Weak USD will not persist, CHF to drop eventually

March 28, 2012 — Mitul Kotecha

Risk appetite has deteriorated slightly since the Bernanke fuelled bounce earlier this week but there does not appear to be much of a directional bias for markets either way. Interestingly Treasury yields continue to pull back even while equity markets have softened overnight.

Data has been mixed, with US consumer confidence dipping in March albeit not as much as expected while US house prices also did not drop by as much as anticipated. Data releases on tap today include monetary aggregates in the Eurozone and durable goods orders in the US. The tone will likely continue to be slightly ‘risk off’.

The USD has come under growing pressure since its mid March high, with the EUR in particular taking advantage of its vulnerability. A combination of improving risk appetite and a correction lower in US Treasury yields in the wake of relatively Fed comments have been sufficient to deal the USD a blow.

However, the outlook for the USD is mixed today as on the one hand it will be helped by a reduction in risk appetite but hit on the other by a drop in US Treasury yields overnight. Data today should be a little more constructive for the USD, with a likely bounce back in durable good orders in February.

Overall, I do not expect the weak USD bias to persist especially as it is based on unrealistic expectations that the Fed will still implement more quantitative easing. Indeed, while further Fed easing is possible it may not need to involve an expansion of the Fed’s balance sheet.

EUR/CHF remains pinned to the 1.20 ‘line in the sand’ imposed by the Swiss National Bank while the CHF has strengthened over recent weeks against the USD. Economic data has deteriorated over recent months, with the forward looking Swiss KoF leading indicator pointing to a further weakening.

We will get further news on this front on Friday with the latest KoF release, with a slight a bounce expected. In turn, bad news on the economic front is adding to pressure for CHF weakness. Market positioning in CHF is negative but there is plenty of scope to increase short positioning in the months ahead given that short CHF positions remain well off their all time highs.

Eventually as risk appetite improves and the US yield advantage widens against Switzerland, both EUR/CHF and USD/CHF will move higher.

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Consolidation

March 19, 2012 — Mitul Kotecha

The overall tone to markets remains a positive one. Core bonds (Treasuries, bunds) have taken on a bearish tone in the wake of strengthening economic data and have established the usual bullish equities / bearish bonds relationship. Meanwhile volatility measures both in equity and currency markets have dropped to historically low levels.

The USD has been propelled by higher US bond yields but looks vulnerable as US Treasuries consolidate in the short term. Data this week is fairly light, suggesting that direction will be limited as only housing data in the US and purchasing managers’ indices in Europe will be of interest. Overall, the start to the week will see markets in consolidation mood.

The USD index had made up plenty of ground since hitting its lows around 78.095 at the end of February. Higher US bond yields in the wake of strengthening economic data and receding expectations of more Fed money printing have boosted the USD. Nonetheless, US Treasuries appear to be consolidating their losses (ie yields have failed to push higher recently), limiting the ability of the USD to strengthen further.

Data releases in the US this week will be mainly centred on the housing market and are unlikely to be strong enough to warrant a further strengthening in the currency. Much will also depend on gyrations in risk. My Risk Barometer has moved into ‘risk loving’ territory, which plays negatively for the USD versus many high beta currencies. The USD will struggle to make further gains in the short term.

The agreement to furnish Greece with a second bailout gave the EUR no help whatsoever. Instead, higher US Treasury yields relative to bunds dealt the EUR a strong blow and the currency came dangerously close to dropping below the 1.3000 psychologically important level versus USD. Even a narrowing in peripheral bond spreads against the core has failed to give the EUR a lift. Further EUR losses will be limited over coming days but only because US yields have not pushed higher.

Nonetheless, the technical picture has turned bearish and any relief could prove temporary. A mixed batch of data releases including ‘flash’ purchasing managers’ indices which overall will reveal the composite PMI below the 50 boom/bust level for a second month in a row, will not be particularly helpful for the EUR. EUR/USD is likely to be stuck in a 1.2974 – 1.3291 range over coming sessions.

