Asian currencies running into resistance

October 10, 2012 — Mitul Kotecha

As the US Q3 earnings season gets underway caution is prevailing as reflected in the losses in US and European equity markets overnight. The VIX jumped as risk aversion increased in the wake of lower revised growth estimates from the IMF and worries that earnings will be far less flattering than in previous quarters. Nonetheless, stronger than forecast earnings from Alcoa helped to kick of the earnings season in positive mode.

In Europe the visit by Chancellor Merkel to Athens was accompanied by reassuring statements from the German leader but this was to little avail as demonstrations in the Greek capital continued. Reports that lenders are discussing extending Greece’s bailout program by two years may provide some relief, however.

Spain remains the major focal point and in this regard there is no progress in the country moving forward with a bailout request much to the chagrin of peripheral debt markets and the EUR. There are few data releases of interest today of which the Fed’s Beige Book will be the main highlight. The market tone will continue to remain cautious but we don’t expect a major relapse in risk appetite.

The USD continues to make good headway in an environment of higher risk aversion, as the USD index continues to maintain a strong correlation with risk. We see little reason for this to reverse although EUR/USD may run into some support around the 1.2824 area. Our preferred crosses include playing short EUR/AUD given that our model indicators show that AUD is oversold at current levels.

Asian currencies will run into some resistance against the background of a firmer USD and the ADXY index is struggling to break higher. The PHP and THB have been the major outperformers so far this month, with most other Asian currencies have weakening.

India has been the biggest beneficiary of renewed portfolio flows to the region, unsurprising in the wake of recent reform announcements registering around $1.3 billion of equity flows month to date. USD/KRW looks like it will struggle to break below 1110 having failed on its attempts to break through this level. Equity capital inflows to Asia are on par with the inflows registered in 2009 and 2010.

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GBP vulnerable, AUD outperforms

July 19, 2012 — Mitul Kotecha

Risk assets edged higher as the Bernanke effect rippled through markets. The fact that the Fed chief maintains and easing bias as reiterated to the Senate yesterday looks sufficient to provide a floor under risk assets over coming weeks. Sentiment was helped by a 6.9% jump in June US housing starts and positive earnings while the Fed’s Beige Book highlighted that growth was “modest to moderate’.

Q2 earnings have exceeded estimates for 72% of S&P 500 companies reporting so far providing a further element of support to risk assets. Hopes of further stimulus in China have also helped. Unfortunately all of this suggests that the market is looking for more artificial stimulus rather than underlying structural improvements. The efficacy of such stimulus is likely to more limited than in the past, suggesting plenty of scope for disappointment.

GBP took a hit on the chin yesterday as the Bank of England opened the door to a rate cut in the latest set of MPC minutes which were on balance seen as dovish. The currency will face another test today in the wake of the June retail sales report which could come in weaker than consensus.

Added to the fact that my quantitative models point to downside risks for GBP both against the USD and EUR the stars are aligning in the direction of growing GBP pressure over coming weeks. I look for GBP/USD to edge back town to technical support around 1.5518 while EUR/GBP is set to re test resistance around 0.7951 in the short term.

AUD’s outperformance continues unabated and the currency is set to make further strides in the days ahead. While AUD remains a relatively high beta currency, it is also a China play. In this respect it has benefited from expectations of more stimulus measures from China. Separately my risk barometer remains in ‘risk neutral’ territory, conducive for risk currencies.

While weak Aussie jobs data last week may have instigated a degree of caution into AUD bulls the currency is likely to continue to grind higher in the absence of a bout a rising risk aversion. Q2 inflation data next week will provide further direction but to be frank the market is already pricing in around 75bps of further policy rate cuts this year, and a benign inflation reading will do little to change this. The key resistance level on the top side for AUD/USD is 1.0475.

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