USD to edge higher

October 15, 2012 — Mitul Kotecha

The surprise rise in the US University of Michigan sentiment survey to its highest level in 5 years provides a better backdrop for asset markets at the start of the week although the follow through is likely to be limited. Chinese exports data may help sentiment its worth noting that Chinese imports were weak. Overall, it appears that the appetite for taking on equity risk is easing as prospects of disappointing US Q3 earnings and lingering growth concerns weigh on sentiment.

Markets may nonetheless, be given some encouragement from economic data this week including likely gains in September US retail sales, industrial production and October Empire State and Philly Fed manufacturing surveys. This will be echoed in Europe, with a second straight increase in the German ZEW investor confidence survey expected to be revealed in October. While the data will do little to ease global growth concerns it will at the very least suggest a renewed downturn is not on the cards.

Economic data may however, take a back seat once again as attention will turn to political developments around the EU Council meeting on 18-19 October. Any major developments are unlikely to emerge from the meeting although Spain and Greece will be on high on the agenda. The lack of progress in the eurozone towards a bailout in Spain and the distribution of Greece’s next loan tranche will once again restrain any positive tone to markets, leaving most asset markets within ranges.

Currencies do not look as though they are about to break out of recent ranges. Nonetheless, the USD will likely continue to edge higher against the background of growing cautiousness towards risk assets. Indeed, there has been some major short covering in the USD over the past week as reflected in CFTC IMM data and I expect the trend to continue as QE3 USD fears increasingly fade. Conversely, EUR short positions are building up once again and the lack of traction towards resolutions in Spain and Greece, point to growing EUR downside risks in the days ahead.

Posted in eurozone, US. Tags: , , , , . Leave a Comment »

Spain downgraded

October 11, 2012 — Mitul Kotecha

Pressure on Spain has intensified in the wake of a two notch downgrade to the country’s debt to just one notch above junk at BBB-. S&P cited “the significant risks to Spain’s economic growth and budgetary performance, and the lack of a clear direction in euro-zone policy”. The slow progress towards a sovereign bailout for Spain will have likely played a role in the decision, a factor that is also weighing on general market sentiment. The debt downgrade may on the margin increase the pressure on the Spanish government to request a formal bailout.

Nonetheless, risk assets including peripheral Eurozone bonds do not appear particularly stressed although it may only be a matter of time before pressure escalates. Italian bond supply today may give some further direction on this front. US Q3 earnings will have some bearing on sentiment too as concerns have grown that they will disappoint. With little on the data front (highlights include Eurozone country September inflation and US trade data) attention will focus on comments from the IMF meetings against the background of growing global growth worries.

Against this background the EUR is likely to continue to drift lower, with the currency set to test support just under the 1.2800 level AUD will have got a boost from the relatively positive September jobs report released this morning, which revealed a 14.5k increase in employment. The positive impact may slightly be mitigated by a rise in the unemployment rate to 5.4% from 5.3%, which also gives further evidence supporting the RBA’s recent rate cut. The data will at least help to alleviate some of the concerns about the jobs market following last month’s surprise drop in employment. My preference is to play AUD via going long positions versus EUR.

Posted in Australia, eurozone, Spain. Tags: , , , . Leave a Comment »

Strengthening risk appetite hitting the dollar

October 13, 2011 — Mitul Kotecha

Strengthening risk appetite is taking its toll on the USD, with the USD index now down around 3.5% from its 4 October peak. Although equity markets probably liked the news the USD was dealt another blow from the FOMC minutes which revealed that some Fed officials were keen on embarking on further large-scale asset purchases after recognizing that the impact of Operation Twist will not be so potent.

Earnings will have some impact on risk and in turn the USD, with Q3 earnings from JP Morgan and Google on tap today. However, risk appetite looks well supported and in a market that became long USDs very quickly, this suggests some scope for squaring long positions in the short term.

What comes next for the EUR? The currency has bounced from its lows and has made considerable ground against the USD over recent sessions. Markets quickly got over Slovakia’s initial rejection of the EFSF’s enhancement as agreement was reached by officials in the country to approve the mechanism in a second vote. However, there is not much news on the progress on issues such as European banking sector recapitalisation, ‘leveraging’ the EFSF or the any change in creditor participation in any Greek debt restructuring.

Although European Commission President Barroso gave some broad outlines of what should be done to recapitalise banks disagreement among officials meant that there was little detail. Perhaps no news is good news and in any case markets will have to wait for the delayed EU Summit for further news, but the longer the wait the greater the scepticism and attendant downside risks to EUR.

The Swiss National Bank must be content with their stance on the CHF. Since the imposition of a ceiling for CHF versus EUR at 1.2000, and after an initial sharp jump higher the currency pair has continued to edge upwards. Meanwhile, speculation that the SNB may even raise the ceiling to 1.30 has grown as domestic complaints such as those from the country’s largest telecoms operator yesterday about the ongoing strength in the currency, continue.

