USD Pressured As Yields Dip

February 18, 2011 — Mitul Kotecha

The USD came under pressure despite a higher than forecast reading for January US CPI and a strong jump in the February Philly Fed manufacturing survey. On the flip side, an increase in weekly jobless claims dented sentiment. The overnight rally in US Treasury yields was a factor likely weighing on the USD. The US calendar is light today leaving markets to focus on the G20 meeting and to ponder next week’s releases including durable goods orders, existing and new home sales.

The jump in the European Central Bank (ECB) marginal facility borrowing to EUR 15 billion, its highest since June 2009, provoked some jitters about potential problems in one or more eurozone banks. At a time when there are already plenty of nerves surrounding the fate of WestLB and news that Moody’s is reviewing another German bank for possible downgrade, this adds to an already nervous environment for the EUR.

Nonetheless, EUR/USD appears to be fighting off such concerns, with strong buying interest on dips around 1.3550. The G20 meeting under France’s presidency is unlikely to have any direct impact on the EUR or other currencies for that matter, with a G20 source stating that the usual statement about “excess volatility and disorderly movements in FX” will be omitted.

Although USD/JPY has been a highly sensitive currency pair to differentials between 2-year US and Japanese bonds (JGBs), this sensitivity has all but collapsed over recent weeks. USD/JPY failed to break the 84.00 level, coming close this week. There appears to be little scope to break the current range ahead of next week’s trade data and CPI.

Given the recent loss in momentum of Japan’s exports the data will be instructive on how damaging the strength of the JPY on the economy. In the near term, escalating tensions in the Middle East will likely keep the JPY supported, with support around USD/JPY 83.09 on the cards.

It seems that the jump in UK CPI this week (to 4.0%) provoked even more hawkish comments than usual from the Bank of England BoE’s Sentance, with the MPC member stating that the Quarterly Inflation Report understates the upside risks to inflation indicating that interest rates need to rise more quickly and by more than expected. Specifically on GBP he warned that the Bank should not be relaxed about its value.

Although these comments should not be particularly surprising from a known hawk, they may just help to underpin GBP ahead of the January retail sales report. Expectations for a rebound in sales following a weather related drop in the previous month will likely help prop up GBP, with GBP/USD resistance seen around 1.6279.

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GBP troubles, KRW too weak

February 17, 2011 — Mitul Kotecha

The Fed FOMC minutes for the January meeting revealed that behind the unanimous vote to leave policy settings unchanged there was some unease about the completion of QE2. Nonetheless, the USD was left weaker given the Fed’s sanguine view on inflation and worries about unemployment. Inflation data will garner most market attention today but the fact that the core rate of CPI inflation is expected to remain well below the Fed’s preferred level could undermine the USD and add a further barrier to the USD’s recovery so far in February. Jobless claims data will also be of interest given the sharp drop last week. Another firm outcome will help to dispel worries about job market recovery.

As warned in my last post, downside risks to GBP were high given the long GBP speculative positioning overhang and hawkish expectations for the BoE Quarterly Inflation Report. In the event the Report revealed a downward growth forecast revision and an upward inflation forecast revision but importantly showed some reluctance to play into market expectations of an early UK policy rate hike. Following on from a weaker than expected UK January jobs report in which unemployment increased, GBP was hit on both counts. GBP/USD is unlikely to veer far from the 1.6000 level, but with markets reassessing interest rate expectations downside risks are beginning to open up.

News yesterday that Moody’s ratings agency has placed Australia and New Zealand’s major banks on review for possible downgrades went down like a lead balloon but once again AUD and NZD showed their usual resilience and acted as if little has happened. AUD and NZD have weakened since the turn of the year. Weaker data and a paring back in policy tightening expectations have contributed to the weaker performance of the AUD and NZD, but markets have gone too far in scaling back the timing and magnitude of interest rate hikes, suggesting that both currencies may bounce back as interest rate expectations become more hawkish.

Asian currencies continue to register mixed performances largely influenced by capital flows. Most equity markets in the region have registered outflows so far in 2011, with the exception of Taiwan and Vietnam. This has been reflected in Asian FX performance, with the strongest performer being the IDR, but its gains have only been around 0.72% versus USD, coinciding with the fact that it has registered some of the least capital outflows this year. Interestingly the worst performing currency has been the THB, one of last year’s star performers. Korea has also registered strong equity capital outflows but this will not persist and a resumption of inflows taken together with positive fundamentals and higher interest rates will boost the KRW this year.

