Peering over the cliff

November 16, 2012 — Mitul Kotecha

As the US edges closer to falling off the fiscal cliff budget discussions between US President Obama and Congressional leaders commencing today will garner most attention. Conciliatory signs from both sides suggest some attempt at compromise but tough starting points mean that it will not be easy to match rhetoric with reality.

Markets are clearly in nervous mood, with US stocks closing lower as risk aversion edged higher. Disappointing earnings from Wal-Mart Stores taken together with a weaker than anticipated Philly Fed survey in November and weekly jobless claims added another layer of negativity to the market. Despite the US-centric fiscal cliff risks the USD remains firm although notably its pace of appreciation has slowed, with the currency likely to make little headway in the near term.

Although unsurprising, data in Europe confirmed that the region fell back into recession, an outcome that will do little to ease tensions. Hopes of a final agreement on Greece’s loan tranche at next week’s Eurogroup meeting may however, limit any damage to Eurozone markets. The EUR has shown signs of bottoming out and may take further advantage of the respite from a more restrained USD. There is little of interest on the data front today, with Eurozone current account data, US industrial production and TICS flows the main highlights.

On the political front the dissolution of parliament in Japan is the highlight, with markets continuing to push the JPY lower as expectations of more aggressive action after elections to the weaken the currency grow. The fourth consecutive downgrade of Japan’s economic assessment by the government highlights the urgency for such action.

Asian currencies are finding a little more resistance to further gains as the appreciation of the CNY has stalled over recent days. The most sensitive currencies to the CNY including KRW and TWD will likely face most resistance to further gains. In contrast those currencies that are more USD sensitive including INR and MYR could take advantage of any pause in USD index gains.

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CNY influence on Asian FX continues to grow

October 31, 2012 — Mitul Kotecha

Asian currencies remain generally well supported both by a softer tone to the USD in general as well as a stronger Chinese currency, CNY. Since the USD/RMB high of 6.3964 on 25 July the RMB has appreciated by around 2.4% vs. USD. This equates to an annualized pace of appreciation of around 6.2%. The RMB is unlikely to continue to strengthen at such a rapid pace and could even be prone to a softer tone into year end.

Potential renewed weakness in the CNY could presage downside risks to Asian currencies. Also worth noting is the fact that equity portfolio capital inflows to Asian have slackened over recent weeks (Indonesia, Philippines and Taiwan registered outflows over October), a factor that could also pose risks to Asian currencies.

The influence of the RMB on Asian FX has continued to grow. Correlations or sensitivities between Asian currencies and the CNY remain are stronger than Asian FX sensitivities to USD movements. The implication is that USD index gyrations are having less influence on Asian currencies.

The most correlated currencies with the CNY are KRW, SGD and TWD although all Asian currencies with the exception of the INR register statistically significant correlations with the movements of USD/CNY. Notably our quantitative models show that the KRW, SGD and TWD are overbought relative to their short term fair value estimates.

While the USD is still influential in driving some Asian currencies several currencies including KRW, CNY and IDR do not possess a statistically significant sensitivity to the USD over the past 3-months. Should the CNY undergo renewed weakness it will mean that the currencies noted above namely KRW, SGD and TWD will be the most vulnerable to weakness given their high sensitivity to CNY.

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US dollar to edge higher

October 29, 2012 — Mitul Kotecha

As US elections approach the USD appears to be holding up reasonably well, edging higher against major currencies including EUR and JPY helped in some part by a recent increase in risk aversion. Notably Asian currencies remain firm taking their cue from a firmer CNY rather than the slightly stronger USD. The notable break below 1100 for USD/KRW highlights the still strong impetus for Asian currencies.

Although a fixation with the outcome of the US elections may limit market movements the USD is likely to remain generally well supported ahead of the important US October jobs report. In general US data this week will look relatively positive, with consumer confidence, the October manufacturing ISM survey and likely to move higher in October. Non farm payrolls in October are also likely to be stronger than the September increase although the unemployment rate may edge higher to around 7.9%.

