Amidst the confusing messages on the JPY over recent weeks officials appear to be giving stronger hints at intervention, leaving the currency on the back foot over recent days.  The drop in the JPY may prove temporary however, if official rhetoric is not followed up by action; USD/JPY is likely to struggle to break through resistance around 88.60.  

Following the BoJ’s disappointing JPY P10 trillion operation announced this week attention turns to the announcement of new government stimulus measures which were reportedly expected today.  This may also prove disappointing however, as there appears to be disagreement between coalition partners on the size and composition of stimulus.  Finance Minister Hatoyama was expected to announce additional spending of up to JPY 4 trillion.  

There was no surprise that the ECB left the refi rate unchanged at 1% yesterday but some surprise in the steps to withdraw provision.  The ECB announced that the interest rate on the December 12-month tender will be indexed to the refi rate and that the full allotment at most of the ECB’s refinancing operations is extended until 13 April 2010 only. As much as ECB President Trichet tried to play down the perception that the steps were a signal of a tighter policy markets are unlikely to interpret it this way. 

Despite the shift in the ECB’s stance EUR/USD pared gains after reaching a high around 1.5141 but failed to test resistance at 1.5150 which is likely to provide strong resistance in the days ahead, reflecting the fact that markets had priced in a hawkish shift by the ECB already.   Going forward, if the market perceives the ECB as prematurely shifting towards a more hawkish stance against the EUR could suffer rather than find any support from such actions

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A Better Start To The Week

November 30, 2009 — Mitul Kotecha

The start of this week looks somewhat better compared to the end of last week. Although nervousness will remain amidst thinning liquidity, news that the UAE central bank “stands behind” local and foreign banks and will lend, albeit at a rate of 0.5% above the 3-month benchmark rate, will reassure investors that banks have sufficient liquidity in the wake of any losses suffered due to the Dubai Holdings debacle. This will see some improvement in risk appetite.

The news will unlikely prevent stock markets in the UAE, which open today following Eid holidays, from sliding, however. Attention will turn to the suspended Sukuk bonds and also to the extent of support (and any strings attached) provided by Abu Dhabi to Dubai. The support from the central bank will help markets outside of the UAE regain a little composure and limit demand for safe haven assets but the rally may prove limited until there is greater transparency.

Nonetheless, even if there is some relief at the beginning of this week due to some containment of the problems in Dubai nerves are likely to fray going into the end of the year, with the multi-month trend of improving risk appetite faltering. There have been plenty of reasons for markets to worry lately including concerns about the shape of economic recovery in the months to come as well as renewed banking sector concerns and these will not be allayed quickly.

Data this week in the US is unlikely to help to dampen growth concerns. The main event is the US November jobs report and although the magnitude of job losses is set to decrease the unemployment rate is set to remain stubbornly high around 10.2%. In addition to an expected decline in the November ISM manufacturing index suggests that growth concerns will intensify rather than lessen. This in turn highlights that any improvement in risk appetite this week will prove limited.

The other key events this week include interest rate decisions in Europe and Australia. Although the ECB is widely expected to leave rates on hold on Thursday, there will be plenty of attention on any details of the Bank’s “gradual” exit strategy. Whether the ECB offers new loans to banks at a variable interest relative to the current fixed rate will be taken as an important sign on the path of liquidity withdrawal. We believe the Bank will stick with a fixed rate. The RBA will take a step further and announce a 25bps interest rate hike tomorrow.

FX markets are likely to be buffeted by the gyrations in risk appetite but at least at the beginning of the week the USD is set to give up its recent gains, with EUR/USD likely to try and hold above 1.5000 as markets digest the better news coming from the UAE. The JPY will be a particular focus given the growing attention of the authorities in Japan. Finance Minister Fujii is quoted in the Japanese press that they won’t intervene in the FX market, which appears to give the green light to further JPY strength though I suspect that if USD/JPY drops below 85.00 again there will plenty of FX intervention speculation and in any case these comments have since been denied.

Posted in central banks, Currencies, Economics, Economy, FX, Interest rates, Japan, Middle East, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , . 4 Comments »

Dubai’s aftermath

November 27, 2009 — Mitul Kotecha

Dubai’s bolt out of the blue is hitting markets globally, with the aftershock made worse by the thin liquidity conditions in the wake of the US Thanksgiving holiday and Eid holidays in the Middle East.  The sell off followed news by government owned Dubai Holdings of a six month debt freeze.  Estimates of exposure to Dubai vary considerably, with European banks estimated to have around $40 billion in exposure though what part of this is at risk is another question. 

