Brave New World

FX Lunchtime update- Spotlight on Euro 18/01/2010

The flight from risk witnessed at the end of last week has continued in Asian and morning London trading. EURUSD reached a one week low early in the session and USDJPY dipped lower to below the 90.75 level. Following last week’s monetary tightening by China and the worse than expected U.S. retail sales figures today’s sentiment is driven by the eurozone, in particular the growing worries over Greece and its government’s plans to cut its fiscal deficit. Greek stocks and bonds are lower today and EURGBP is now trading below the 0.88 handle; the lowest since September.

The situation in Greece will presumably dominate the meeting of Eurozone finance minsters in Brussels this week. Greece’s finance minister Papaconstantinou said, “If there is something lacking (in our crisis plan), we will take additional measures.” He added, “As a new government, our priority of re-establishing reliability in our statistics and outlining our growth and stability program has helped create a new climate of hope but there is still work to do.” The sheer scale of the the  task facing the socialist government doesn’t sit well with the track record of fiscal discipline by previous Greek governments. The current plan is to cut the budget gap to 2.8% of GDP in 2012 from a deficit of 12.7% today. This year the deficit is to be reduced by the equivalent of 4% of GDP. Such stringent cuts would test the most socially cohesive and law-abiding society. The fact that Greece has shown a relative propensity for social unrest- witness the riots in December 2008- has led to nervousness among European officials and international investors. Strong words from the ECB and some German politicians about the lack of options have not quelled doubts that Greece will be able to repair its fiscal position. Today’s Daily Telegraph reports that the ECB has issued a document titled: “Withdrawl and explusion form the EU and EMU”. A long hot summer of rioting on the streets of Athens will do little to give investors confidence in the country or the periphery of Europe and will lead investors to speculate that Greece will be the first country to leave the eurozone. And with it the potential for further countries to exit. In any case, the position of the Euro is looking increasingly precarious.

Market sobers up 30/10/2009

GDP figures don’t have the staying power they once had. Just as talk of a calamitous slump in the UK following the awful GDP numbers on Friday had evaporated by earlier this week, with Sterling recouping its losses, the brief euphoria in the markets after yesterday’s US data evaporated within a matter of hours and with it the US Dollar index recouping most of its losses. This morning’s US economic data has added to the bearish tone in the market. Personal consumption stalled in September after climbing each of the four previous months, while personal income was down 0.5% m/m, compared with a market expectation of a 0.5% rise. The University of Michigan Consumer Confidence survey beat market expectations but was still down to 70.6 in October from  73.5 in September. Overall, a nervousness is creeping into the market as it is looking increasingly unlikely that the consumer, which still accounts for 70% of the US economy, is strong enough to recover without government support. The Dollar has rallied strongly on the bearish sentiment on the economy, reaching a low of 1.4727 in afternoon London trading. Expect further dollar strength in the meantime; at least until the crucial FOMC meeting next week.

US GDP data rekindles risk appetite 29/10/2009

Risk appetite has returned, with a vengeance following this morning’s better than expected US GDP figures. The US economy grew by 3.5% on an annualised basis in the third quarter of 2009, higher than the market expectation of 3.2%. This is the first positive GDP number Q2 of 2008. As expected, risk appetite improved with the expected rise in US equities, a fall in government bonds and a sell-off in the US Dollar.

All of this was expected, and as I began writing this post it looked as though the rally would be short-lived. The GDP growth look less impressive given that much of it has relied on “stimulus-driven gains in consumer and home building“. On that basis it would be reasonable to expect a buy-the-rumour, sell-the-fact type of reaction in the market, with the USD recouping its losses and equities drifiting lower. I’m glad I didn’t place any trades. Barring the Japanese Yen, all other G10 currencies have kept hold of their gains. In particular, the British Pound has had a stellar morning, jumping over 100 pips since the GDP figures- apparently on the back of strong buying from the Middle East. Earlier, positive mortgage approvals numbers from the UK gave investors confidence that the UK economy may be on the turn.

