Brave New World

Foreign Exchange Outlook 07/04/2009

EURUSD: Bearish. Current spot (1503BST): 1.3261. Targeting 1.3160 (100 day SMA)

• Heightened risk aversion
• Worsening economic outlook in Europe
• Lack of policy response from European policy makers

GBPUSD: Mildly bullish. Current spot (1503BST): 1.4710. Targeting 1.4960 (yesterday’s high)

• Better than expected data
• Limited downside risk from Thursday’s BoE announcement
• Technicals indicate a higher move in Cable

USDJPY: Mildly bearish. Current spot (1503BST): 100.322. Targeting 100

• Heightened risk aversion may see break back through psychologically important level

Comment– Given the market surge at the end of last week on the back of G20, news of a relaxation of the mark-to-market rule for financial services firms, and relief that the US NFP figures showed that less than 700k jobs(!) were lost in March, it is unsurprising that the market has taken time to take stock. Risk appetite has diminished this week, with equity markets displaying nervousness. Reports that the IMF are about to announce that the toxic asset problem is much larger than originally thought have served to refocus minds on the origins of this crisis and the lack of progress made on its resolution. However, we are not quite back to the doom and gloom of six weeks ago.

The AUD is consolidating gains made against the USD, with the RBA effectively announcing earlier this morning that the rate cut cycle is over, following one last cut of 25bps to 3%, a strong current account surplus (unlike Japan, both exports and imports increased). China is showing some renewed signs of confidence, in some of its latest data- although the optimism in official figures should be discounted the data is moving in the right direction.

GBP– The UK economy, while still unofficially the toxic man of Europe, is showing signs that a flattening of the downturn is taking place. Last week’s Nationwide survey showed a surprise rise in house prices, although Halifax showed a drop. Industrial production data out today showed a further fall of 1.0% in February, better than the market expectation and better than January’s fall of 2.7%. Manufacturing output dropped  0.9% in February, following a revised fall of 3.0% in January- making it the smallest monthly fall since August 2008. Authorities in Europe’s second largest economy have been proactive, using every available tool at their disposal. In this context, sterling should be reasonably well supported, although any strong return to risk aversion will bear down on GBPUSD. .

The EUR has benefitted from a return to risk appetite, and a boost to IMF finance from G20 meeting, which reduced the region’s exposure to Eastern European economic implosion reaching a high just short of 1.3590 at the start of the week. Risk aversion, policy inaction and appalling data from the region have served to undermine the single currency this week and with little prospect of those three bearish elements changing EURUSD looks vulnerable for the remainder of the week.

USDJPY has traded in a 60 pip range since the start of European trading, with the BoJ’s announcement or keeping rates on hold at 0.1% having no impact on the market. The accompanying statement highlighted worries about possible deflation, and the dependency the Japanese economy has on global demand. The break of USDJPY over the psychologically important 100 mark has been well supported, but continuing risk aversion will weigh heavily on the pair.

China’s dollar problem 04/04/2009

Paul Krugman explains China‘s problem of owning so many dollars. The Nobel prize winner argues that the country is in a much weaker position than is commonly thought.

US Dollar Outlook for this week 30/03/2009

USD BULLISH

Trade: Short GBPUSD, short AUDUSD

Following last week’s impressive return of risk appetite, with rallies witnessed in equities, commodities and high yielding currencies, particularly the Aussie and the Kiwi, it was perhaps inevitable that this week would see a more cautious tone given the event risk surrounding it. The USD started the trading session in Asia, Sunday night UK time, higher against all G10 currencies bar the JPY, which gained 200 pips against the greenback. This signifies not only a flight to risk aversion but the return of the JPY as a safe haven currency. The Australian dollar, by contrast, dropped sharply against the USD, falling from 0.6925 to a low of 0.6769. iFlow data shows a strong turnaround in positioning; with new strong net buying of dollars. The EUR is now among the strongest net sold among G10 currencies. Ahead is an extremely busy remainder of the week, with three very important events; namely G20 on April 2, the ECB rate decision also on the same day, and the Non-Farm Payroll numbers out on Friday the 3rd. All three are potential game changers, although the G20 communique will have the furthest reaching implications. A draft communique obtained by the FT, and of course subject to revision, contains no statement about explicit global coordinated stimulus and no mention of an increase in the SDR- ie no change in the USD’s reserve currency status. These are both dollar positive.