The lack of information surrounding the Dubai announcement made matters worse.  The aftermath is likely to continue to be felt over the short term, with further selling of risk assets likely.  Indeed, there is still a lot of uncertainty surrounding international exposure to Dubai or what risk there is to this exposure and until there is further clarity stocks look likely to face another drubbing.

The most sensitive currencies with risk aversion over the past month have been the JPY, and USD index, which benefit from rising risk aversion whilst on the other side of the coin, most Asian currencies especially the THB and KRW as well as the ZAR, and AUD look vulnerable to any rise in risk aversion.  JPY crosses look to be under most pressure, with the likes of AUD/JPY dropping sharply and these currencies are likely to drop further amidst rising risk aversion. 

The rise in the JPY has been particularly dramatic and has prompted a wave of comments from Japanese officials attempting to talk the JPY lower including comments by Finance Minister Fujii that he “will contact US and Europe on currencies if needed”.  So far, these comments have had little effect, with USD/JPY falling briefly through the key psychological level of 85.00, marking a major rally in the JPY from a high of 89.19 at the beginning of the week.  Unless markets believe there is a real threat of FX intervention by Japan the official comments will continue to be ignored.

It’s not all about risk aversion for the JPY, with interest rate differential playing a key role in the downward move in USD/JPY over recent weeks.  USD/JPY has had a high 0.79 correlation with interest rate differentials over the past month.  The US / Japan rate differential narrowed sharply (ie lower US rate premium to Japan) to just around 4.5bps from around 100bps at the beginning of August.  With both interest rate differentials and risk aversion playing for a stronger JPY the strong JPY bias is set to continue over the short term.

Is this the beginning of a new rout in global markets?  It is more likely another bump on the road to recovery, with the impact all the larger due to the surprise factor of Duba’s announcement as it was widely thought that Dubai was on the road to recovery.  The fact that the news took place on a US holiday made matters worse whilst the weight of long risk trades suggests an exaggerated fall out over the short term.

Posted in Asia, Currencies, Economics, emerging markets, equity markets, Europe, Financial crisis, FX, Interest rates, Japan, Middle East, Monetary Policy, US. Tags: , , , , , , , , , , , , , , . 1 Comment »

Buffer for risk trades

November 25, 2009 — Mitul Kotecha

Firmer data, most recently in the form of the stronger than expected US consumer confidence and dovish Fed comments as reiterated in the Fed FOMC minutes will provide a buffer for risk trades, supporting the USDs role as the prime funding currency over coming weeks.  Nonetheless, any improvement in sentiment will have to push against the weight of position adjustment into year-end as investors book profits on risk trades.  The net effect could be an increase in volatility especially in thinning liquidity expected in the wake of holidays in Japan and the Thanksgiving holiday in the US.

This could make it difficult for many asset markets to sustain key psychological and technical levels.  Whether the S&P 500 can hold gains above 1100 could prove significant as could EUR/USD’s ability to hold onto gains above 1.50.  The expiry of last week’s EUR/USD 1.48/1.51 option may provoke a move out of its range but there seems to be little appetite for a sustained break above the 23rd October high around 1.5061.  Even so, an upside bias is more likely given the likely softer tone to the USD. EUR/USD looks well supported around 1.4865.

Position adjustment towards the end of the year has been particularly evident in FX markets.  For instance, the latest CFTC Commitment of Traders’ data revealed that speculative investors have sharply reduced net long EUR positions into last week whilst there was a significant degree of short covering of GBP positions.  It is worth noting however, that aggregate USD net short speculative positions actually increased, largely due to a sharp jump in net JPY positioning, suggesting that overall sentiment for the USD remains very negative.

It is difficult to see a strong reversal in USD sentiment into year-end and the Fed’s commitment to maintaining interest rates at a low-level for an “extended period” taken together with hints of extending asset purchase programmes suggests little support to the USD over the short-term unless there is a more significant increase in risk aversion and or profit taking/book closing into year-end.  It seems that the impact of improved risk appetite is winning for now, giving no respite to the USD.

Posted in central banks, Currencies, Economics, Economy, equity markets, Europe, FX, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , . Leave a Comment »
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