Follow The Oracle

July 12, 2010 — Mitul Kotecha

Many investors are probably wishing they had the psychic abilities of Paul the octopus. The mollusc once again gave the correct prediction, by picking Spain to beat the Netherlands to become the winner of the World Cup. This ability would have been particularly useful for currency forecasters, many of which have been wrong footed by the move higher in EUR/USD over recent weeks.

Confidence appeared to return to markets over the past week helped by a string of rate hikes in Asia from India, South Korea and Malaysia, and firm data including yet another consensus beating jobs report in Australia. An upward revision to global growth forecasts by the International Monetary Fund (IMF) also helped, with the net result being an easing in double-dip growth concerns.

The good news culminated in a much stronger than forecast June trade surplus in China. However, China’s trade numbers will likely keep the pressure on for further CNY appreciation, and notably US Senators are still pushing ahead with legislation on China’s FX policy despite the US Treasury decision not to name China as a currency manipulator.

Political uncertainty on the rise again in Japan following the loss of control of the upper house of parliament by the ruling DPJ party. The JPY has taken a softer tone following the election and will likely remain under pressure. CFTC IMM speculative JPY positioning has increased but this has been met with significant selling interest by Japanese margin accounts who hold their biggest net long USD/JPY position since October 2009 according to Tokyo Financial Exchange (TFX) data.

In the absence of the prodigious abilities of an “oracle octopus” data and events this week will continue to show slowing momentum in G3 country growth indicators but not enough to warrant renewed double-dip concerns. Direction will be largely driven by US Q2 earnings. S&P 500 company earnings are expected to have increased 27% from a year ago according to Thomson Reuters.

There are several data releases of interest in the US this week but the main release is the retail sales report for June which is likely to record another drop over the month. Data and events in Europe include the Eurogroup finance ministers meeting, with markets looking for further insight into bank stress tests across the region. Early indications are positive but the scope of the tests remains the main concern. The July German ZEW survey will garner some interest and is likely to show a further slight decline in economic sentiment.

EUR/USD gains looked increasingly stretched towards the end of last week, as it slipped back from a high of around 1.2722. Technical resistance around 1.2740 will prove to be tough level to crack over coming days, with a pullback to support around 1.2479 more likely. CFTC IMM data reveals that short covering in EUR has been particularly sharp in the last week, with net short positions cut by over half, highlighting that the scope for further short covering is becoming more limited.

Conversely aggregate net USD long positions have fallen by over half in the last week as USD sentiment has soured, with longs at close to a three-month low. The scope for a further reduction in USD positioning is less significant, suggesting that selling pressure may abate.

Posted in Asia, Australia, central banks, China, Commodities, Currencies, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Germany, IMF, Interest rates, Japan, Monetary Policy, Politics, Singapore, South Korea, Spain, US, US administration. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Shaping up to be a “risk on” week

April 15, 2010 — Mitul Kotecha

It’s most definitely turning into a “risk on” week. On the earnings front both JP Morgan Chase and Intel beat forecasts whilst data releases did not disappoint either. In particular, US retail sales came in much stronger than expected. The Fed’s Beige Book also gave markets some good news to chew on. The reports from the twelve Federal Reserve Districts noted that economic activity “increased somewhat” since the March 3rd report.

The positive tone will continue today with the release of the March industrial production data, expected to show a strong gain over the month (consensus 0.7%), whilst both the Empire State and Philly Fed manufacturing surveys are set to post small gains in April, consistent with strengthening manufacturing activity in the months ahead.

Fed speakers have also been helpful for market sentiment. Fed Chairman Bernanke sounded a little more upbeat on the economy but highlighted the “significant restraints” remaining in the US economy. Bernanke maintained the “extended period” of low rates statement despite some speculation that the Fed was verging on removing this. The net impact of the testimony, improved data and earnings and firmer risk appetite is to keep the USD on pressure. In contrast, commodity currencies including AUD, NZD and CAD, will benefit, both from firmer risk appetite and an upturn in commodity prices.

Despite the positive reception to Greece’s debt auction there is not a lot of faith in the ability of Greece to weather the storm. Reports that Greece will need far more funding than has been initially promised by the EU/IMF – potentially as high as EUR 90 billion over coming years – together with worries about selling the loan package to the public in Germany and other eurozone countries, as well EU comments that Portugal will need further fiscal consolidation, have not done much good for confidence. Technically EUR/USD will see plenty of resistance around 1.3692.

After Singapore’s move to tighten monetary policy via the SGD revaluation, and following close on the heels of India, Malaysia and Vietnam, attention has turned to who’s next in line. South Korea must be a prime candidate, especially following data yesterday revealing a drop in the unemployment rate. Of course, China is very much in the spotlight and is set to embark on monetary tightening measures as well as CNY revaluation soon.

India is set to move again as early as next week, with inflation data today likely to seal the case for another hike (consensus 10.37% in March). The risk remains however, that many Asian central banks are moving too slowly to curb building inflation pressures and may find that they ultimately need to tighten more than they otherwise would have done.

China’s heavy slate of data released will if anything fuel greater expectations of an imminent CNY revaluation as well as monetary tightening. China’s economy grew a very strong 11.9% in Q1, above already strong consensus expectations, whilst CPI rose 2.4% YoY in March.

The growth data alongside further evidence of accelerating real estate prices highlight the risks of overheating in the economy and the need to act quickly to curb inflation threats. Given this expectation, firm risk appetite, and more follow through from Singapore’s FX move, the outlook for other Asian currencies remains positive.

