Unloved US Dollar

July 16, 2010 — Mitul Kotecha

The USD index is now at its lowest level since May 3 and is showing little sign of turning around. The bulk of USD index weakness overnight came via the EUR and GBP, both of which rose sharply against the USD, with EUR/USD breaching its 90 day moving, hitting a high of 1.2955 and GBP/USD on its way to testing its 200 day moving average, reaching a high of 1.5472. Commodity currencies fared far less positively, perhaps feeling the after effects of the weaker Chinese data this week, with the NZD also dented by weaker than expected inflation data in Q2.

The USD was once again hit by US growth worries. To recap, the US data slate revealed a soft reading for PPI, whilst the July Empire manufacturing index dropped 14.5 points, a far bigger drop than forecast. The Philly Fed index also dropped further in July despite expectations of a small gain. In contrast, June industrial production edged higher, but manufacturing output actually fell. There was a bit of good news in the fact that weekly jobless claims fell more than forecast.

The releases extended the run of weak US data, keeping double-dip fears very much alive. The data have acted to validate the Fed’s cautious growth outlook expressed in the latest FOMC minutes but a double-dip is unlikely. Today’s releases include June CPI, May TIC securities flows, and July Michigan confidence. Another benign inflation report is expected. Consumer confidence is set to slip further against the background of soft data and volatility in equity markets whilst TICS data is forecast to reveal that long term securities flows declined in May compared to the $83 billion inflows registered in April.

The move in the EUR is a making a mockery out of forecasts including my own that had expected renewed downside. The relatively successful Spanish bond auction yesterday helped to ease eurozone sovereign debt concerns further, with a likely strong element of Asian participation. I have still not given up on my EUR negative view given the likelihood of a deteriorating economic outlook in the eurozone and outperfomance of the US economy, but over the short-term the EUR short squeeze may have further to go, with EUR/USD resistance seen at 1.3077.

Equity markets were saved from too much of a beating following the release of better than expected earnings from JP Morgan, a $550mn agreement between Goldman Sachs and the SEC to settle a regulatory case, and news from BP that it has temporarily stemmed the flow of oil from the leak from its Gulf well. Agreement on the US financial reform bill, passed by the Senate yesterday and likely to be signed into law by US President Obama next week, likely helped too.

The tone of the market is likely to be mixed today, with US growth concerns casting a shadow on risk trades. Earnings remain in focus and the big name releases today include BoA, GE and Citigroup but early direction could be negative following news after the US close that Google Inc. profits came in below analysts’ expectations. Data in the US today is unlikely to help sentiment given expectations of more weak outcomes, leaving the USD vulnerable to further selling pressure.

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ECB, BoE and RBA in the spotlight

July 5, 2010 — Mitul Kotecha

Double-dip fears are the pervading influence on market psychology at present even as European sovereign concerns appear to be easing. Friday’s release of the June US jobs report did little to alleviate such concerns but the headline payrolls number was less negative than the indications provided by other jobs data.

Growth fears have in particular been centred on the US in the wake of a run of disappointing data, These new found concerns have somewhat tarnished the USD’s ability to benefit from safe haven buying as risk aversion increases, as reflected in the 4.5% drop in the USD index since its high on 7th June. The prospects for the USD do not look too much better this week, but the drop is more likely a correction rather than a renewed weakening trend.

Having navigated its way through the European Central Bank’s (ECB) 12-month liquidity payback, various debt auctions, and Germany’s presidential election last week the EUR may find itself with less obstruction in its path but will nonetheless, likely struggle to make much headway this week. EUR speculative positioning, as indicated by the CFTC IMM data, reveals that there has been little short covering over the last couple of weeks, suggesting speculative sentiment remains negative.

Nonetheless, the rebound in EUR/USD has been impressive since its low around 1.1876 about a month ago and not just against the USD, with EUR making up ground on various crosses too including CHF and GBP. Easing sovereign concerns will have helped but there are plenty of downside risks ahead as austerity measures begin to bite and growth divergence becomes more apparent.

The ECB council meeting on Thursday is unlikely to give much direction for the EUR, with the meeting likely to pass with an unchanged rate decision and no change in economic assessment. There will be more attention on whether EUR/USD can maintain a toe hold above the psychologically important 1.2500 level, which I suspect may prove tough to hold this week.

