Contagion spreading like wildfire

November 16, 2011 — Mitul Kotecha

EUR continues to head lower and is is destined to test support around 1.3484 versus USD where it came close overnight. Contagion in eurozone debt markets is spreading quickly, with various countries’ sovereign spreads widening to record levels against German bunds including Italy, Spain, France, Belgium and Austria. Poor T-bill auctions in Spain and Belgium, speculation of downgrades to French, Italian and Austrian debt, and a weak reading for the November German ZEW investor confidence index added to the pressure.

A bill auction in Portugal today will provide further direction but the precedent so far this week is not good. The fact that markets have settled back into the now usual scepticism over the ability of authorities in Europe to get their act together highlights the continued downside risks to EUR/USD. Although there is likely to be significant buying around the 1.3500 level, one has to question how long the EUR will continue to skate on thin ice.

The Bank of Japan is widely expected to leave policy unchanged today but the bigger focus is on the Japanese authorities’ stance on the JPY. Finance Minister Azumi noted yesterday that there was no change in his stance on fighting JPY speculators. To some extent the fight against speculators is being won given that IMM speculative positions and TFX margin positioning in JPY has dropped back sharply since the last FX intervention to weaken the JPY.

However, this has done little to prevent further JPY appreciation, with USD/JPY continuing to drift lower over recent days having already covered around half the ground lost in the wake of the October 31 intervention. Markets are likely therefore to take Azumi’s threats with a pinch of salt and will only balk at driving the JPY higher if further intervention takes place. Meanwhile, USD/JPY looks set to grind lower.

GBP will take its direction from the Bank of England Quarterly Inflation Report and October jobs data today. There will be particular attention on the willingness of the BoE to implement further quantitative easing. A likely dovish report should by rights play negatively for GBP but the reaction is not so obvious. Since the announcement of GBP 75 billion in asset purchases a month ago GBP has fared well especially against the EUR, with the currency perhaps being rewarded for the proactive stance of the BoE.

Moreover, the simple fact that GBP is not the EUR has given it a quasi safe haven quality, which has helped it to remain relatively resilient. Nonetheless, GBP will find it difficult to avoid detaching from the coat tails of a weaker EUR and in this respect looks set to test strong support around GBP/USD 1.5630 over the short term.

Posted in Bond markets, central banks, Currencies, ECB, Economics, Economy, Europe, eurozone, Federal Reserve, Financial crisis, Fiscal/Budget, France, FX, Germany, Greece, Italy, Japan, Monetary Policy, Portugal, Spain, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Follow The Oracle

July 12, 2010 — Mitul Kotecha

Many investors are probably wishing they had the psychic abilities of Paul the octopus. The mollusc once again gave the correct prediction, by picking Spain to beat the Netherlands to become the winner of the World Cup. This ability would have been particularly useful for currency forecasters, many of which have been wrong footed by the move higher in EUR/USD over recent weeks.

Confidence appeared to return to markets over the past week helped by a string of rate hikes in Asia from India, South Korea and Malaysia, and firm data including yet another consensus beating jobs report in Australia. An upward revision to global growth forecasts by the International Monetary Fund (IMF) also helped, with the net result being an easing in double-dip growth concerns.

The good news culminated in a much stronger than forecast June trade surplus in China. However, China’s trade numbers will likely keep the pressure on for further CNY appreciation, and notably US Senators are still pushing ahead with legislation on China’s FX policy despite the US Treasury decision not to name China as a currency manipulator.

Political uncertainty on the rise again in Japan following the loss of control of the upper house of parliament by the ruling DPJ party. The JPY has taken a softer tone following the election and will likely remain under pressure. CFTC IMM speculative JPY positioning has increased but this has been met with significant selling interest by Japanese margin accounts who hold their biggest net long USD/JPY position since October 2009 according to Tokyo Financial Exchange (TFX) data.

In the absence of the prodigious abilities of an “oracle octopus” data and events this week will continue to show slowing momentum in G3 country growth indicators but not enough to warrant renewed double-dip concerns. Direction will be largely driven by US Q2 earnings. S&P 500 company earnings are expected to have increased 27% from a year ago according to Thomson Reuters.