The SNB has not indicated that it favors such a move and may be content with a gradual decline in the CHF as is taking place now, but should the fragile market calm at present disintegrate the SNB may have another battle on their hands as appetite for the currency strengthens anew. On the top side resistance is seen around 1.2469 for EUR/CHF.

Like many other high beta currencies AUD is being influenced less by domestic factors and more by risk aversion. Even more influential to the direction of AUD/USD is the movement in commodity prices and like risk aversion this had a negative influence on AUD as commodity prices dropped sharply over September.

Due to a bounce in both risk and commodities AUD has bounced sharply from its recent lows back above parity with the USD. AUD will have found further support from the firm September jobs report today. It is difficult to go against rising risk appetite at present but there is still a significant risk that hopes of a solution to the eurozone’s woes do not materialise while growth expectations are pared back further. Against this background the AUD will remain susceptible to sharp

Posted in Australia, central banks, ECB, Economics, Economy, equity markets, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Greece, Interest rates, Monetary Policy, Switzerland, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Earnings in focus

October 19, 2009 — Mitul Kotecha

The majority of US Q3 earnings have beaten market expectations resulting in a boost to risk appetite and further pressure on the US dollar. At the time of writing, 61 companies have reported earnings in the S&P 500 and an impressive 79% have beaten forecasts according to Thomson Reuters. This week there are plenty of earnings on tap and although a lot of positive news appears to be priced in the overall tone to risk appetite remains positive. This implies a weaker US dollar bias given the strong negative correlation between US equities and the USD index.

Aside from the plethora of earnings there are plenty of data releases on tap this week including housing data in the US in the form of building permits and starts as well as existing home sales. The data will likely maintain the message of housing market stabilisation and recovery in the US. There will also be plenty of Fed speakers this week and markets will once again scrutinize the speeches to determine the Fed’s exit strategy.

Highlights this week also include interest rate decisions in Canada and Sweden. Both the BoC and Riksbank to leave policy unchanged and expect a further improvement in the German IFO in October though at a more gradual pace than in recent months. There will be plenty of interest in the UK MPC minutes given conflicting comments from officials about extending quantitative easing. RBA minutes will be looked at for the opposite reason, to determine how quickly the Bank will raise interest rates again.

The USD index managed a slight rebound at the end of last week but is likely to remain under pressure unless earnings disappoint over coming days. US dollar Speculative sentiment became more bearish last week according to the CFTC IMM data, with dollar bloc currencies including the AUD, NZD and CAD benefiting the most in terms of an increase in speculative appetite. GBP short positions increased to a new record but the rally towards the end of last week may have seen some of these short positions being covered. Overall any recovery in the USD this week may just provide better levels to go short.

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

What to watch this week

October 12, 2009 — Mitul Kotecha

Over recent days trading has been characterised by dollar weakness, stronger equities, rising commodity prices and most recently an increase in US bond yields, the latter driven by some slightly hawkish Fed comments. Whether the tone of stronger attraction to risk trades continues will largely depend on US Q3 earnings however, with many earnings reports scheduled this week.

Given the plethora of Fed officials on the wires over recent days and the mixed comments from these officials there may more attention on US CPI on Thursday than usual but the data is unlikely to fuel any concern about inflation risks. Instead there will be more interest on the Fed FOMC minutes on Wednesday which will once again be scrutinised for the timing of an exit strategy.

Over the week there is plenty for markets to digest aside from earnings reports. US consumer and manufacturing reports will garner most attention. The key release is US September retail sales (Wed) where some payback for the “cash for clunkers” related surge in sales over the last month is likely to result in a drop in headline retail sales, though underlying sales will likely post a modest rise.

Fed speeches will also be monitored and speakers include Kohn, Dudley, Tarullo and Bullard this week. Recent comments have hinted that some Fed members are becoming increasingly concerned about the timing of policy reversal and further signs of this in this week’s speeches may give the dollar some comfort but this will prove limited given that the Fed is still a long way off from reversing policy.

Even if the market believes the Fed is starting to contemplate the timing of reversing its current policy setting it is unclear that the dollar will benefit much in the current environment. Sentiment remains bearish; speculative dollar sentiment deteriorated sharply over the past week according to the CFTC Commitment of Traders (IMM) data, to levels close to the lowest for the year.

Moreover, the correlation between interest rate differentials and currencies is still insignificant in most cases suggesting that even a jump in yields such as the move prompted by last week’s comments by Fed Chairman Bernanke should not automatically be expected to boost the dollar. Once markets become more aggressive in pricing in higher US interest rates this may change but there is little sign of this yet

In contrast the euro continues to benefit from recycling of central bank reserves and recorded a jump in speculative appetite close to its highest level this year according to the IMM data. Reserve flows from central banks may contribute to EUR/USD taking aim at its year high around 1.4844 (last tested on 24 September 09) over coming days.

Posted in central banks, Currencies, Economy, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »
« Older posts