The Reserve Bank of Australia (RBA) also announces its rate decision (Tuesday) and will likely pause in tightening cycle. Recent data have remained positive, especially with regard to the labour market. The RBA will wait for the Q2 CPI data on July 28th before deciding on the next policy move, with jobs data on Thursday also likely to provide further clues. AUD/USD may struggle in the current environment where growth worries are prevalent, and the currency is likely to find it tough going over the coming weeks.

Finally, the Bank of England (BoE) meets this week too but like the ECB and RBA no change is likely. Although we will have to wait a couple of weeks for the minutes of the meeting it seems highly unlikely that MPC members will vote for a hike aside from Sentance who has espoused a more hawkish stance. Notably GBP speculative short positions have been scaled back over recent weeks as sentiment for the currency turns less negative but GBP gains against the USD will be more limited this week, with renewed GBP upside against the EUR more likely.

Posted in Australia, central banks, Currencies, Economics, Economy, Europe, eurozone, Fiscal/Budget, FX, Interest rates, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

What To Watch This Week

May 24, 2010 — Mitul Kotecha

The end of last week proved to be a calmer affair than the preceding few days. There was some encouraging news on the Greek front, with Germany finally approving its share of the European Union (EU) aid package whilst Greece appeared to be on track with its budget deficit reduction as the country recorded a cash deficit of EUR 6.3billion in the first four months of the year, a 42% reduction compared to a year earlier. EU officials also agreed on tougher sanctions for countries breaching austerity rules.

There were plenty of negatives to offset the good news however, as European business surveys including the German IFO index and flash eurozone purchasing managers indices (PMIs) revealed some loss of momentum in growth as well as increased divergence. European banking sector concerns intensified as the Bank of Spain was forced to take control of CajaSur, a small savings bank holding 0.6% of total Spanish banking assets, which faced difficulties due to distressed real estate exposure. Its woes highlighted the problems faced by many Spanish savings banks due to property market exposure.

US data releases this week will confirm that economic recovery gathered steam in Q2. May consumer confidence data is likely to record a small gain, due in large part to improving job market conditions, whilst the Chicago PMI is set to retrace slightly in May, albeit from a healthy level. Both new and existing home sales are set to record gains in April, the former following a sizeable gain in March although the drop in house prices likely to be revealed by the Case-Shiller index will continue to fuel doubts about the veracity of the turnaround in the US housing market.

In Europe there is not much in terms of first tier releases and highlights include sentiment data such as German Gfk and French consumer confidence indices, and the May French business confidence indicator. The data are likely to be mixed, and as indicated by last week’s surveys will reflect a relatively healthy Q2 2010, but a worsening outlook for the second half of the year.

In the absence of UK data today there will be plenty of attention on the details of plans by Chancellor Osborne to cut GBP 6 billion from the budget deficit. The measures will be small change ahead of the emergency budget package on June 22nd when much bigger cuts are expected. Nonetheless, the first step today will be a crucial test of the new government’s ability to convince ratings agencies and markets that it is serious about reducing the burgeoning fiscal deficit.

Following the massive positioning adjustments of the last week markets will look somewhat calmer over coming days but risk aversion is likely to remain elevated, suggesting little respite for most currencies against the USD. The recent moves have left net aggregate USD positioning registering an all time high according to the CFTC Commitment of Traders data, in the latest week, but after the slight retracement lower in the USD index, it is set to make further gains over coming days.

It was notable that EUR and GBP looked more composed at the tail end of the week whilst attention turned to the liquidation of long positions in CHF, AUD, NOK and SEK. These risk currencies are set to remain under pressure but there will be little respite for EUR which is set to drift lower, albeit a less aggressive pace than over recent weeks and a re-test of EUR/USD technical support around 1.2296 is likely. GBP/USD has showed some resilience over recent days but remains vulnerable to further downside pressure, with 1.4310 immediate support.

