USD momentum fading, EUR and gold supported

September 10, 2013 — Mitul Kotecha

Although Syria tensions continue to linger in the background risk assets performed well overnight helped in part by Chinese trade and inflation data released over the weekend. Meanwhile the weaker than forecast US jobs report has eased some of the markets fears about tapering, with the Fed looking less likely to pare back asset purchases too aggressively. Even the situation in Syria looks a little less tense as US President Obama opened the door to holding off any air strikes on Syria if the country handed over its stock of chemical weapons as proposed by Russia. A limited data slated today, with only second tier releases on tap suggests there will be some positive follow through to markets today.

The USD has lost momentum in the wake of last Friday’s US employment report and subsequent drop in US yields. The USD may be helped by a relatively firm US retail sales reading expected at the end of the week but tapering uncertainty will likely act to restrain any topside. Additionally, underperformance of US bonds and equities alongside foreign selling of US portfolio assets (especially by reserve managers) highlights the uphill struggle faced by the USD in the short term. Notably aggregate net USD positioning increased again last week, with net long USD positioning around its three month average, highlighting the lack of USD momentum at present. Further USD gains may need to wait for when the Fed finally begins to taper next week.

EUR has been the most resilient major currency against the USD this year. It has easily quashed expectations that it would face a difficult time in the wake of a weaker growth trajectory and ongoing peripheral worries. Admittedly the Eurozone economy remains weak and will contract this year, but there are already signs of improvement, with positive data surprises being revealed. Moreover, the Eurozone external position has strengthened due to strong portfolio inflows and a healthy current account surplus. Although there a number of risks ahead including Italian political tensions and German elections the near term outlook for the EUR looks constructive, with strong technical support seen around 1.3220.

Gold has moved into consolidation mode, with a range of 1360-1400 being observed over recent days. Lower US bond yields, and a weaker USD in the wake of the softer US August jobs report suggests will offer some support to gold prices while speculative positioning has shown a significant improvement over recent weeks, with positioning well above the three month average. Some resolution towards ending South African strikes and improving risk appetite may dampen the upside but we expect gold prices to be relatively resilient over the coming weeks as seasonal demand kicks in (our analysis shows that historically gold has a positive month in September) with a retest of the recent high around USD 1434 set be breached over the coming week.

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Watch to watch this week

September 9, 2013 — Mitul Kotecha

While the world awaits US Congress’ vote on military action in Syria there is at least some distraction on the data front. Friday’s US August employment report contributed a further layer of uncertainty to the Fed tapering debate. Payrolls came in lower than forecast, with downward revisions to previous months. The unemployment rate dropped 7.3% but this was largely due to less people looking for jobs, something that the Fed will take into consideration.

It is doubtful that the jobs data will prevent tapering beginning at the September 17-18 FOMC meeting but it does support the view of a smaller (USD 10 billion) taper. In any case, data this week will if anything reinforce expectations that the Fed will commence tapering asset purchases this month, with a solid August retail sales reading forecast. Consequently the USD is set to maintain a firm tone into this week.

Eurozone markets may be dented by ongoing political issues, with Italian politics in particular legal action against former PM Berlusconi in focus. Meanwhile, worried that its forward guidance is having less impact than hoped for as core bond yields rise the Eurozone Central Bank sounded decidedly dovish at its policy meeting last week. The dovish cause will be supported by a contraction in Eurozone industrial production. As a result, the EUR will remain capped over the coming days.

Similarly the Bank of England has had little success in containing the rise in gilt yields with its forward guidance given the positive run of UK data releases over recent weeks and a likely firm UK September jobs report will make the job even more difficult. Outperformance of UK data continues to support relative GBP strength especially against EUR.

Elsewhere news that Japan has been awarded the rights to host the 2020 Olympics has boosted growth expectations and hit the JPY even as the debate over whether to increase the consumption tax grow. An upward revision to Japanese Q2 GDP releases this morning supports the view that the economy will be able to withstand the tax hike.

Meanwhile Australian markets will be buoyed by the election victory of Tony Abbott’s Liberal-National Coalition although notably it will have to deal with a host of minority parties to pass legislation through the Senate. AUD will likely see a post election boost in the short term.

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Lots of events / data to chew on

September 2, 2013 — Mitul Kotecha

US Labor Day holidays should keep trading relatively subdued over the course of today. Even the prospects of a military strike in Syria have paused following the decision by US President Obama to gain approval from Congress. Given that Congress does not return from summer recess until September 9 any action is not going to be quick. Consequently risk appetite may improve in the near term. Additionally Asian markets will benefit from a rise in China’s manufacturing confidence in August to a 16 month high. ,

Markets will have plenty of data and events to chew over as the week progresses. Overall US data will maintain its less impressive trend, with a drop in the August US ISM manufacturing confidence survey expected, while the July trade deficit is set to widen and non farm payrolls are likely to come in at a softer pace of around 160k. Negative US data surprises will likely see a further bullish retracement in US Treasuries and in turn a loss of upward momentum for the USD.