The lack of stimulus:

1) Is seen by the market as a complacent move by policymakers in a world faced with serious deflationary pressures, increasing risk aversion and so buying US dollars

2) Shows a strong determination by European governments not to relent, in spite of records being broken daily in the eurozone for a collapse in confidence, output, exports and members states being downgraded- Ireland being the latest, losing its AAA status today.

The event risk  for the USD surrounding the G20 communique concerns the ECB’s decision on Thursday on cutting rates. If the ECB cuts, as many market participants expect, by 100bps there could be a sea change in attitudes towards European policy makers’ ability to be proactive, and could boost appetite. However, the eurozone will still behind the curve in terms of policy response and this could benefit the USD. However, the EURUSD is difficult to call for this reason

Sterling looks particularly weak, with Gordon Brown’s credibility severely damaged. More than other G-20 leaders he badly needs a successful summit. The forced sale of Scotland’s largest building society- Dunfermline- underlines quite how weak the financial sector remains, checking the belief that the worst in the financial services sector is over. The FT reported that another 15,000 jobs could be lost in the sector in the next quarter. GBPUSD is currently 1.4270. Sell. Stop 1.4350. Target 1.4054 (Feb low)

AUDUSD witnessed a sharp sell-off in the opening 24 hours of the trading week. The pair trading as a pure measure of risk appetite and outlook for world trade and demand. I am bearish about the prospects for positive sentiment returning. AUDUSD is currently trading at 0.6820, stop 0.6880. Target 0.6700, then 0.6630

FX Review for 26 March 27/03/2009

Following the riotous price action yesterday afternoon the foreign exchange market has been very quiet, with the main pairs trading in narrow ranges in Asian and European morning trading. As was noted in an earlier post, US Treasury Secretary Geithner’s comments that the US would consider proposals to expand the IMF’s SDR led to a brief but almighty US dollar collapse. Thereafter followed a haste retraction, a restatement of the strong dollar policy and a USD positive reaction in the market. Subsequent comments in favour of expanding the SDR came from a number of important figures, notably IMF chief Dominique Strauss-Kahn and influential financier George Soros. The move to creating an international reserve currency away from the USD appears to be, in academic circles at least, a serious proposition but one which will ultimately take time to implement. It is important to remember that the creation of a reserve currency does isn’t necessarily a signal to sell dollars. The USD makes up 42% of the basket of the SDR whereas the EUR accounts for 36%. The sharp move up in EURUSD yesterday had little fundamental justification. 

In the UK retail sales come in line with expectations, with a drop of -1.9% in February versus the market expectation of 0.4%, bringing the annual rate of increase to 2.5%- the lowers since 1995. Market reaction was minimal. The forward looking Germany GFK sentiment index fell 2.4 in April from 2.5 in March. French Consumer confidence index in March came in at -43, again in line with expectations.

Equity market rally- this time it’s different 25/03/2009

Growth forecasts from China and the new Geithner plan give BNP’s Redeker cause for optimism.

FX Review 25/03/2009

As market commentators and some investors attempt to be calling an end to the bear market on the back of an impressive rally in equities, data from the real economy continues to deteriorate at an astonishing rate. The latest trade data from Japan, released overnight, shows a further collapse in exports; 49.3% in February from a year ago. The saving grace for the  JPY was piece of news was that imports also showed a similar dramatic fall, dropping 43% in the same period. This puts the Japanese current account in the positive territory for the first time in five months. USDJPY has grinded lower, from a high of 98.34 to 97.36, before recovering slightly. The jury is still out on the likelihood of the BoJ undertaking aggressive quantitative easing BoE and Fed style, with the Governor Shirakawa refusing to comment on that or the possibility of a zero interest rate policy. 

