Currency Tensions Intensify Ahead of G7

February 5, 2010 — Mitul Kotecha

Portugal, Greece and Spain remain firmly in the spotlight but it may not be long before the light broadens to include UK, US and many other countries facing similar difficulties on the fiscal front. Portuguese, Greek and Spanish equities were smashed in the wake of growing concerns and sentiment looks like it will get worse before it gets any better.

Events in each of these countries are not helping matters. In Portugal, parliament began to vote on a bill on financial transfers to the regions, which could damage the ability of the government to reduce the deficit whilst speculation that the Prime Minister is about to resign has intensified. In Greece tax collectors have started a 48-hour strike as social unrest worsens in the wake of the implementation of deficit cutting measures.

Although European officials pour cold water on the idea that the whole EMU Project could unravel bond markets are not taking any chances whilst the EUR looks destined to languish at ever weaker levels until there is a semblance of calm. Meanwhile. the European Central Bank (ECB) has clearly stated that does not want to get involved.

The G7 meeting in Canada will move rapidly into focus this weekend, with a joint press conference expected on Saturday. Sovereign debt concerns and restrictions and banks will likely be addressed whilst the not insignificant matter of China’s currency will also likely be discussed.

US pressure on China to strengthen the CNY has increased as has tensions between the two countries following US arms sales to Taiwan and a scheduled meeting between President Obama and the Dalai Lama.

There is growing speculation that the upcoming US Treasury report in April will label China as a currency manipulator which could result in tensions ratcheting up to a higher level. China holds the cards given the US reliance on Chinese money but with mid-term elections looming in the US and Obama’s promise to double US exports within five years, US pressure on China will intensify as will likely resistance from China.

Posted in Asia, Bond markets, central banks, China, Currencies, Europe, Financial crisis, Fiscal/Budget, FX, Greece, US. Tags: , , , , , , , , , , , , . Leave a Comment »

PIIGS fears fuelling risk aversion

January 29, 2010 — Mitul Kotecha

Risk aversion has come back with a vengeance over the last 10 days driven by a host of concerns that continue to damage market sentiment. As has been evident over the past year the USD and JPY remain the best currency plays against the background of rising risk aversion and both currencies look well supported.

Market concerns are not going away quickly but some of the fears plaguing markets have at least receded especially on the US political front, with Obama’s State of the Union address, Geithner’s testimony on AIG and Bernanke’s reappointment all passing without too much incident, at least from a market perspective. I still believe that market fears are overblown but it is clearly evident that the market is not in the mood to concur. More pain is likely in the weeks ahead.

Euro-sovereign spreads continue to suffer from the ongoing Greek saga whilst the other major fear remains further monetary tightening in China. Rumours that China is about to imminently revalue the CNY are also running rife. The bigger than expected hike in the reserve ratio in India reflects the fact that Asia is on a faster track to tighten policy than Western economies.

As regular readers probably noticed, my articles on econometer.org have been sporadic recently. This is due to the fact that I have been on the road for the last two weeks giving client seminars across several countries in Asia. Without giving too much away it is evident that pessimism is pervasive and most investors I polled are looking for a “W” or “double dip” profile for economic growth in the G7 economies over coming months. Hardly anyone looked for a “V”.

The other casualty emanating from Greece’s woes, as well as worries that other European PIIGS (Portugal, Italy, Ireland, Greece, Spain) face ratings downgrades, is the EUR. EUR/USD slipped below the psychologically important level of 1.40 this week and is showing no sign of turning around. Warnings by S&P ratings that Portugal faces challenges on the fiscal front show that these sovereign concerns will be with us for a long while yet.

After letting investors believe that the European Commission would offer no support for Greece, there appears to be a growing realization that Greece is not simply a local problem but a Euro wide problem, as noted by European Commission President Barroso. Whilst this may be good for Greek debt the path to recovery is still likely to be a massively painful one, and the EUR may gain little support from this news.

The UK has not escaped the clutches of ratings agencies and warnings by S&P that UK banks are no longer among the “most stable and low-risk” in the world highlights the headwinds faced by GBP at present. The weaker than expected out-turn for Q4 GDP (0.1%) highlights the fact that UK economic recovery is fragile, which in turn plays negatively for the banking sector. This news has put a break on GBP but there appears to be plenty of demand for GBP above 1.600 vs USD.

Posted in Asia, Bond markets, central banks, China, Currencies, Economics, Economy, emerging markets, Europe, Financial crisis, Fiscal/Budget, FX, Greece, India, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Not quite a Greek tragedy, but close

January 15, 2010 — Mitul Kotecha

Not quite a Greek tragedy but getting there. Greece’s announcement of a three-year plan to reduce its burgeoning fiscal deficit has not convinced markets. Greece’s 5-year CDS widened out to around 333bps whilst 10-year sovereign spreads widened further. There has been some contagion in other European countries notably Spain, Portugal, Ireland, Italy, Poland etc.

The plan which aims to cut the budget deficit from 12.7% to 2.8% of GDP by the end of 2012 appears to be very optimistic if not unrealistic. One of the main problems is not related to the magnitude of deficit reduction but to the starting point of 12.7% of GDP which is more realistically around 14-15% of GDP.

The deficit is planned to be cut by 4% this year alone which seems tough given the likelihood that the economy will contract this year and thereby increase the cyclical portion of the deficit. However, the major concern is the ability of the Greek authorities to cut nominal wages and pensions and in areas where inefficiency and corruption are widespread, such hospital and defense spending.

Greece needs to convince the European Commission and if the negative reaction by markets is anything to go by it may need further revisions including more drastic spending cuts as well as concrete plans for structural reforms. Greece will also find it difficult to ignore the skeptical market reaction given that the country aims to raise around EUR 54 billion to fund its public debt.

