EUR and GBP outlook this week

February 10, 2014 — Mitul Kotecha

In Europe, the main focus will be on the preliminary estimate of Eurozone Q4 2013 GDP data which is likely to post a gain of 0.2% QoQ as most countries in the Eurozone are set to have recorded positive growth over the quarter. EUR traded more positively at the end of last week but looks like it will struggle to retain gains versus USD above its 100 day moving average around 1.3608.

Markets will also digest the decision by the German Constitutional Court to effectively defer a decision on Outright Monetary Purchases by the European Central Bank to the European Court of Justice. Although there will be some caution ahead of the March 18 final decision on OMT, EUR will find some, albeit limited relief as it seems less likely that the European Court will strike it down.

In the UK the Bank of England Quarterly Inflation Report will reveal an upward revision to growth forecasts but downward revisions to inflation and importantly an adjustment of forward guidance to a broader range of indicators rather than just unemployment. Indeed, as in the US the BoE will not give the impression that they are about to raise policy rates given the sharp fall in the unemployment rate. GBP/USD will be range bound ahead of the release of the QIR, with gains likely gapped around 1.6471.

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Equity outflows from Asia accelerate

June 26, 2013 — Mitul Kotecha

A slate of better than expected US data releases including May durable goods orders, new home sales and June consumer confidence data (the latter two releases reaching their highest levels since 2008) helped to boost risk appetite, spurring equity markets higher and the VIX ‘fear gauge’ lower.

Firmer US data came alongside soothing comments from China’s central bank PBoC, about liquidity conditions in the banking sector, with an official noting that it will keep money market rates at “reasonable levels”. The European Central Bank’s Draghi added to the fray by noting that Outright Monetary Transactions (OMT) was even more essential now, highlighting the ongoing backstop provided by potential ECB peripheral bond purchases.

Meanwhile the positive US data releases helped to push Treasury yields higher, with the 10 year yield breaching 2.6%. Commodities remained under pressure, with higher yields in particular weighing on gold prices.

The calendar is rather light today and will provide little market direction, with an Ecofin meeting in Europe, UK spending review and US Q1 GDP revision in tap. Expect some positive follow through from the firmer tone to European and US equities overnight which will support risk assets including EM currencies although concerns about tapering are from over.

The rout in equity markets over recent weeks has had a devastating impact on equity flows to Asia. The outflow of equity portfolio capital from Asia accelerated sharply over June. Month to data Asia has recorded $10.2 billion in outflows, a massive move out of the region given that total inflows year to data have now dropped to $8.7 billion. One more month at this pace of outflows would see Asia registering net outflows for the year.

Indonesia, South Korea and Taiwan have been hit the most over June but no country has recorded net equity inflows. Year to date India has registered the strongest equity inflows of $14.7bn while South Korea has registered the biggest outflows of $7.3bn.

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US dollar finding its feet

June 11, 2013 — Mitul Kotecha

Markets continue to second guess the Fed but the Fed’s Bullard did not provide much by way of clues overnight. Nonetheless, US Treasury yields continue to push higher. Taken together with an upgrade to US credit ratings by S&P ratings (in light of the better US fiscal outlook) provided some support to the USD. Data releases overnight provides little direction and a similarly lean data schedule today will leave markets without any major directional influences aside from reacting to the rise in US yields.

After dropping by around 3% the USD index looks to be showing greater stability and further gains are likely over coming weeks as the USD tracks US yields higher. Retail sales data on Thursday will provide more direction both to Treasuries and to the USD and a likely healthy reading expected ought to allow the USD to register further gains. Similarly June Michigan confidence data is likely to reveal that consumer sentiment remains at its strongest level since July 2007.

Conversely the EUR is unlikely to react well to the hearing in the German Constitutional court on a number of legal complaints in particular the ECB’s Outright Monetary Purchases (OMT) programme, with the German Bundesbank being of the most vociferous opponents of the programme. While the court is unlikely to rule against OMT, it will at the least highlight the divisions within the Eurozone over this and other policies.

The Bank of Japan’s inaction at its policy meeting today was met with disappointment. There was a significant minority expecting action especially the implementation of 2 year liquidity provisioning operations widely reported by the Japanese press. Consequently the JPY strengthened following the unchanged BoJ decision but its gains are likely to be limited. Relatively higher US yields suggest that the USD will renew its strength versus JPY.

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USD undermined by data, Gold under pressure

April 15, 2013 — Mitul Kotecha

Risk measures remain generally well supported, with markets remaining fairly resilient to Eurozone concerns as the European Central Bank (ECB) OMT threat continues to do its work to deflate tail risks. Even the EUR continues to sit stubbornly around 1.31 versus USD while Eurozone peripheral bonds remain supported.

The Eurogroup and Ecofin announcement of an extension of Irish and Portuguese loans and the revelation that Cyprus will need even more funds than previous estimates (EUR 23 billion compared to EUR 17.5 billion previously) has been taken in its stride by markets. Eurozone inflation and the April German ZEW investor confidence survey will be the highlights of the calendar in the region this week although neither should dent the generally supportive tone.

Firm risk appetite is contributing to some of the pressure on commodity prices, with the CRB commodities index losing further ground as precious metals slide. Gold prices have now entered a bear market given the more than 20% fall since September 2011 as ETF and speculative investors continue to exit. There is little sign that investors are about to let up the selling pressure, with the trend continuing to be lower.

Data releases this week in the US will be of particular focus to determine whether the economy is entering into renewed downward lurch or is facing a mere blip along the way to recovery. Indeed, the recent run of softer data including weaker than expected March retail sales and April consumer confidence data released at the end of last week have reinforced growth concerns while supporting US Treasuries and undermining the USD.

The Fed’s Beige Book will help give some indication of how growth is faring across the US while industrial production and housing starts ought to show some gains. Q1 13 earnings reports will also be in focus. The weakness in US data over recent weeks is likely to be merely a blip on the path to recovery but nonetheless the impact of the Sequester may be accentuating the softening in the growth indicators.

Elsewhere Japanese FX policy will come under scrutiny at the G20 meeting this week, with officials likely to press Japan to refrain from competitive currency devaluation echoing the message from the US Treasury’s semi-annual currency report to Congress at the end of last week. USD/JPY has lost some upside momentum as a result and is set to slip further, with support seen around 96.71.

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