One of the purest gauges of risk appetite in the FX market is AUDJPY. Since the US growth numbers were announced the pair has risen from 82 to 83.27 (as of 10.51 ET). The Aussie appears to have found its footing again after a few nervous days of risk aversion and concerns about the health of the Australian banking sector.

Overall though, the mood is nervous, with a much higher VIX (volatility index) and some technicals showing the market at a crossroads. The jury is still very much out on whether we are at the start of a sustainable recovery. Macro Man sums it up

The Week Ahead for Currencies 26/10/2009

The week has started in lacklustre fashion with little movement in nearly all the main G10 currency pairs. In overnight Asian trading the Swiss France moved tantalisingly close to parity against the US Dollar, although the pair has since moved away from this important psychological level. Little in the way of economic data or equity price action has given much of a direction to the FX market. This is unlikely to last.

Important data from the US and Europe should stir market price action, with American consumer confidence data out on Tuesday and Q3 GDP and personal consumption data out on Thursday. The market is looking for an annualised rate of economic growth for the latest quarter of 3%, with the same expectation for consumption. Given the US Dollar’s current status as the weakling of the G10 (second to Sterling) it will take much stronger than expected readings to change the course of the greenback.  The EURUSD will be a particularly important pair to observe as the recent rally appears to have stalled around 1.5000. Before the psychologically level was breached many strategists warned of a break-out with the expectation of barrier options being triggered. This hasn’t happened, and calls into question how much further the rally in the Euro has left to run. EURUSD has been trading on risk appetite and interest rate differentials, both of which have been given a boost by an impressive run in recent weeks of positive economic data. The pair has had a remarkably close correlation to the S&P 500. My view, therefore, is that the equity market is well overdue for a correction translates into a bearish EURUSD position. A surprise to the downside in German and Eurozone CPI data later on this week, as well as consumer confidence data from the US tomorrow, may also influence a sell-off.

Sterling has found a some support today following Friday’s meltdown. Some in the FX Strategy community are beginning to forecast a reversal in Sterling’s weakness, particularly against the USD. BNY Mellon’s Simon Derrick believes the political fallout of Sterling reaches parity with the Euro would be too great for the Labour government in the run-up to the general election for them to continue their policy of benign neglect. Also, there is widespread scepticism about the preliminary GDP numbers released on Friday.  I don’t buy the Sterling bull story one bit. The Brown government is powerless in so many areas that the idea they have control over the currency markets is laughable. If EURGBP does go to parity it will be due ti Asian central banks continuing to diversify their FX reserves into Euros following a maintenance of the peg to the USD. The British pound has no such friends. 70% of the UK’s GDP is made up of consumer spending- something that will remain on its uppers for some time to come. GBPUSD may reverse but given the US relationship with China, a dollar collapse is almost unfathomable in the near term.

Littler Britain 23/10/2009

The UK economy contracted by 0.4% in the third quarter of 2009, according to preliminary data released today. The financial markets, which had been expecting weak growth, reacted with shock. Not one of the 33 economists surveyed by Bloomberg expected a negative reading; the consensus forecast being 0.2% from a range of zero to 0.7%.  Chris Giles from the FT suggests that forecasters had expected a better reading due to the positive sentiment from business survey data since June and recent benign industrial production data. Overall, it seems,  a positive outlook for the UK has recently gained momentum, with Bank of England minutes revealing a more hawkish position adopted by the MPC, with a unanimous verdict against the extension of QE. Such a view will have to be revisted with today’s figures, at the very least, as they are so out of the step with expectations for growth.

It was therefore no surprise that the GBP nosedived today. Sterling fell from almost 1.67 to below 1.65 within minutes of the announcement while gilts rallied and short sterling futures fell as expectations for any near term monetary tightening evaporated. By late London trading GBPUSD had fallen a massive 370 pips- a sharp spike in volatility and what looks to be a key reversal in Sterling’s two week rally. The next target should be 1.60- safely within its 9 month range, and still higher than two weeks ago but with all the feeling of a dead man walking, particularly given today’s much more sanguine data from the Eurozone.