Posted in Australia, bank rescue, central banks, Currencies, Economics, Economy, equity markets, Europe, eurozone, Financial crisis, Fiscal/Budget, FX, Germany, Greece, IMF, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , . 1 Comment »

High yield / commodity currencies take the lead

January 7, 2010 — Mitul Kotecha

Although equity markets continue to tread water the appetite for risk looks untarnished. So far into the new-year the winners are commodity / high yield plays as well as emerging market assets. The AUD, NOK, NZD and CAD have been the stars on the major currency front, with only GBP registering losses against the USD so far this year. The move in these currencies has been well supported by resurgent commodity prices; the CRB commodities index is up close to 10% since its low on 9 December.

There is little reason to go against this trend and the USD index is set to continue to lose ground as risk appetite improves further. I highlighted the upside potential in high yield / commodity currencies in a post titled “FX Prospects for 2010” and stick with the view that there is much further upside. I still prefer to play long positions in these currencies versus JPY which I believe will come under growing pressure as the year progresses.

Economic data has also been supportive, especially in Australia, supporting the AUD’s yield advantage. Although comments from the central bank towards the end of last year downplayed expectations of much further tightening, data releases support the case for another rate hike at the 2 February RBA meeting, with a fourth consecutive hike of 25bps to 4.00% likely at the meeting.

There will be some important clues from next week’s jobs data in Australia but judging by the solid gain in November retail sales, which rose 1.4% versus consensus expectations of 0.3%, and 5.9% jump in building approvals, the case for a rate hike has strengthened.  AUD/USD will now set its sights on technical resistance around 0.9326. 

AUD/USD has the highest sensitivity with relative interest rate differentials – correlation of 0.85 with Australia/US interest rate futures differentials over the past month – and so unsurprisingly the AUD rallied further as markets reacted to the strong retail sales data. I believe Australian interest rates will eventually get back up to 6% – pointing to more upside for AUD/USD as this is more than is priced in by the market.

It is fortunate for the USD that the correlation between the USD index and interest rate expectations remains low but nonetheless the December 15 FOMC minutes may have provided another excuse to sell the currency. The minutes were interpreted as slightly dovish by the market, with many latching on to the comments that some members of the FOMC debated the potential to expand the scale of asset purchases and continuing them beyond the first quarter.

Posted in Australia, central banks, Commodities, Currencies, Economics, emerging markets, equity markets, FX, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , . 2 Comments »

US Dollar Déjà vu

December 18, 2009 — Mitul Kotecha

The USD is in a win-win situation at present.  Good economic data in the US helps to advance expectations of US monetary tightening, lending the USD support, regardless of the positive impact on risk appetite.  Similarly, bad economic news is also supporting the USD as it leads to higher risk aversion.  Either way the USD has surged over the past few weeks, appreciating by close to 5% since its low on 25 November. 

There was a similar but directionally opposite move in the USD last year taking place from almost the same time.  The USD index hit a high around 21 November 2008 but fell by over 10% in just less than a month.  If the same pattern is repeated this year the USD index has much further to strengthen although it is worth noting that the drop in the USD last year reversed practically to this day a year ago, with the USD subsequently rising by close to 13% in the next few months. 

Given that the move at the end of last year may not be the best comparison given the distortions due to the crisis and massive repatriation to the US in Q1 2009 it’s worth looking at what happened in 2006 and 2007 for a better comparison.   From the beginning of December 2006 to 11 January 2007 the USD strengthened by 3.5% but then dropped by around 4.5% within the next 3 months.  Similarly, the USD strengthened by close to 4% from the end of November 2007 to 20 December 2007.  However, the USD dropped by over 8% in the three months after.  So what I am saying is that it is way too early to suggest that the USD rebound will be sustained over coming months and judging by past evidence all its doing is proving better levels to sell for a subsequent decline over Q1 2010.   

Is the USD really in a win-win situation? Well, the more plausible explanation is perhaps a bit more simplistic.  It’s year end and the market is squaring up, with FX moves being exaggerated by thinning liquidity.  There is some support to this theory from the CFTC Commitment of Traders IMM data which revealed a sharp reduction in net aggregate USD short positions in the latest week, with a further sharp reduction in net short positions expected in next week’s release. 

Whilst it is too early to buck the trend yet, going into early next I look for a reversal of the recent appreciation in the USD against the background of improving risk appetite and US interest rates that are unlikely to go for a long while yet.

Posted in Currencies, Economics, FX, Interest rates, US. Tags: , , , , , , , , . 1 Comment »
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