With little in the way of data the European morning has got off to a sluggish start. The most significant news has been the German Ifo business climate data which reached a new record low of 82.1 in March from 82.6 in February. This was in line with expectations and after an initial sell-off EURUSD rallied about 50 pips from 1.3480 to 1.3530. Earlier the EUR had reached a low against the USD of 1.342- a strong support level. 

In the UK the CBI Distributive Trades Survey showed a marked deterioration in March, with a reading of -44 compared with -25 in February. The news had little impact on the GBP, although the data points to a much worse than expected retail sales figure out tomorrow. A public spat between the Government and the Bank of England has developed following Mervyn King’s comments yesterday that the UK should be cautious at expanding the fiscal deficit. These comments came at the same time that Gordon Brown was beginning his world tour calling for a coordinated stimulus agreement at the G20 meeting. A government spokesman stated that a further stimulus would not be ruled out. This highly unusual public disagreement should bear down on the GBP as will investor nervousness over today’s failure of the today’s auction of GBP 1.75bn worth of 40 year bonds. Gilts have slumped on the back of the news. This is likely to greatly weaken Gordon Brown’s hand in his call for further stimulus measures.

FX Review 24/03/2009

Equity markets across Europe have are broadly flat in mid-morning European trading, after initially opening higher. Overall, risk appetite appears to be higher following yesterday’s stunning rally, with a Dow Jones up 6.8%. Overnight in Asia, the Japanese yen was the main victim of the change in sentiment, with the JPY rising from 96.5 to 98.0, and EURJPY rising to a 5 month high from 132 t0 134. However, given that JPY looked set to lose its safe haven status, the yen was likely to be weakened in any risk environment.

The EUR and the AUD appear to be the main beneficiaries from the new positive environment ignited by the Fed’s quantitative easing decision and Geithner’s plan to remove banks’ toxic assets.  The AUD has benefitted strongly in the last few days from the rise in commodities, on the back of a weakening USD. The RBA’s decision to keep rates on hold last week was accompanied by minutes suggesting that rates may still head lower if monetary easing was not gaining any traction. Given that rates are at 3.25% Australia is still some way off the need to introduce quantitative easing (QE). This has boosted the AUD, especially given what now looks like a QE race by other central banks. The European Central Bank is often considered to be the last refuge of the monetarist, and their central bankers would balk at any suggestion that they are about to enter the QE race. However, the EUR was chief beneficiary of the US money printing announcement last week and is increasingly looking like the new safe haven currency, with both the ECB and the main Eurozone governments advocating prudence on monetary and fiscal expansion. How long this stance can be maintained is increasingly open to question. Revised projections for German growth published yesterday show the region heading the way of depression- ridden Japan. The IMK, a German think tank, now expects Germany’s GDP to contract 5% in 2009 – more than double the expected fall back in January. This was by no means the worst prediction – Commerzbank expect a contraction in the region of 6-7% in 2009). The 5% rise in EURUSD last week will have tested the strongest of monetarist nerves in the European Central Bank. Definitive, surprising decisions is not the style of the ECB, but drastic times call for drastic measures and the effectiveness of the Fed’s move last week may given some European policy makers food for thought. The GBP has made gains against the USD and JPY but this has been less pronounced than the strength of the EUR or AUD. This morning’s surprising CPI announcement (up 3.2% y/y vs the expected 2.6%) was, according to BoE Governor Mervyn King, due to the sharp decline in sterling over the last few months. He expects renewed deflationary pressures over the next few months. The currency looks vulnerable at these levels against the USD, near the top of its range in the last few months. With Bank of England comments that there appears to be no improvement in lending the outlook overall is bearish.