There are several data releases of interest in the US this week but the main release is the retail sales report for June which is likely to record another drop over the month. Data and events in Europe include the Eurogroup finance ministers meeting, with markets looking for further insight into bank stress tests across the region. Early indications are positive but the scope of the tests remains the main concern. The July German ZEW survey will garner some interest and is likely to show a further slight decline in economic sentiment.

EUR/USD gains looked increasingly stretched towards the end of last week, as it slipped back from a high of around 1.2722. Technical resistance around 1.2740 will prove to be tough level to crack over coming days, with a pullback to support around 1.2479 more likely. CFTC IMM data reveals that short covering in EUR has been particularly sharp in the last week, with net short positions cut by over half, highlighting that the scope for further short covering is becoming more limited.

Conversely aggregate net USD long positions have fallen by over half in the last week as USD sentiment has soured, with longs at close to a three-month low. The scope for a further reduction in USD positioning is less significant, suggesting that selling pressure may abate.

Posted in Asia, Australia, central banks, China, Commodities, Currencies, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Germany, IMF, Interest rates, Japan, Monetary Policy, Politics, Singapore, South Korea, Spain, US, US administration. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Risk Appetite Puts Dollar On The Back Foot

February 22, 2010 — Mitul Kotecha

Markets look somewhat calmer going into this week helped by comments by Fed members who noted that the discount rate hike did not signal a shift in monetary policy, something which is likely to be repeated by Fed Chairman Bernanke in his testimony to Congress on Wednesday and Thursday.  A tame US January CPI report last Friday helped too, giving further support to the view that the Fed will not hike the Fed Funds rate for some time yet; a rate hike this year seems highly unlikely in my view.  

Data this week will be conducive to a further improvement in risk appetite and despite the lingering concerns about Greece the EUR may find itself in a position to extend gains.  In Europe all eyes will be on the February German IFO survey and eurozone sentiment indicators, which following the surprising strength in the manufacturing Purchasing Managers Indices (PMIs), are likely to reveal solid gains. 

The main highlights in Japan this week includes January trade data and industrial production. The trade numbers will be particularly important to determine whether the rebound in exports due in large part to robust Asian demand, has continued whilst the bounce back in exports will be a key factor in fuelling a further gain in industrial output. 

In the US aside from the testimonies by Fed Chairman Bernanke there are plenty of releases on tap including consumer confidence, new and existing home sales, durable goods orders and a likely upward revision to Q4 GDP.  For the most part the data will show improvement and play for a further improvement in risk appetite. 

FX direction will depend on whether markets focus on the potentially positive USD impact of a reduction in USD liquidity or on the likely firmer tone to risk appetite this week.  Given expectations of firmer data and the soothing tone of the Fed, risk currencies will likely perform better, with crosses such as AUD/JPY favoured.  The USD will likely be placed on the back foot, especially given the very long market positioning in the currency.

The EUR will be helped by the fact that speculative market, according to the CFTC IMM data, holds record short positions in the EUR (as of the week ended 16 February) giving plenty of potential for short-covering.   The more timely Tokyo Financial Exchange (TFX) data also reveals that positioning in EUR/JPY has continued to be scaled back.  

CFTC Commitment of Traders (IMM) data – Net EUR speculative positioning

EUR/USD bounced smartly from its lows around 1.3444 on Friday, partly reflecting some short covering and the drop in FX volatility suggests the market is more comfortable with EUR/USD around these levels.  A positive IFO survey and improved risk appetite could see EUR/USD test resistance around 1.3774, its 20 day moving average, over coming days.  Ongoing Greek concerns suggest that any EUR bounce will be limited, however. 

USD/JPY looks well supported and although data this week will suggest that exports are improving despite JPY strength, the relatively more aggressive stance of the Fed compared to the BoJ, long JPY positioning, and improved risk appetite, give plenty of scope for the JPY to extend losses, with technical USD/JPY support seen around 91.28.

Posted in central banks, Currencies, Economics, Economy, equity markets, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Germany, Greece, Interest rates, Japan, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »