Q4 earnings and Chinese data

January 18, 2010 — Mitul Kotecha

Since the start of the year the market has gyrated from “risk on” to “risk off” and back again. On balance the overall tone has been just about positive, with firmer economic data, most notably in China outweighing sovereign debt concerns in Greece and elsewhere. Although debt concerns are unlikely to dissipate quickly, especially given Greece’s inability to convince markets of its plans to cut its burgeoning budget deficit, the “risk on” tone is likely to win.

“Risk off” may be the tone at the start of the week however, as US equities ended the week on a negative note ahead of the Martin Luther King holidays. The holidays will likely keep trading slow. Data wise the main US events housing starts on Wednesday and the Philly Fed on Thursday. Q4 US earnings are likely to take a bigger share of market attention as the earnings season rolls on. Bank earnings will be a key focus, with Citigroup, Morgan Stanley, BoA, Wells Fargo and Goldman Sachs set to report this week.

Given the growing influence of Chinese data on markets the monthly data pack from China will capture more attention than usual on Thursday. In particular, GDP and inflation data will be of most interest. GDP data is likely to reveal an acceleration in growth in Q4 YoY to above 10% but given worries about over heating and following last week’s tightening in China’s monetary policy CPI data will be closely scrutinized. Inflation is likely to pick up further maintaining the pressure for further monetary tightening as well as a stronger CNY.

Elsewhere, in the eurozone the main event is the German ZEW survey tomorrow, which is likely to show further signs of flagging, due to Greek concerns. There is also an interest rate decision to contend with; the Bank of Canada is unlikely to surprise markets as it keeps policy unchanged tomorrow. The UK has a relatively heavier data slate, with CPI tomorrow, Bank of England minutes on Wednesday and retail sales at the end of the week.

The UK data kicked off on a positive note this week, with house prices rising 0.4% MoM in January and 4.1% YoY according to UK property website Rightmove, the biggest annual gain in over a year. Moreover, activity on Rightmove’s website reached a record high in the first full week of the year. The data as well as expectations that Kraft will raise its bid for Cadbury will likely help GBP in addition to other GBP positive M&A news. GBP/USD will look to test resistance around 1.6365 this week.

After a slightly firmer start helped by the weak close to US equity markets on Friday the USD is likely to generally trade on the back foot over the week. Speculative sentiment for the USD has definitely soured into the new-year as reflected in the CFTC IMM data which revealed a big jump in net short positions in the week ending 12 January 2010. Net aggregate USD positions shifted from +1.6k to -51.9k over the week, with the main beneficiaries being the EUR, and risk trades including AUD, NZD and CAD.

Posted in Asia, central banks, China, Currencies, Economics, Economy, emerging markets, equity markets, Europe, Fiscal/Budget, FX, Germany, Greece, Interest rates, 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 »

“Risk On”- Which Currencies Will Benefit?

January 5, 2010 — Mitul Kotecha

It was a “risk on” beginning of the week as equity markets rallied, commodities prices rose, and G10 bonds and USD came under pressure. Stronger manufacturing PMIs helped to boost confidence in the global economic recovery, with solid PMIs revealed in China, and across the rest of Asia, UK, and the US. The US ISM manufacturing which rose to its highest since April 2006 also revealed a rise in the unemployment component, consistent with view of an unchanged reading for December payrolls.

In the Eurozone the PMI matched the flash release and remained in expansion territory though there was some slippage in Germany, Spain, and Italy, underscoring the likely underperformance of the Eurozone economy relative to expectations of faster recovery in the US. Nonetheless, the PMIs continued to show a picture of expansion, with the Eurozone PMI at its highest in 21-months.

The USD lost ground against the background of improved risk appetite and looks set to fall further abruptly ending its short covering rally. The USD appears to be finding little support from interest rate expectations, with the correlation between most currencies and relative interest rate differentials remaining relatively low for the most part (just -0.04 over the past 3-months between the USD index and US rate futures).  The correlation between the USD and US 10-year bond yields looks somewhat stronger however, and could offer some relief to the USD if yields continue to push higher.

Speculative (CFTC Commitment of Traders) data reveals just how massive the shift in USD positioning has been over recent weeks, with net aggregate USD positioning (vs EUR, JPY, GBP, AUD, NZD, CAD, CHF) registering its first net long USD position since May 2008. The swing in positioning has been dramatic, from -167k contracts on 15 September 2009 to +8.7k in the week ending 29th December 2009. The data also reveals the sharp deterioration in sentiment for the EUR to its lowest since September 2008. Likewise net JPY positions have shifted to their biggest net short since August 2008.

