High Hopes

October 11, 2011 — Mitul Kotecha

EUR/USD has rallied over recent days from a low around 1.3146 last week. Market hopes of a eurozone solution may fall flat but the pressure on officials has ratcheted higher, and the risks of failure are now too significant to jeopardize with half measures. Weekend promises of banking sector recapitalisation by Germany and France have helped but will not be enough should such promises prove empty. Markets will likely give the benefit of the doubt to eurozone officials ahead of the delayed October 23 EU Summit and the November 3 G20 meeting.

Consequently EUR will find some support over coming days and could extend gains as risk appetite improves; having broken above 1.3600 the next big resistance level for EUR/USD is 1.3800. The fact that EUR speculative positioning is very negative (biggest short position since June 2010 according to IMM data) highlights the potential for short covering.

Possible good news in Greece, with an announcement by the Troika (ECB, EU and IMF) on talks over the next tranche of the bailout will likely provide more EUR support. One stumbling block for the EUR could come from the Slovakian vote on EFSF bailout fund enhancement, which is by no means guaranteed to pass.

The JPY remains firm benefitting from higher risk aversion, registering one of the highest correlations with risk over recent months. However, the reason why the JPY is not even stronger is that bond yield differentials (especially 2-year) with the US have widened out in favour of the USD over recent days. If the recent improvement in risk appetite continues, combined with widening yield differentials it could push USD/JPY to finally move higher and sustain a break above 77.00.

GBP/USD has made an impressive bounce over recent days from a low around 1.5272 last week despite the Bank of England’s announcement of more quantitative easing last week and credit ratings downgrades of several UK banks. This resilience is impressive but it appears that GBP is caching onto the coat tails of a firmer EUR rather than benefitting from a domestically led improvement in sentiment. Nonetheless, there is scope for further gains in GBP given that speculative positioning in the currency moved close to its all time low early last week in anticipation of BoE QE.

Posted in bank rescue, Currencies, ECB, Economy, Europe, eurozone, Financial crisis, Fiscal/Budget, FX, Germany, Greece, Japan, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

In the eye of the storm

October 4, 2011 — Mitul Kotecha

The rout in global markets continues as the bad news mounts up. Failure to achieve concrete results from the meeting of eurozone finance ministers yesterday together with intensifying banking sector concerns and weaker global manufacturing surveys left a sour taste for investors. Aside from the selloff in global stocks the EUR fell to an eight month low and looks on track to test psychological support around 1.30 versus USD.

Attention continues to be focussed on the Greece. Greece’s failure to meet its deficit targets did not appear to derail the prospects of the country receiving it’s next loan tranche but discussions between the Troika and Greek officials are ongoing and payment to Greece may not now be made until November. European officials have indicated that they will reassess Greece’s deficit targets combining 2011 and 2012 targets, suggesting some leeway for Greece to be able to qualify for the next loan tranche.

One reason that markets are reacting negatively is the hints from Eurozone officials that the agreement reached in July on a second bailout for Greece may need “technical” revisions which has been perceived to imply bigger write downs for Greek bond holders compared to the haircuts of 21 percent agreed back in July.

There seems to be no end to the problems for the EUR and markets are clearly running out of patience. Over the near tem there appears to be little to prevent sentiment from deteriorating further. What is needed is a clear plan and this is clearly not forthcoming. Greece remains in the eye of the storm but as yet there is no plan to ring fence the country and avoid a deeper fallout globally.

Elsewhere risk currencies in general continue to be hit, with the AUD in particular facing pressure as the RBA hinted at prospects of interest rate cuts in the weeks ahead. The outright winner is the USD and further gains are likely as risk aversion continues to intensify despite the fact that the US has it’s own problems to deal with. As we move further into October the potential for more volatility remains high.