Elsewhere the four key major central bank decisions on tap this week will likely prove to be non-events, with the Bank of Japan, European Central Bank, Bank of England and Reserve Bank of Australia set to keep policy rates unchanged. The BoJ is likely to take comfort from the improvements in domestic data and rising inflation reducing any pressure for any further easing in the near term. The ECB will likely repeat its forward guidance and reveal updated staff forecasts.

On the data front final Eurozone PMI manufacturing survey readings, July German industrial activity and UK manufacturing PMI will garner attention. Some likely improvement in risk appetite will likely see a further spread narrowing for Eurozone peripheral bonds while the EUR will find some support. In Australia aside from the RBA, retail sales and the federal election this weekend will be in focus. Improving risk appetite will be constructive for the AUD.

In Asia attention will remain on the INR and IDR this week, with both currencies gaining some ground in the wake of USD swap measures with oil companies in India and a policy rate hike in Indonesia. Stability may prove temporary but a slightly firmer tone to risk appetite at the start of this week may give more room for upside in these currencies in the short term. Further out, it is difficult to see any sustained reversal given the prospects for higher US yields, more capital outflows and domestic fundamental fragilities.

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USD edges higher

August 29, 2013 — Mitul Kotecha

There appears to be some prevarication over possible military strikes on Syria resulting in less angst in markets over an imminent strike. Consequently risk appetite edged higher overnight while US Treasury yields also rose. Potential military strikes have also led to firming oil prices. Pressure on vulnerable emerging market assets has continued unabated however, with tapering worries and domestic vulnerabilities resulting in ongoing capital outflows.

In Asia the INR and IDR remain under considerable pressure. However, INR forwards recovered somewhat overnight and the spot rate strengthened in the wake of the introduction of a forex swap window for Indian oil firms. The measure will help to alleviate some of the demand/supply pressures for USDs but is however, unlikely to arrest the decline in the INR for long. In Indonesia the central bank may increase policy rates by 50bps today which ought to help the IDR in the short term.

The USD gained a little ground as US yields rose. The USD may benefit as markets fret about possible military action against Syria resulting in an attendant rise in risk aversion. Nonetheless, a series of negative data surprises over recent days contrasting with positive surprises in Europe leaves the USD rather vulnerable against major currencies. In contrast the USD is set to continue to remain firm against many emerging market currencies given the ongoing outflow of capital in the wake of higher US yields and tapering fears.

AUD’s tentative recovery in early August has proven to be an abject failure. Like many other high beta currencies AUD has suffered as risk aversion has intensified recently. Additionally speculation of further policy easing has also dampened the AUD. Consequently speculative sentiment remains weak. In reality, further rate cuts may depend on whether the AUD can rally following an over 15% fall since April. Any failure for the AUD to gain ground may stay the hand of the RBA. Although it has found some support today, further downside pressure is likely with a breach of the 5 August low at 0.8848 expected.

GBP underwent some volatility in the wake of BoE governor Carney’s speech. Initial weakness was bought into as shorts were covered however, leaving the currency back where it started. Carney’s speech was interpreted as dovish, with the governor noting that the BoE was read to loosen policy if higher market rates impacted the economy. Nonetheless, there was little immediate implication for policy. Overall GBP is likely to be constrained around resistance at 1.5590, with gains limited ahead of the BoE policy meeting next week.

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Respite for Asian currencies

August 26, 2013 — Mitul Kotecha

Pressure on policymakers in developed economies to orchestrate more predictable exits from unconventional monetary policies has intensified as reflected in comments at the Jackson Hole symposium the wake of the intense volatility in emerging market assets over recent weeks. While it is unlikely that a crisis is looming there is no doubt that mixed messages and lack of clarity over exit policies is having a demonstrable impact on EM assets.

Such clarity is unlikely to come this week. However, a pull back in core bond yields from recent highs will likely contribute to a calmer tone to markets at the turn of the week and some further near retracement in a positive direction for risk assets. Whether this lasts will depend on the clarity of the message from central bankers and in this respect speeches by four Fed officials over coming days, ECB’s Weidmann today and BoE governer Carney on Wednesday, will be scrtutinized.

The data slate is not particularly heavy but looks skewed towards relatively more positive Eurozone releases. In the US a likely drop in July durable goods orders today and pull back in consumer confidence tomorrow will provide little support to US asset markets including the USD while the trend of positive data surprises in Europe including likely gains in August economic sentiment indices and German IFO will add further evidence that growth will turn positive in Q3.

In Japan labor market data will reveal relative strength, with a low unemployment rate, helping to support the consumer. Inflation is set to rise further too, suggesting that policy measures are garnering some success. However, the upward trend in inflation is by no means guaranteed and ultimately renewed aggressiveness on the JPY will be needed as inflation tops out.

How will this leave currency markets? The USD is likely to continue to fare poorly against the EUR and GBP especially given the less than impressive data releases expected this week while the JPY is likely to remain on the back foot, pressured in part by firmer risk tone.

On the Asian currency front, further short term retracement is likely, especially for those currencies that have been beat up the most, namely INR and IDR. However, gains will likely prove limited, with tapering concerns and capital outflows showing little sign of reversing. Additionally, a likely disappointing Q2 GDP release in India at the end of the week will be unhelpful for the INR.

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