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Renewed Eurozone Tensions

January 5, 2012 — Mitul Kotecha

The USD has so far failed to build on the strong momentum seen at the end of last year. Its early days yet however, and given the ongoing tensions in the Eurozone the USD is hardly likely to lose much ground in the weeks ahead. US data continues to impress relative to elsewhere as revealed in the December ISM manufacturing survey data and overnight news that sales at auto makers and retailers were firmer in December. This economic outperformance may however, feed into a tone of improved risk appetite which could play negatively for the USD.

The USD will face a test from the release of the December payrolls data tomorrow, with forecasts currently looking for the gradual improvement in job market conditions to continue. As usual the December ADP private sector jobs released today will be instrumental in finalising the forecasts for payrolls. Overall, the USD will continue to benefit from the travails in the Eurozone, keeping the USD index well supported around 80.00.

EUR/USD has failed to sustain gains above 1.3000 so far this week and has continued to come under pressure on the crosses. While the potential for short covering may limit its losses sentiment continues to be downbeat. Better than forecast December service sector PMI data have helped to allay the worse fears about the Eurozone economy but this will be of little help to the EUR as further deterioration is likely in the months ahead.

Meanwhile yield differentials continue to have some bearing on EUR/USD. The fact that German 2-year yields have dropped further below US 2-year yields therefore ought to spell bad news for the EUR and will likely act as a cap to any rally in the currency. The news flow in the Eurozone will continue to weigh on the EUR too, with speculation that Spain will need an European Union (EU) / International Monetary Fund (IMF) loan intensifying and press reports that Spain will need to increase its provisions for bad property assets by up to EUR 50 billion. Attention today will turn to a EUR 8 billion bond auction in France.

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Sell Risk Currencies on Rallies

November 3, 2011 — Mitul Kotecha

The Federal Reserve FOMC outcome and Greece’s travails failed to dampen the recovery in risk appetite overnight. The Fed highlighted downside risks to growth and revised lower its forecasts. However, positively for risk appetite the Fed left open further policy easing options, hinting at more quantitative easing if needed.

Meanwhile European leaders tightened the noose around Greece by cutting off EUR 8 billion in aid payments and threatening to cut of all aid if the country’s referendum now scheduled for December 4 fails to endorse the EU rescue package announced last week.

At the emergency meeting of European leaders yesterday Greece’s Prime Minister also admitted that the referendum will not only decide the fate of the rescue package but also whether Greece wants to remain in the eurozone. Greece was not only the eurozone country in focus as Italy continues to be racked by political uncertainties, with Prime Minister Berlusconi failing push through legislation on structural reforms ahead of the G20 meeting beginning today.

The risk rally is highly unlikely to last, with the EUR, commodity and high beta emerging market currencies to face further pressure. Although the immediate market focus will be on the G20 meeting beginning today the fact that leaders are now seriously beginning to consider the prospects of a Greek exit from the eurozone while taking a tougher stance on the country highlights how important the December 4 referendum will be.

Ahead of the vote markets will remain highly nervous and risk aversion will remain elevated. Consequently risk assets are set to face further pressure. Moreover, the fact that China has downplayed the prospects of further bond purchases from the EFSF bailout fund suggests there will be no help from this quarter any time soon.

Aside from the G20 meeting markets will pay attention to Draghi and Co. at the European Central Bank (ECB) today as well as bond auctions in France and Spain but we do not look for much excitement from the ECB despite the increased uncertainty within the eurozone. While an interest rate cut today cannot be ruled out given the increased market uncertainty the ECB is likely to wait until December before cutting policy rates.

Posted in Asian currencies, central banks, China, Commodities, Currencies, ECB, Economics, Economy, emerging markets, Europe, eurozone, Federal Reserve, Fiscal/Budget, France, FX, Greece, Interest rates, Italy, Monetary Policy, US. 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

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