In contrast progress in the Eurozone on the debt front is frustratingly slow, with little sign of any request for Spanish financial assistance. At least there appears to be some traction in Greece, with agreement on spending cuts amounting to around EUR 13.5 billion to be deliberated this week opening the door to the next disbursement of loans to the country. Lack of progress in Spain taken together with superior US data (note economic sentiment gauges in Europe are set to reveal a deterioration tomorrow) will weigh on the EUR, with the currency likely to continue to drift lower, with a test of 1.2825 on the cards.

The JPY has been a relatively exciting currency over recent days, having weakened against the USD in the wake of higher US bond yields. Expectations of additional easing by Japan’s central bank at its meeting tomorrow are also helping to put pressure on the JPY. The BoJ is expected to announce an additional JPY 200 billion of purchases of Exchange Traded Funds and additional purchases of JGBs. Such action has partly been priced in and while the JPY will remain under some short term pressure a sustained break above USD/JPY 80 appears unlikely unless the central bank delivers more aggressive measures than anticipated.

Posted in Asian currencies, Japan, Spain, US. Tags: , , , . Leave a Comment »

Equity flows to Asia surge

January 20, 2012 — Mitul Kotecha

Equity flows to Asia have begun the year in solid form. Although not quite as strong as in 2010 the pace of recent acceleration in flows has been more rapid, suggesting that it will soon overtake the year to date inflows seen over 2010. In total Asia has registered around $4.955 billion in foreign equity inflows. Korea has received the biggest inflows at $2.4 billion followed by India $1.04bn and Taiwan $1.03 billion.

The Indian rupee (INR) has been a clear beneficiary of such flows while the Korean won (KRW) has also strengthened. I suspect that official resistance may have limited Taiwan dollar (TWD) gains but clearly the risk on start to the year has resulted in strengthening inflows and in turn stronger Asian currencies.

Unless there is a disaster in Greece or elsewhere in Europe next week there is little to stop the short term trend but I remain wary over coming weeks and am cautious about extrapolating this trend forward. Like in 2010 and 2011 equity flows began the year strongly only to drop over following weeks and currencies were not slow to follow.

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Plenty of event risk

October 17, 2011 — Mitul Kotecha

This week is heavy with event risk, with a lot expected from EU leaders. So far the risk on tone to markets has held up, with for example the VIX fear gauge resting below the key 30.0. The G20 meeting over the weekend set the deadline for action for concrete solutions to the eurozone debt crisis for the October 23 EU Summit.

However, there will be little detail on issues such as banking sector recapitalisation, private sector involvement in any debt restructuring or ‘leveraging’ the EFSF bailout fund until the report on Wednesday night by the Troika on Greece. The reward to EU leaders would be the potential for more aid from the IMF but even now it seems that a German government official has poured cold water of a plan being announced at the EU Summit which will disappoint markets.

There are also plenty of data releases for markets to digest over coming days including inflation releases, manufacturing surveys and industrial production data in the US while in Europe the German IFO and ZEW surveys are scheduled for release. The data will follow on from the better than expected September US retail sales releases at the end of last week continuing to dampen expectations that the global economy is falling in recession though there will be a marked deceleration in European data.

Meanwhile the US Q3 earnings season rolls. The risk on tone will likely continue to weigh on the USD and weigh on bonds but unlike a few weeks ago when a lot of bad news was priced in, the scope for disappointment is becoming increasingly high.

Many currencies remain highly correlated with gyrations in risk and in this respect the improvement in risk appetite is good news for high beta / commodity. AUD, NZD, CAD and JPY are amongst the most sensitive currencies and therefore prone to a bigger reaction as risk improves, with the former three strengthening and the JPY weakening. Asian currencies poised to benefit from firmer risk appetite include INR and KRW, both with relatively high correlations with risk.

EUR/USD has made a solid recovery over recent days from its lows around 1.3146 spurred by hopes of action by European officials. Such hopes may yet be dashed but the EUR looks supported over coming days ahead of the EU summit Speculative positioning also reflects a slight improvement in EUR sentiment as IMM short positions have declined in the last week but its worth noting that this week’s European data are unlikely to be supportive for the EUR.

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