Saturday, 16 November 2013

What We Learned From Trading Major Currencies In 2013? - Nomura

"Lesson #1: Take the long view on big policy shocks.

The market learns quickly, and the type of news that gets repeated tends to be digested by the market essentially instantly (think about the monthly NFP release). Big policy shocks are different. For about a year, we have been digesting the true content and implications of “Abenomics”. The lesson has been that the really big (one-off) policy shocks can create trends lasting multiple months as the market only gradually buys into a new secular theme. In this situation, trends can last several quarters and potentially years.

An application of this lesson is the current wave of better eurozone sentiment, where we are recognizing that after a three-four year bear-wave, the greater optimism may last for a sustained period of time. Hence, we have generally been in no rush to implement short Euro trades.

Lesson #2: Relationships between FX and rates are complex:

An important lesson from 2013 has been that not all yield moves are created equal in relation to FX. This lesson is, obviously, not entirely new. It has always been the case that yield moves caused by sovereign risk and/or inflation concerns were negative for FX, while moves caused by policy tightening and/or higher growth were positive.

Obviously, it is hard to say for sure during which specific periods a rise in yields will be viewed in the context of a structural turning point. But given the very low level of yields currently, it is possible that this will remain the case into 2014. As such, we may need to see a rise in short US rates in order for the USD to benefit on a global basis. As such, batches of temporary spikes in the 10-year rate will not necessarily translate into USD broad-based gains

Lessons #3: Growth forecasting based on extrapolating the past is risky:

It is tempting to anchor forecasts of future GDP growth on prior observations. As the market misjudges future GDP growth by anchoring too heavily on prior observations, we believe there will be opportunity based on misaligned expectations. We believe that these opportunities will likely manifest themselves in the forms of both upside and downside surprises.

Opportunities for upside surprise, we believe exist in the United States and United Kingdom. On the other hand, we believe that the market is overestimating the strength of the recovery in the eurozone. Consensus is now for 1% growth in 2014, while last year consensus was for just marginally positive growth in 2013."

Jens Nordvig - Nomura 

Developed Macro: Risks Assets Hold Up Well, Spurred By Yellen

Despite disappointing growth data out of the Eurozone and Japan risk assets are holding up well, spurred by comments by Fed Chairman nominee Yellen who defended the Fed’s quantitative easing programme and gave little sign of an imminent tapering.

Consequently equities and gold rallied, while US Treasury yields slipped. The USD held firm benefitting from the relative growth weakness in the Eurozone and Japan, with USD/JPY finally breaking through the 100 psychological barrier.

Eurozone GDP came in at just 0.1% QoQ barely expanding over the third quarter while Japanese growth slowed to annualised rate of 1.9%.

The data highlighted the potential for more policy steps from the ECB although the Japanese growth slowdown was seen as temporary.

Europe Week Ahead: Eurogroup Mtg, German Zew, -Ifo, -GDP, EZ PMI, BoE Minutes

The Eurogroup meeting on 22 November will discuss the Commission’s opinions on member states’ draft budgets and whether they comply with the country specific recommendations adopted in July. The meeting will also include the Commission’s assessment of the fiscal outlook for the Eurozone and its policy implications. Member states have to finalise their budgets before the end of the year in light of these discussions. The latest reviews of Portugal and Greece will also likely take center stage following the decision by Ireland this week to exit its bailout programme without a precautionary credit line. We expect most Eurozone business surveys to resume their march higher this month, following a temporary setback in October. While we believe the cyclical momentum remains positive, business confidence should benefit from rising risk sentiment as well as the surprise ECB rate cut and overall low interest rate environment.

Eurozone flash PMIs are likely to rise further into expansion territory, more so in the manufacturing sector this month, a view which is also backed by the internal dynamics of PMI sub-components despite the October pause. Notwithstanding their recent poor GDP performance, France and Italy might experience the sharpest PMI rebounds in the near-term. Our forecast is for the Eurozone composite PMI index to rise back to its September level of 52.2.

We also look for the German ZEW and IFO indices to post decent increases in November on the back of a record new in the DAX (for the former) and stronger growth and business expectations (for the latter). Both surveys are now close to local highs, however, and could soon look toppish, in our view.

German GDP looks set to be confirmed at +0.3% QoQ in Q3, with the breakdown reflecting the positive contribution from domestic demand, fuelling the hope that the investment cycle might give a further boost to the recovery, both in Germany and in its Eurozone trade partners.