What does this imply? The market is very short EUR and JPY but the JPY has much further to go on the downside as it increasingly retakes the mantle of funding currency.  In any case compared to historical positioning JPY shorts are not so big suggesting more room to increase short positions.   

The EUR has moved into a short term uptrend, with the MACD (12,26,9) having crossed its signal line and positioning supports further upside. EUR/USD will need to take out strong resistance at 1.4459 (December 29) before it can embark on a more significant move higher. Asian currencies also look set to take more advantage of a resumption of USD weakness, especially in the wake of strong risk seeking capital flows into the region. KRW, TWD, IDR and PHP look bullish technically.

Posted in Asia, Commodities, Currencies, Economics, Economy, equity markets, FX, Interest rates, US. Tags: , , , , , , , , , , , , , , , , , , , , , , . 1 Comment »

All eyes on US payrolls

January 4, 2010 — Mitul Kotecha

Happy New Year.  Markets are likely to struggle for direction ahead of the key US December non-farm payrolls data though the end of the year ended on a softer note for equity markets in the US, whilst Asian stocks were somewhat firmer.  The USD has taken a firmer tone at the start of this week but is likely to face renewed pressure into the new-year.  The fact that USD/Asian FX has failed to build any momentum on the upside also highlights risks to the USD from current levels. 

Ahead of payrolls look for EUR/USD technical support around 1.4177, with strong resistance around 1.4459 whilst USD/JPY will find support at 91.00 and resistance around 94.08.   I favour a firmer bias for the USD at the beginning of the week but this may not last too long and would look to take profits on long USD / short risk currency positions into next week. 

2010 is set to be a year of two halves for currency markets and whilst the USD is to eventually recover, the rally seen at the end of last year is likely to prove unsustainable, especially now that a lot of short USD positions have been covered.   If anything the pull back in various risk currencies provide better levels to take long positions, especially in the AUD and NZD as well as many Asian currencies where renewed appreciation in the months ahead is likely.  I particularly like the IDR and KRW, two of last year’s winners. 

The US jobs report will provide some evidence of a normalisation in economic conditions, with December likely to have marked the best month in two years for payrolls (Bloomberg consensus forecasts a 1k drop in payrolls). Although hiring is unlikely to pick up quickly and wage pressures are set to remain subdued, the data will mark an encouraging shift in job market conditions following the loss of 7.2 million jobs since the US recession began.  The unemployment rate is likely to remain stubbornly high, however.

Ahead of the jobs data markets will be able to garner some clues to the data from the jobs component in today’s release of the December ISM data.  The ISM is likely to remain in expansion territory though is unlikely to register much of a gain from last month’s 53.6 reading.   The eurozone and UK also release their manufacturing PMIs today and although both will remain above the 50 boom/bust mark, neither are set to register much improvement from November’s reading. 

There will also be some attention on central bank thinking this week, with the release of the December 16 meeting FOMC minutes as well as the BoE rate decision to digest.  The minutes will likely acknowledge some signs of improvement in the economy but there will be no indication that the Fed is shifting its “extended period” thinking even if the Fed wants to reassure markets that it has an exit strategy in place.   The BoE meeting will be a non-event for markets, with more interest on the outcome of the February meeting.

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

Speculative data points to USD struggle

December 29, 2009 — Mitul Kotecha

The latest CFTC Commitment of Traders (IMM) data shows just how massive the shift in speculative USD positioning has been over recent weeks.  Net aggregate USD short positions (vs. EUR, JPY, GBP, AUD, NZD, CAD, CHF) have shifted from -172k at the beginning of December to -11k in the week ending Dec 22nd.   This corresponds with the sharp rally in the USD versus various currencies over the same period.  

The net speculative USD position is now at its highest since May 2009 and at this pace of improvement the market will be net long USD very quickly.  However, the data also suggests that there should be a degree of cautiousness in buying the USD from here.  The USD may simply be repeating the pattern seen in 2006 and 2007 when the USD strengthened into year end only to drop sharply in the weeks after. 

If the rally in the USD has largely been due to short covering into year end then this source of support for the USD is looking exhausted. Indeed it is difficult to argue that interest rate moves have helped the USD as correlations are still low between the USD index and US rate futures. The shift in USD speculative positioning may explain the inability of the USD to make much further headway over recent days and suggests difficulty for the USD in the days ahead, with the USD index likely to struggle to get above last week’s high o 78.449.

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