USD weaker except versus JPY, EUR gains unsustainable

April 8, 2013 — Mitul Kotecha

Risk aversion is creeping higher whether due to weaker data and budget concerns in the US, political uncertainty in Europe or tensions in the Korean peninsular. Central banks continue however, to do their utmost to keep monetary conditions sufficiently easy to facilitate recovery.

The Bank of Japan was the latest to do its part under the helm of governor Kuroda, with new measures including a major increase in asset purchases, delivering a positive surprise to markets while pushing the JPY sharply weaker.

Only the ECB appears to lag in terms of central bank activism keeping policy on hold last week despite weak economic conditions are ongoing austerity pain. A series of industrial production releases across the Eurozone including German February IP scheduled for release today will not change the picture materially.

The much weaker than expected US March jobs report in which payrolls increased by only 88k, concern that economic activity is following a similar pattern to previous years ie strength in Q1 followed by weakness in Q2, has intensified. I do not believe this is the case but the jury is still out.

At the least the data will embolden Fed doves who will use the data as evidence that any tapering off in asset purchases should not occur quickly. A series of Fed speeches this week including one by Fed Chairman Bernanke tonight will be listened to very closely to determine whether the jobs report has provoked further caution from the Fed. Moreover, Fed FOMC minutes will be scrutinized to determine how the Fed will adjust the flow rate of asset purchases to the changing outlook.

The overall tone to FX markets is one of broad based USD weakness, with the notably exception of the JPY where the relatively aggressive BoJ stance has provoked a bigger reaction. The EUR has taken advantage of a softer USD but is unlikely to sustain gains around the EUR/USD 1.3000 level given the political problems across the Eurozone and relatively weaker economic conditions.

Indeed, news that Portugal’s constitutional court rejected austerity measures has put at risk the ability of the country to achieve its budget targets and regain access to international bond markets. Meanwhile Cyrpus’ bail in continues to leave a sour taste among depositors across the region while Italy continues to edge towards fresh elections.

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SEK weaker, Asian FX still following CNY

November 28, 2012 — Mitul Kotecha

Despite a series of better than expected data releases in the US including October durable goods orders, Case Shiller house prices and consumer confidence the lack of progress towards resolving the fiscal cliff is weighing on risk appetite. Comments by Senate Majority leader Reid of little progress in budget talks hit equity markets and will cast a shadow over risk appetite today.

News that the US did not label China a currency manipulator did little to help as such an outcome was expected in the US Treasury’s semi-annual currency report, especially given the recent appreciation of the CNY. Any positive boost from the Greek aid deal also proved short lived. The lack of major data releases or events today will likely most asset classes within recent ranges.

The EUR has failed to hold onto Greek debt deal inspired gains but looks well supported above 1.2900. The realisation that any aid to Greece will still be subject to several parliamentary approvals, ongoing reforms and a successful debt buy back may have dampened sentiment or more likely the deal was already priced in.

Looking ahead there is little on the economic front to provide any directional impetus for EUR/USD aside from M3 money supply data where a modest increase is expected in October. In contrast the run of better US economic data is set to continue, with October new home sales and the Beige Book likely to provide encouraging reading. The difficulty in reaching agreement on the fiscal cliff may perversely play negatively for the EUR as risk aversion pushes higher.

My quantitative models have continued to point to EUR/SEK upside. Economic data yesterday provided more negative news for the currency, with business and consumer confidence for November recording bigger than expected declines. Q3 GDP data tomorrow will confirm the slowing in the economy, while retail sales are set to record a decline.

However, while the SEK remains vulnerable it is already pricing in some bad news. I suspect that the 26 October high around EUR/SEK 8.7194 will be difficult to break through. I prefer to play SEK weakness versus NOK at current levels.

Asian currencies remain relatively well supported and continue to track movements in the CNY rather than the USD although slightly higher risk aversion will weigh limit the ability of Asian FX to strengthen. USD/KRW looks likely to continue to struggle to break below the 1080 level as markets remain wary of official action to weaken the currency. A likely unchanged rate decision from the Bank of Thailand ought to leave the THB to trade within its tight range.

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USD pressured, limited gains for Asian currencies

November 26, 2012 — Mitul Kotecha

Risk assets registered a positive performance over the past week despite the plethora of events / issues that remain unresolved. However, it’s back to business today with talks over Greek’s debt sustainability and resolution towards distribution of its next loan tranche set to resume.

Meanwhile, markets will digest the results of elections in the Spanish region of Catalonia which have fuelled greater uncertainty in the wake of the gains in seats for pro-referendum parties who won 87 of the Catalan parliament’s 135 seats. However, the results did not provide the strength of support for pro independence parties as had initially been feared, suggesting some relief for the EUR.

Together with the failure to make any progress on the EU budget it is clear that there are still many layers of uncertainty lying ahead for European markets. Nonetheless, optimism appears to be winning the day as the EUR and peripheral bonds shake off such concerns. The risk going forward is that the market is hoping for too much, with the risk / reward dynamic skewed asymmetrically in the wake of any failure to reach agreement especially regarding Greece.

News of healthy US Thanksgiving spending will be followed by data releases this week that are set to provide further signs of improvement although markets will remain focussed on any progress towards resolving the fiscal cliff. An upward revision to US Q3 GDP, gains in durable goods orders, and new home sales in October will provide encouraging news contributing to a tone of firmer risk appetite. This will be echoed by the Fed’s Beige Book.

Economic news in Europe (expected lower economic sentiment index) and in Japan (fourth consecutive decline in industrial production) will highlight the comparative outperformance of the US economy while adding pressure for more aggressive policy measures elsewhere.