UK MPC minutes will be scrutinized for any hints to a possible change to the 7% threshold on the unemployment rate. Following the release of the November inflation report, which revealed that the 7% threshold on the unemployment rate may be achieved as soon as in Q414 based on constant interest rates, the timing of the next rate hike looks closer than we had previously thought. The 7% threshold is certainly not a trigger, as the BoE vigorously emphasised, and there is a lot of uncertainty over the future path of the unemployment rate. It would be interesting to see if the possibility of revision in that threshold has been debated or if other measures of slack get increased attention among members of the MPC. In terms of the outcome of votes, we expect unanimity on both the decision on the Bank rate and the size of the asset purchase programme.

US Week Ahead: FOMC Minutes, Retail Sales, CPI, PPI, Housing, Philly Fed

We forecast weaker October retail sales, with both top-line sales and sales excluding autos declining 0.1%. Motor vehicle sales came in weaker at a 15.2 million unit annual rate in October, down just slightly from September. Weaker auto sales should subtract from the top-line figure. At the same time, gasoline prices were much lower in October at an average of USD3.34 per gallon for the month, down 5.3% from the month before. We anticipate this will drag down nominal receipts in the retail sales report. The bulk of the decline in our forecast is due to these nominal factors – though in real terms, the decline in gas prices will boost real consumer incomes which could be a positive factor for spending moving into the important holiday shopping season.

We forecast the top-line October CPI fell 0.1%, while the core CPI likely posted a 0.1% increase. While seasonal factors will offset some of the impact, the 5.3% decline in retail gasoline prices during the month will drag down the energy index, and will be responsible for the majority of the top-line decline. Agricultural prices have been soft over the past few months suggesting that the food index will show that consumer food prices remained stable during the month. We look for the core CPI to post another trend-like 0.1% gain.

Existing home sales likely declined 2.6% to a 5.15 million unit annual rate in October. Pending home sales, contracts that typically become completed sales in one to two months, have declined over the past two months. There was a steep 5.6% decline in pending home sales September, following a 1.7% decline in August. Commentary from the National Association of Realtors in the September existing home sales report suggested declines in the coming months and a moderation in the sales pace may be expected as housing affordability falls alongside rising mortgage interest rates.

The FOMC minutes will be parsed for hints on the timing of an expected taper early next year. After leaving policy unchanged last month, the FOMC minutes may offer insights into any changes in the FOMC’s assessment of the economy. Many economic data releases were interrupted between the September and October FOMC meetings as a result of the government shutdown, so the minutes may give some insight into whether the Committee looks for meaningful shutdown-related impacts in upcoming data.

We will look closely at the minutes for any discussions on potential changes to forward guidance. In particular, we look for any possibility that the FOMC may adjust the threshold levels in their Fed funds rate guidance as an additional policy tool. We heard from FOMC members recently on this subject, Federal Reserve Bank of Atlanta President Lockhart mentioned that he might consider dropping the unemployment threshold below 6.5%, perhaps in conjunction with the start of the taper. The minutes may provide additional details of the range of views on the Committee regarding this subject, and any deliberations that took place at the last meeting.

In the October FOMC statement, there were some small changes to the committee’s description of economic developments. While growth continued to expand at a “moderate pace,” the recovery in the housing sector “slowed somewhat in recent months.” That compares with the September statement text that the “housing sector has been strengthening, but mortgage rates have risen further.” In a similar vein, the September statement reference to the “tightening of financial conditions observed in recent months” was dropped, reflecting the pullback in rates. The October minutes may shed some light on FOMC views and expectations for the housing market, and how the Fed viewed financial developments in between the September and October meetings that led them to drop the statement reference to the “tightening of financial conditions” in the October statement.

The top-line PPI likely fell 0.3% in October, while the core remained muted with a 0.1% rise. The lower residential gasoline prices in October will also weigh on the energy index in the PPI, and this is the cause of most of the top-line decline in our forecast. Food prices were down 1.0% in the PPI last month, another decline is not expected, but agricultural prices have remained soft so we do not look for an offsetting increase in the food index this month. Price pressures in the core should also be limited in line with recent trends.

The October Philadelphia Fed Business Outlook Survey likely rose to 21.0 from 22.3. A strong new orders index last month (27.5, up from 21.2 in September) suggests good momentum for activity in November. As energy prices continue to decline, lower prices paid or prices received indexes could be a source of downside risk to our forecast if they drag down the top-line. We expect, however, that the general activity indexes and employment related indexes should suggest continued moderate expansion in the Philadelphia Fed District