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FX Winners and Losers

February 16, 2011 — Mitul Kotecha

There has been a sense of mean reversion in FX markets so far this year as some of last year’s winners have become losers. Namely NZD, CHF, JPY and AUD have all lost ground whilst EUR and GBP have gained ground. The odd one out is the SEK which has strengthened over 2010 and in 2011 versus USD. I expect this pattern to change and the likely winners over the next 3- months are NZD, AUD and CAD, with CHF and JPY the likely losers.

EUR held up reasonably well in the wake of slightly disappointing growth data, with eurozone GDP rising less than expected in Q4, and a smaller than expected gain in the February German ZEW investor confidence survey (economic sentiment component). My sense is that the net long EUR speculative position has already been pared back somewhat over recent days reducing the potential selling pressure on the currency in the near term.

Given that EUR/USD is one of the only major currency pairs being influenced by interest rate differentials, its direction will hinge more on policy expectations but in the near the announcement by the German Finance Minister this morning of a restructuring plan for WestLB may give the currency some support.

Perhaps one explanation for the stability of EUR/USD around the 1.3500 level is that US data was also disappointing yesterday. January retail sales rose less than forecast whilst revisions to back months suggest less momentum in Q4 consumer spending than previously envisaged. As with the eurozone data weather likely played a role in contributing to the outcome.

The net impact on currencies is that they are largely stuck within tight ranges. Further direction will come from the release of the Fed FOMC minutes for the January 26th meeting. The minutes may undermine the USD if a likely dovish slant continues to be expressed but given that the FOMC decision at that meeting to hold policy setting unchanged had no dissenters this should not come as a surprise.

Whilst the battle between the USD and EUR ended in a stalemate GBP outperformed in the wake of the increase in UK January CPI inflation and in particular the letter from the BoE governor to the Chancellor keeping open the door to a rate hike. The Quarterly Inflation Report (QIR) today will be particularly important to determine whether the bounce in GBP is justified.

I remain hesitant to build on long GBP positions given the net long speculative overhang in the currency. The risks following yesterday’s jump in GBP are asymmetric, with a hawkish QIR likely to have less impact on the currency than the negative impact from a more dovish than expected report.

Econometer.org has been nominated in FXstreet.com’s Forex Best Awards 2011 in the “Best Fundamental Analysis” category. The survey is available at http://www.surveymonkey.com/s/fx_awards_2011

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US Dollar Upside, Euro tensions

February 14, 2011 — Mitul Kotecha

Following the famine that was last week this week will see a feast of data releases, which hopefully will give some clearer direction to currency markets. The key eurozone data focus for FX markets will be the German February ZEW survey and it should highlight that investor confidence is bouncing back smartly. This will be accompanied by data showing a slight acceleration in GDP in the eurozone in Q4 2010. Good news, but the reality is that the EUR is being driven more by peripheral bond tensions and relative yields.

Although the EUR may get a brief lift from the news of the resignation of Egypt’s President Mubarak this will likely prove temporary. Given that tensions are beginning to creep higher EUR/USD may struggle to make any headway this week and will more likely slip below 1.3500 for a test of 1.3440 as sentiment sours. Even the usual sovereign interest may look a little more reluctant to provide support this week. The net long positioning overhang as reflected in the CFTC IMM data suggests some scope for a squaring in long positions, likely accelerating any downside pressure.

As usual data releases are failing to have a major impact on the JPY whilst interest rate / yield differentials suggest the JPY should be much weaker. One explanation for the stubbornly strong JPY is the strength of recent portfolio inflows to Japan, especially into its bond markets. This could reverse quickly and IMM positioning suggests that the potential for a shakeout of long positioning looms large, something that many Japanese margin traders are well positioned for according to TFX data. USD/JPY 84.51 will provide firm resistance to a move higher in the short-term.

GBP will be guided by the Bank of England Quarterly Inflation Report on Wednesday as well as the January CPI and retail sales data. The Report will reveal that inflation moderates over the medium term, even if short-term projections are shifted higher. Consequently, interest rate markets may even pare back overly hawkish expectations for UK rates, leaving GBP vulnerable. Nonetheless, markets maybe somewhat more sceptical or at least nervous in light of a likely increase in UK CPI, albeit mostly due to the increase in value added tax (VAT) at the turn of the year. Moreover, GBP may find some solace from a rebound in retail sales in January.

Overall, GBP/USD will take its cue from EUR/USD and the currency is vulnerable to a sustained drop below 1.6000 this week. The fact that GBP/USD IMM positioning is at its highest since September 2008 suggests a lot of scope for a sell-off. EUR/GBP looks like its consolidating in an even narrower range between 0.8400-0.8500.