The net FX impact of the market’s optimism is to sell USDs leaving it vulnerable in an environment of improving risk appetite. Nonetheless, given that the market is now pricing in a resolution to several of the issues noted above, USD weakness may prove limited from current levels. EUR/USD is set to face resistance around the 1.3023 level while USD/JPY will face strong resistance around 83.20.

Asian currencies have benefitted from the firmer tone to risk appetite (most except IDR and INR are strongly correlated to risk) but gains have been limited over the past week as central banks in the region increasingly resist further strength. The lack of upward trajectory in the CNY has been a key driver for the slower pace of appreciation of Asian currencies over recent days and I expect this trend to continue.

China may even countenance some softening in the CNY into year end suggests limited upside for Asian currencies into year end despite a firmer risk tone. The INR remains the major underperformer, with the currency continuing to suffer from domestic considerations, and benefitting the least from any improvement in risk appetite.

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USD bounces back, JPY to strengthen, AUD rallies

November 8, 2012 — Mitul Kotecha

To put it mildly there was plenty of volatility in the wake of the US elections. Equities reacted badly as the prospects of higher taxes as part of a solution to resolving the fiscal cliff in the US came back into the frame. worries outweighed any positive impact from the potential for Fed QE to continue in its current form without the risk of being curtailed by Republican President.

Poor data out of Europe contributed to the market malaise as the growth trajectory into Q4 continued to worsen. The passage of Greek austerity measures through parliament failed to undo the damage. German industrial production fell sharply, down 1.8% MoM while downward growth revisions / upward deficit revisions from the European Commission dealt another blow to sentiment.

Growing pressure on the German economy may at the least prompt a more dovish stance at the European Central Bank (ECB) meeting today while the Bank of England (BoE) is set to increase its asset purchases today although it will be a close call on this front.

The USD came under pressure in the immediate aftermath of US President Obama’s victory. However, it didn’t take long for the usual higher risk aversion, stronger USD relationship to kick in, with the USD subsequently reversing all its losses and more. With elections out of the way markets are waking up to the reality of the considerable challenge ahead in resolving the fiscal cliff. Risk assets clearly don’t like what they see.

As only September US trade data and November Michigan confidence are left on the US calendar this week risk gyrations will continue to drive the USD though I suspect that gains will be restricted in the wake of lower US bond yields.

Most currencies except the JPY took advantage of a weaker USD but finally USD/JPY dropped on the back of the jump in risk aversion. The drop in US bond yields and the output of my quantitative models both suggest that the JPY should be firmer against the USD. The recently more aggressive stance of the Bank of Japan taken together with warnings of FX intervention may be helping to keep the JPY on the back foot, however.

Given that speculative JPY positioning has turned negative over recent weeks the BoJ’s stance maybe having some impact in shifting FX expectations especially as it has fuelled some portfolio outflows from Japan over recent weeks. Nonetheless, it won’t take long for JPY bears to become frustrated with the lack of downside traction in the currency, with USD/JPY subsequently set to edge back towards the 79.00 level

Stronger than expected Australian jobs numbers helped to boost the AUD this morning. Jobs were up 18.7k in October much more than consensus. Even better was the details of the report, with full time jobs up 18.7k and part time down 8k. The unemployment rate was at 5.4%, lower than expected. Overall, a solid report and in stark contrast to NZ jobs data this morning. The data will certainly give more juice to AUD/NZD and corresponds with my quant models looking for NZD downside and AUD resilience. The data will also likely dampen further expectations of another rate cut by the RBA in December which in any case looks like a close call.

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US dollar on the front foot

November 5, 2012 — Mitul Kotecha

Worries about earnings have resulted in a lacklustre performance for equity markets and a gradual increase in risk aversion over recent days. Nonetheless, economic data especially in the US continues to be encouraging as revealed by a spate of recent releases culminating in the October US jobs report which revealed a 171k increase in payrolls and upward revisions to previous months. Although the unemployment rate ticked higher to 7.9%, the trend is one of gradual but unspectacular improvement.

This has provided some support to the USD but notably US bond yields have not reacted much, leaving the USD a little vulnerable to any slippage. Commodity prices continue to be pressured, with a firmer USD and better US data fuelling further downside. The trend is set to continue over coming days especially if the data releases result in reduced expectations for more US quantitative easing.

The USD is likely to remain firm benefitting from weaker economic data elsewhere and a lack of progress with regard to Greece and Spain. Missed debt and deficit targets in Greece highlight the tough task ahead although Greek officials appear to be hopeful that they will receive the votes needed in votes on Wednesday and Sunday to pass reforms and budget cuts demanded by lenders.

This week there will of course be plenty of attention on US elections and various permutations of the outcome and its impact on markets. Polls show that the Presidential race is too close to call although the House and Senate races look like delivering the status quo. The worst case scenario for markets is for a prolonged period of uncertainty if the results produce no clear cut result which could ultimately undermine the USD.

Aside from the elections central bank decisions from the European Central Bank, Bank of England and Reserve Bank of Australia will also garner attention. While an unchanged outcome from the ECB is likely, both the BoE and RBA are set to ease policy further, the former in the form of a GBP 25 billion increase in quantitative easing and the latter with a 25bps policy rate cut. In Europe, the 8 November Eurogroup meeting will also be in focus as officials discuss progress on Greece’s next loan tranche.

Posted in Australia, Bank of England, central banks, ECB, US. Tags: , , , . Leave a Comment »
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