Risk Aversion Back With A Vengeance

May 5, 2010 — Mitul Kotecha

Risk aversion is back with a vengeance as reflected in the rise in equity volatility (VIX), drop in equity markets and rally in US Treasuries.  European peripheral debt markets sold off despite the EU/IMF aid package for Greece, whilst EUR/USD slid below 1.3000.  Various rumours dealt a blow to markets including talk of a sovereign ratings downgrade and a EUR 280 billion bailout for Spain.   The message is clear.  This situation is becoming increasingly dire by the day.  Europe is in big trouble and the whole euro project is under threat of unravelling.  

Concerns about parliamentary approvals, implementation/execution risk, prospects for relatively weaker growth in Europe, as well as contagion to Spain and Portugal, has tempered any enthusiasm towards the EU/IMF bailout package.  In addition, despite the large size of the EUR 110 billion loan package there are growing worries that it will be insufficient to cover Greece’s funding requirements over the next three years.  All of this implies that the EUR will remain under pressure for some time yet.  I have previously spoken about a drop to around EUR/USD 1.25 but the risk is for a much sharper decline is growing.

The USD is the clear winner, spiking to its highest level since May 2009 and is looking well set to consolidate its gains over the short-term despite the fact that net aggregate USD speculative positioning has already reached its highest level since September 2008 (according to the CFTC Commitment of Traders IMM data) in contrast to EUR positioning, which is at a record low.  This is unlikely to stand in the way of further downside for EUR/USD, with the next technical support level seen at 1.2885, which would match the previous lows see in April 2009.

A combination of worries including contagion to Spain and Portugal, policy tightening in China, debt concerns in the UK and Japan, all threaten to undo the positive message from recent positive economic data including further strengthening in Purchasing Managers Indices globally.   The immediate attention remains on Greece and growing scepticism about the ability of Greece to carry out austerity measures in the face of rising domestic opposition, including a nationwide strike today. 

The rout in US and European markets will spill over to Asia, putting equity markets and Asian currencies under pressure.  Another risk currency to suffer is the AUD, which has dropped sharply following the Reserve Bank of Australia (RBA) meeting, in which the Bank indicated that rates were close to peaking.  Speculative positioning has dropped for the past two weeks as longs are taken off but AUD/USD weakness is set to be temporary, with buyers likely to emerge around near term support seen around 0.9001.

Posted in Asia, Australia, Bond markets, central banks, China, Currencies, Economics, Economy, equity markets, Europe, eurozone, FX, Germany, Greece, IMF. Tags: , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Q1 Economic Review: Elections, Recovery and Underemployment

April 10, 2010 — Mitul Kotecha

I was recently interview by Sital Ruparelia for his website dedicated to “Career & Talent Management Solutions“, on my views on Q1 Economic Review: Elections, Recovery and Underemployment.

Sital is a regular guest on BBC Radio offering career advice and job search tips to listeners. Being a regular contributor and specialist for several leading on line resources including eFinancial Careers and Career Hub (voted number 1 blog by ‘HR World’), Sital’s career advice has also been featured in BusinessWeek online.

As you’ll see from the transcript of the interview below, I’m still cautiously optimistic about the prospects for 2010 and predicts a slow drawn out recovery with plenty of hiccups along the way.

Sital: Mitul, when we spoke in December to look at your predictions for 2010, you were cautiously optimistic about economic recovery in 2010. What’s your take on things after the first quarter?

Click here to read the rest…

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

Why Buy Asian FX (Part 2)

April 2, 2010 — Mitul Kotecha

The strength of portfolio capital inflows into Asia reflects the outperformance of Asian economies relative to Western economies. Whilst the US, Europe, Japan and UK have struggled to recover from recession and are likely to register only sub-par recovery over the coming months, Asian economies led by China are recovering quickly and strongly. This pattern is set to continue, leading to a widening divergence between Asian and G7 economic growth.

As growth strengthens inflationary pressures are set to build up and Asian central banks will likely raise interest rates more quickly than their G7 counterparts. Already some central banks have moved in this direction, with India, Malaysia, Philippines and Vietnam, having tightened policy. This will be followed by many other central banks in Asia over Q2 2010 including China. Even countries with close trade links to Asia, in particular Australia will rate hikes further over coming months, with Australian interest rates likely to rise to a peak of 5% by year-end.

Given that the US is unlikely to raise interest rates in 2010 higher interest rates across Asia will result in a widening in the interest rate differential with the US leading to more upside potential for Asian currencies as their ‘carry’ attraction increases relative to the USD. The most sensitive Asian currencies to interest rate differentials at present are the Malaysian ringgit (MYR), Thai baht (THB) and Philippines peso (PHP) but I believe that as rates rise in Asia, the sensitivity will increase further for many more Asian currencies.

Most Asian currencies have registered positive performances versus the USD in 2010 led by the MYR and Indonesian rupiah (IDR) and closely followed by the Indian rupee (INR), THB and South Korean won (KRW). The notable exception is China which has been unyielding to pressure to allow the CNY to strengthen. Even China is set to allow some FX appreciation although if the US labels China as a “currency manipulator” it could prove counterproductive and even result in a delay in CNY appreciation.

Looking ahead, the trend of strengthening Asian FX will continue likely led by the likes of the KRW and INR but with the MYR, TWD and IDR not far behind. Stronger growth, higher interest rates, strengthening capital inflows and higher equity markets will contribute to appreciation in Asian currencies over the remainder of the year.