Another positive slate of US data releases and likely more pressure on US bond markets this week suggest that the USD will find further support, with the USD index likely to take a shot at the 79.00 level. Indeed a further improvement in both the Philly Fed and Empire manufacturing surveys is expected, providing more evidence of strengthening manufacturing momentum, will be borne out in the hard data, with a healthy gain in industrial output expected. Similarly a healthy reading for US retail sales will support the evidence that the US consumer is in full recovery mode.

The positive impact on the USD may be dampened however, by benign inflation readings this week, supporting the view that US policy rates will not be raised for a long time yet. This is likely to be echoed in the Fed FOMC minutes this week. Nonetheless, speculative positioning suggests plenty of scope for short USD covering, with the latest CFTC IMM report revealing the biggest net short position since October 2010.

Econometer.org has been nominated in FXstreet.com’s Forex Best Awards 2011 in the “Best Fundamental Analysis” category. The survey is available at http://www.surveymonkey.com/s/fx_awards_2011

Posted in central banks, Currencies, ECB, Economics, Economy, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Germany, Interest rates, Japan, Middle East, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . 1 Comment »

All eyes on G20

November 8, 2010 — Mitul Kotecha

Although we move from feast to famine this week in terms of data there are still a few events that are noteworthy. In the US the September trade balance (Wed) will be of interest with a narrowing expected. Net exports negatively impacted GDP in Q3 but this is likely to reverse in Q4. Michigan confidence at the end of week is also likely to reveal better news with a rebound expected in October in the wake of firming equities, whilst the October budget statement is likely to reveal a sharp narrowing compared to October last year. Several Fed speakers over the week will be also be in focus as markets try to gauge the level of support within the FOMC for the QE2 announced last week.

There are a few data releases of interest in the eurozone including the preliminary estimate of Q3 GDP. Worryingly the divergence across the eurozone between healthier northern Europe and weaker performing in Southern Europe is becoming increasingly stark, a big headache for the Eurozone Central Bank with its one size fits all policy. Elsewhere, in the UK the Bank of England Quarterly Inflation Report will be scrutinized to determine whether recently firmer data and sticky inflation has pushed the BoE away from following the Fed into QE2. Japan’s volatile machinery orders data marks the highlight of its calendar, with a sharp drop expected in September following two strong months.

The main event of the week is the G20 leaders meeting in Seoul at the tail end of the week. Rhetoric going into the meeting suggests little support for the US plan to limit current account surpluses to 4% of GDP and even US officials appear to have cooled on the idea. Moreover the G20 meeting will probably elicit further reaction to the Fed’s QE2 announcement. Reaction was highly critical initially but seems to have softened lately. Currencies will nonetheless, remain the major topic of discussion although expectations of a global agreement are likely to be disappointed.

The Fed’s QE2 announcement helped provide a prop to risk assets and weighed on the USD last week despite the amount of asset purchases being within expectations. The USD will remain a sell on rallies this week and once again the best way to play USD weakness is likely via the higher yielding commodity currencies, especially AUD and NZD. Scandinavian currencies also offer a good way to capitalize on USD weakness.

The EUR may also struggle this week given worries about peripheral Europe and widening in peripheral bond spreads. Ireland’s budget cuts announced last week have so far failed to shore up confidence whilst political uncertainties are also rising. Greece’s regional elections revealed that the ruling socialist party narrowly retained control allowing the government to continue with reforms suggesting a modicum of support for its debt. Nonetheless, with Irish and Portuguese sovereign worries continuing, the EUR will continue to lag. Notably the CFTC IMM data revealed that speculative EUR sentiment deteriorated in the latest week to its lowest in over a month. EUR/USD is likely to target 1.3864 after dropping swiftly below the 1.4000 level.

Perhaps best way to play EUR vulnerability is versus the AUD, with a further decline through 1.3800 likely to pave the way for a drop below the 13 September low around 1.3660. AUD/JPY may also be another cross worth exploring especially as Japan’s new fund begins buying JGBs today, which could limit JPY upside. A test of AUD/JPY 83.65 is on the cards shortly. If Australia’s October employment report on Thursday reveals another strong reading it will likely give the currency further support into the end of the week.

Posted in Asia, Australia, Bond markets, central banks, Commodities, Currencies, Economics, Economy, equity markets, Europe, eurozone, Fiscal/Budget, FX, Greece, Interest rates, Ireland, Monetary Policy, Portugal, South Korea, UK, US, US administration. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . 2 Comments »
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