Posted in Currencies, Economics, Economy, Europe, eurozone, Fiscal/Budget, FX, Greece, US. Tags: , , , , , , , , , , , . Leave a Comment »

Fed does the Twist, markets do the Shake

September 22, 2011 — Mitul Kotecha

Although it was widely expected the Federal Reserve’s decision to implement a fresh version of Operation Twist together with a downbeat assessment of the economy came as a disappointment to equities and risk assets in general. The only surprise was the larger size of the operation at $400 billion.

Moody’s downgrade of three US banks added to the malaise as US equities dropped sharply, commodities slid, longer term Treasuries rallied whilst shorter term bonds dropped. The USD registered broad gains both on the back of the fact that no more quantitative easing was announced and due to a shift away from risk assets. At least there was no more negative news out of the eurozone as talks between the Troika (ECB, IMF, EC) and Greek officials continue on the next tranche of the bailout.

Markets will continue to digest the Fed’s outcome today and the negative tone will likely filter through markets today. There is little on the data front to result in a shift in this tone. In the US data includes weekly jobless claims while in Europe attention will be on manufacturing and service sector confidence measures.

While the potential for a positive outcome to talks in Greece may provide a short term boost to sentiment the overwhelming tone is likely to remain negative especially as Operation Twist is unlikely to change the dynamic of a weak growth trajectory for the US and developed economies over the coming months. Against this background, selling risk assets on rallies remains the preferred option.

The USD will continue to look firmest against high beta emerging market currencies in the current environment. Currencies in this group are those that have the highest correlations with risk (as m measured by my in house risk barometer) over the past 3 months including CAD, ZAR, TRY, INR, MXN, ARS & RUB. In contrast currencies that also have high correlations but actually strengthen as risk aversion increases are CNY and JPY.

Posted in Asia, Asian currencies, central banks, Commodities, Currencies, ECB, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Federal Reserve, Financial crisis, FX, Greece, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Euro slides as Greek worries intensify

September 12, 2011 — Mitul Kotecha

The USD ended last week on high a note having overcome speeches by Fed Chairman Bernanke and President Obama. Bernanke’s lack of detail on potential further Fed stimulus offered the USD a lifeline as there was no mention of QE3 but nervousness may mount ahead of the September 21 FOMC meeting.

This week’s data releases (including retail sales, inflation, industrial production and regional manufacturing surveys may offer some direction to the USD and it is likely that the data over coming days will look less negative than in past weeks, giving the USD some support. Having broken above its 200 day moving average around 76.1986 for the first time in a year the USD index is set to begin the week in positive mode and will likely extend its gains over coming days.

In sharp contrast, EUR/USD crumbled at the end of last week dropping through its 200 day moving average despite positive news from Germany (rejection of bills in the constitutional court) and Italy (passage of austerity measures). The European Central Bank (ECB) did not help the EUR’s cause however, with the change in its stance to a more balanced assessment of risks from its more hawkish stance previously.

However, the real damage occurred as speculation of a Greek default intensified and ECB hawk Stark resigned from the ECB council, highlighting the divisions within the governing board. This week attention will remain on Greece as negotiations between the Troika (ECB, EU and IMF) and Greek officials resume.

Ahead of the talks Greece approved a further EUR 2 billion in austerity measures over the weekend but nonetheless, despite denials by Greek officials speculation of a debt default will continue to hammer the EUR lower. Near term technical support is seen around 1.3525 for EUR/USD.

GBP found some relief last week following the decision by the Bank of England to leave policy unchanged though it is unlikely to be able to make much if any headway against the USD over coming sessions as expectations of further UK quantitative easing may simply have been pushed back to the November meeting.

Inflation data this week will give further clues to policy but once again there is likely to be no sign of any easing in inflation pressure, limiting the room for maneuver for the BoE. Moreover, a weak outcome for UK retail sales in August will maintain the trend of soft UK data keeping up the pressure for more BoE action. As a result GBP will struggle against the USD but given that problems in Europe look even worse, GBP will likely extend gains against the EUR this week.

Posted in central banks, Currencies, ECB, Economics, Economy, Europe, eurozone, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Germany, Greece, IMF, Interest rates, Italy, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »
« Older posts
Newer posts »