Posted in Asia, central banks, China, Commodities, Currencies, Economics, Economy, emerging markets, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Germany, Greece, IMF, India, Interest rates, Monetary Policy, Singapore, South Korea, US. Tags: , , , , , , , , , , , , , , , , , , , , , . 1 Comment »

What to watch

March 7, 2010 — Mitul Kotecha

US February non-farm payrolls released at the end of last week put the finishing touches to a week that saw risk appetite continue to improve each day. There were no big surprises from the various central bank decisions including the RBA, BoE and ECB last week though Malaysia’s central bank did surprise by hiking 25bps. The RBA’s 25bps hike was a close call but in the event the Bank delivered a 25bps hike too.

Sentiment towards Greece has improved in the wake of the announcement of fresh austerity measures by the Greek government, which provoked a short covering EUR/USD rally from around 1.3435 lows though the EUR never really showed signs of embarking on the sort of rebound the massive short EUR speculative position had suggested.

US jobs report revealed that non-farm payrolls dropped by 36k and was all the more remarkable given the potentially very negative impact of severe weather distortions to the data. The data provides the setting for a firm start to the week in terms of risk appetite which will likely put the USD under a bit of pressure into the week.

This week’s events include central bank decisions in New Zealand and Switzerland. The RBNZ has already indicated that it sees no reason to raise interest rates in H1 and an unchanged decision will come as no surprise to the market. The NZD offers better potential for appreciation than the AUD in the short term and I suspect that a “risk on” tone at least early in the week will keep the Kiwi supported.

The SNB in Switzerland is also unlikely to offer any surprises in its rate decision with an unchanged outcome likely. It appears that the Bank has take a somewhat more relaxed tone to the strength of the CHF and any comments on the currency will be scrtunised for hints of intervention.

It probably isn’t much of a shock to expect Greece to remain in the spotlight this week as markets continue to deliberate whether Greece needs financial aid and if so, whether it will be provided by EU countries such as Germany and/or France, at least in terms of some form of debt guarantee.

Further tensions within Greece, with more strikes in the pipeline will test the resolve of the government to carry through austerity measures while likely acting as a cap on any EUR upside over coming days. I still think EUR/USD 1.3789 is a tough nut to crack.

Meanwhile, GBP/USD looks like it will find it tough going to gain much traction above 1.50 with political uncertainties in the form of a likely hung parliament as well as what looks like various efforts by the BoE officials to talk GBP down, likely to prevent an real recovery.

Posted in Australia, central banks, Currencies, Economics, Economy, Europe, Financial crisis, Fiscal/Budget, FX, Greece, US. Tags: , , , , , , , , , , , . Leave a Comment »

The Ball Is In the EU’s Court

March 4, 2010 — Mitul Kotecha

A run of data and events have continued this week’s theme of improving risk appetite. Greece lived up to expectations, with the government announcing a EUR 4.8 billion package of austerity measures amounting to around 2% of GDP. The US ADP jobs data was in line with expectations, with employment dropping by 20k in February, whilst ISM non-manufacturing index delivered an upside surprise to 53.0 in February, contrasting with a weaker eurozone Purchasing Managers Index (PMI).

Greece now believes it has lived up to its part of the bargain and the ball is now in the court of EU countries. However the issue of aid from the EU remains highly sensitive with little sign of any aid forthcoming from EU partners. Moreover, Germany dealt a blow to Greek hopes by stating that financial aid would not be discussed when the Greek Prime Minister visits tomorrow. Failure to provide such assistance could see Greece turn to the IMF. The key test will be the roll over of around EUR 22 billion of debt in April/May.

Markets have reacted positively to recent events, with Greek debt rallying and the EUR strengthening to a high of 1.3727 overnight amidst reports that regulators are investigating hedge fund trades shorting the EUR. The 17 February high of 1.3789 will provide strong resistance to further EUR/USD upside but the currency looks vulnerable to selling on rallies above its 20-day moving average around 1.3631. The EUR will be driven by news about any aid to Greece rather than data whilst the medium term outlook remains bearish.

In the US the steady but gradual recovery in the economy is continuing to take shape. The Fed’s Beige Book revealed that economic activity “continued to expand” but severe snowstorms restrained activity in several districts. Overall, the report revealed little new information following so soon after Fed Chairman Bernanke’s testimony. Today’s US releases are second tier, with a likely upward revision to Q4 non-farm productivity to around 6.5% and a 1.5% increase in January factory orders.

As has been the case recently the weekly jobless claims data will garner more attention than usual given that it has recently signaled deterioration in job conditions. One factor that could have distorted the claims as well as the payrolls data is harsh weather conditions in parts of the US. Indeed, this has led us to cuts in forecasts for February non-farm payrolls scheduled to be released tomorrow, with the real consensus likely to be much weaker than the -65k shown in the Bloomberg survey.

There are four central bank decisions of interest today no change is likely from all of them. Indonesia and Malaysia are both edging towards raising interest rates but are likely to wait until Q2 2010 before hiking. There will be no surprises if the Bank of England (BoE) and European Central Bank (ECB) leave policy unchanged too, but there will be particular interest in the ECB’s announcement on changes in liquidity provision and the BoE’s signals on the potential for further expansion in quantitative easing. A dovish signal from the BoE will deliver GBP a blow, leaving GBP/USD vulnerable to a drop back below 1.50.

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