Posted in Asia, Australia, central banks, China, Currencies, Economics, Economy, emerging markets, equity markets, FX, India, Interest rates, Monetary Policy, South Korea, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , . 1 Comment »

Greek Saga Rumbles On – Does Anybody Care?

March 24, 2010 — Mitul Kotecha

The debate over Greece continues to rumble on. France and Spain requested a separate summit meeting of the 16 heads of eurozone countries immediately before the full 27-member EU summit starting tomorrow but this was met with resistance. Meanwhile, Germany has called for “a substantial contribution” from the IMF towards a Greek aid package, whilst maintaining that no EU deal will be reached for Greece at the summit.

Frankly, the whole Greek saga has become extremely boring, with the lack of agreement about how to fix it doing little to inspire confidence. In particular the fractured opinion amongst EU leaders highlights the difficulties in reaching an agreement in a union made up of so many conflicting interests. At most the summit may agree on the conditions for a rescue package for Greece rather than a package itself. This will leave markets unimpressed,

US new home sales data today is likely to paint a slightly better picture with a small gain expected, albeit following the 11.2% plunge in the previous month. Sales will be helped by the extension of the home buyer tax credit. The US February durable goods orders report is also released today, with a small increase expected. A smaller gain in transport orders suggests that the 2.6% jump last month will not be repeated.

In Europe, the key release is the March German IFO business climate survey and a rebound is likely following February’s decline, helped by warmer weather and a weaker EUR. Flash readings of Eurozone March purchasing managers indices (PMIs) are also released but these are unlikely to extend gains from the previous month. Despite expectations of firmer data the EUR/USD is vulnerable to a further decline, with support around 1.3432 in sight for an imminent test.

Attention in the UK will turn to the pre-election Budget and particularly the government’s plans to cut spending and reduce the fiscal deficit. Failure to provide a credible blue print to restore fiscal credibility will damage confidence, heightening the risks of an eventual sovereign ratings downgrade and more pressure on GBP which appears destined for another drop below 1.50 versus USD.

Most currencies have remained within ranges and the most interesting currency pair is EUR/CHF having failed to react to verbal warnings from the Swiss National Bank (SNB) about excessive CHF strength. EUR/CHF looks vulnerable to a further decline unless the SNB follows up rhetoric with action. Even if there is FX intervention by the SNB it may prove to be a temporary barrier to a market with an eye on the psychologically important 1.4000 level.

Despite the pressure on the Japanese government and Bank of Japan (BoJ) to engineer a weaker JPY, export performance has proven resilient, with exports jumping 45.3% on the year in February, helped by the strength of demand from Asia. Unfortunately this is doing little to end Japan’s deflation problem and even if there is less urgency for a weaker JPY to boost exports, JPY weakness will certainly help to reduce deflationary pressures in the economy. USD/JPY is stubbornly clinging to the 90.00 level, with little inclination to move in either direction.

Posted in Bond markets, central banks, Currencies, Economics, Economy, equity markets, Europe, Financial crisis, Fiscal/Budget, FX, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , . 1 Comment »

GBP bulls brave or crazy?

March 10, 2010 — Mitul Kotecha

The UK Pound’s (GBP) performance over recent months has been dismal. The currency has failed to show any real sign of recovery, having fallen to and below the psychologically important level of 1.50 against the USD. A number of factors including fiscal/debt concerns, political worries, and uncertainties about whether the Bank of England will step up asset purchases, have accumulated to turn even the most ardent GBP bulls into bears.

The outcome of the upcoming UK general election widely expected on May 6, remains a major weight on GBP sentiment. Until the outcome is clear or unless one or other party develops a clear lead in the polls, it is difficult o see GBP sustain any durable recovery. In the near term GBP/USD is vulnerable to a test of its 2010 low around 1.4780 and then towards 1.44. The risk to this is that the market is very short GBP which could result in a sharp bounce in GBP in the wake of any good news. However, a rally in GBP will only result in fresh sellers.

Ahead of the elections will be the budget and this will be closely scrutinized for steps to reduce the size of the burgeoning fiscal deficit. Whichever party comes into power will need to convince markets that a credible and timely plan exists to reduce the size of the deficit and prevent a sovereign ratings downgrade. If not, GBP could see itself under much more pressure. In this respect it’s worth noting the Fitch ratings warning that the UK sovereign credit profile has deteriorated.

It’s not all bad for GBP, however. By some measures it’s now the most undervalued major currency, opening up the possibility of a sharper bounce back over the medium term. Moreover, UK debt markets are already trading as if a ratings downgrade has taken place, whilst arguably GBP has also priced in a lot of negative news already, as reflected in the very negative speculative positioning in the currency.

The economic news is also not as bad as the headlines might suggest and although recent housing data has been a bit mixed, both consumer spending and the housing market have held up reasonably well. Bearing all this in mind GBP is set to recover over the medium term, but it would be very brave to buy the currency any time soon, at least until UK elections are out of the way.

Posted in Bond markets, central banks, Currencies, Economics, Economy, Financial crisis, Fiscal/Budget, FX, Interest rates, Monetary Policy, Politics, UK. Tags: , , , , , , , , , , , , , . 1 Comment »
« Older posts
Newer posts »