Greek concerns and similar countries elsewhere in Europe will likely act as a major weight on the EUR in the days ahead. Interestingly GBP seems to be a beneficiary. The situation does not appear to have a happy ending in sight and more pain looks likely. Rumours/talk of a Eurozone break-up are likely to intensify, however unrealistic such an event may be. ECB President Trichet dampened speculation in his speech following the ECB meeting that Greece could exit the euro but also confirmed that there would be no special treatment for Greece.

Posted in Bond markets, central banks, Currencies, Economics, Europe, Financial crisis, Fiscal/Budget, FX, Greece. Tags: , , , , , , , , , , . 2 Comments »

“Risk On”- Which Currencies Will Benefit?

January 5, 2010 — Mitul Kotecha

It was a “risk on” beginning of the week as equity markets rallied, commodities prices rose, and G10 bonds and USD came under pressure. Stronger manufacturing PMIs helped to boost confidence in the global economic recovery, with solid PMIs revealed in China, and across the rest of Asia, UK, and the US. The US ISM manufacturing which rose to its highest since April 2006 also revealed a rise in the unemployment component, consistent with view of an unchanged reading for December payrolls.

In the Eurozone the PMI matched the flash release and remained in expansion territory though there was some slippage in Germany, Spain, and Italy, underscoring the likely underperformance of the Eurozone economy relative to expectations of faster recovery in the US. Nonetheless, the PMIs continued to show a picture of expansion, with the Eurozone PMI at its highest in 21-months.

The USD lost ground against the background of improved risk appetite and looks set to fall further abruptly ending its short covering rally. The USD appears to be finding little support from interest rate expectations, with the correlation between most currencies and relative interest rate differentials remaining relatively low for the most part (just -0.04 over the past 3-months between the USD index and US rate futures).  The correlation between the USD and US 10-year bond yields looks somewhat stronger however, and could offer some relief to the USD if yields continue to push higher.

Speculative (CFTC Commitment of Traders) data reveals just how massive the shift in USD positioning has been over recent weeks, with net aggregate USD positioning (vs EUR, JPY, GBP, AUD, NZD, CAD, CHF) registering its first net long USD position since May 2008. The swing in positioning has been dramatic, from -167k contracts on 15 September 2009 to +8.7k in the week ending 29th December 2009. The data also reveals the sharp deterioration in sentiment for the EUR to its lowest since September 2008. Likewise net JPY positions have shifted to their biggest net short since August 2008.

What does this imply? The market is very short EUR and JPY but the JPY has much further to go on the downside as it increasingly retakes the mantle of funding currency.  In any case compared to historical positioning JPY shorts are not so big suggesting more room to increase short positions.   

The EUR has moved into a short term uptrend, with the MACD (12,26,9) having crossed its signal line and positioning supports further upside. EUR/USD will need to take out strong resistance at 1.4459 (December 29) before it can embark on a more significant move higher. Asian currencies also look set to take more advantage of a resumption of USD weakness, especially in the wake of strong risk seeking capital flows into the region. KRW, TWD, IDR and PHP look bullish technically.

Posted in Asia, Commodities, Currencies, Economics, Economy, equity markets, FX, Interest rates, US. Tags: , , , , , , , , , , , , , , , , , , , , , , . 1 Comment »

AUD and NZD outperformance

December 10, 2009 — Mitul Kotecha

Just as the euro looked as though it was showing some signs of rebounding following the battering it received in the wake of the downgrade of Greece’s credit ratings, S&P placed Spain on credit watch negative from neutral, which helped drag EUR/USD all the way down again. Expect more to come as sovereign risk concerns / fiscal deficit remain in focus. EUR/USD was helped by the usual sovereign demand, preventing a test of technical support around 1.4625 but another push lower is likely over the short term.

Despite a tough budget from Ireland yesterday, it alongside the likes of Latvia, Ireland, Hungary and Portugal will remain on the ratings agencies’ hit lists. Eurozone periphery bond spreads have widened sharply against bunds but even larger countries in Europe such as Italy have seen an increase in funding costs. Added to these concerns are the lingering uncertainties about Dubai as reflected in the continued rise in CDS.

In contrast, growth worries are receding quickly in Australia where another robust jobs report was released. Employment rose 31.2k in November, with an upward revision to the previous month, to 27.2k from 24.5k initially. The details looked good too, with much of the jobs increase coming from full time hires (30.8k). The jobless rate fell to 5.7% compared to 5.8% in October. Taken together with the hawkish slant to the RBNZ statement, the data will help keep the AUD and NZD resilient to any sell off in risk trades.

The decision by the RBNZ to leave interest rates unchanged at 2.5% came as no surprise. However, Governor Bollard did shift away from the earlier pledge not to hike interest rates until H2 10 and stated that a hike could come around the middle of 2010. The RBNZ also upgraded its growth forecasts. A rate hike could come even earlier in my view, a factor likely to keep the NZD well supported.

Markets will digest more interest rate decisions today, in the UK and Switzerland. No change is likely from both the BoE and SNB but the issue of QE will remain at the forefront, especially given the split decision by the BoE MPC at the last meeting. As for the SNB the usual concerns about CHF strength are likely to be expressed but the tone of the SNB’s comments are likely to remain dovish, expressing little urgency to begin implementing an exit strategy.

The US data slate is light but does include weekly jobless claims and October trade data. There will be more interest than usual on the claims data given the surprise in last week’s payrolls report. Claims have been on an improving trend declining at a more rapid pace than previous recessions and markets will eye the numbers to determine whether they point to further improvement in payrolls or whether they suggest the November data was merely an aberration.

Posted in Bond markets, central banks, Economics, Economy, Europe, FX, Interest rates, Middle East, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »
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