Mitul Kotecha on FX and the world economy

Written by Mitul Kotecha Thursday, 04 October 2012 14:31
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Mitul Kotecha is author of the forthcoming Chronology of a Crisis (Searching Finance October 2012).


Markets were given a boost as US recovery hopes strengthened in the wake of encouraging data out of the US, with both the ADP private sector jobs report and ISM non manufacturing index beating forecasts. Consequently the data will lead to some revision higher of expectations for September non farm payrolls to +135k.


The European Central Bank (ECB) meeting today will not be particularly noteworthy as it takes place just a month after the Outright Monetary Transactions (OMT) announcement. There is an outside chance of a policy rate cut but recent ECB comments suggest this is unlikely. The main question remains about the timing of OMT activation but the ball is firmly in Spain’s court on this issue. So far there is no indication of an imminent request for Spanish aid.


The bottom line is that the ECB meeting will have nowhere near the same impact on the EUR as the last meeting, with the currency set to remain tightly range bound ahead of Friday’s US payrolls data or until Spain decides to formally request a bailout. EUR/USD will find resistance around 1.2971 and support at 1.2804 in the short term.


GBP continues to look vulnerable both against the EUR and USD. Having dropped from its highs above 1.63 versus USD the downward trajectory looks well entrenched. My quantitative models corroborate this view, with the models pointing to EUR/GBP trading closer to 0.82. Weaker data including both the manufacturing and service sector September purchasing managers indices (PMIs) both of which missed forecasts are helping to undermine the currency.


The Bank of England (BoE) meeting outcome today will not have much of an impact on GBP given a likely unchanged decision but we continue to believe that the central bank will expand its balance sheet further in November, which in turn will act as another drag on the currency.


AUD has been dealt a major blow this week following the surprise rate cut from the Reserve Bank of Australia (RBA). Clearly external concerns are leaving open the prospects of further rate cuts which in turn are damaging sentiment for AUD. Even so, my correlation analysis shows that the AUD has lost some of its interest rate sensitivity, suggesting that it may not suffer too much further.


The currency’s recent drop from its mid September high around 1.0626 has shaken out plenty of long positions and we suspect that further downside in the currency will be more limited.


We expect to see good support for AUD/USD around the 1.0165 level while AUD is also likely to see some stabilisation on the crosses including against the NZD.


About Mitul Kotecha



I have worked in the financial industry as a strategist/economist for over 16-years in several corporate and investment banks in London.   I have covered a range of financial products including bonds, interest rates, equities and foreign exchange. 


I am currently working in Hong Kong for Crédit Agricole Corporate & Investment Bank, where I am the head of global currency strategy, in charge of a team of analysts providing research and strategy for the bank’s clients and internal trading and sales teams.


I hold an honours degree in economics and a masters degree in economics and finance and have developed a comprehensive knowledge of economic and financial theory during my studies and in my employment.  


I am regularly consulted by the press/media for my views on markets and economies appearing regularly on business channels such as CNBC, Bloomberg TV, Channel News Asia, and Reuters TV.  I am also regularly quoted in various newspapers including the Financial Times and Wall St. Journal as well as various newswires including Reuters, Bloomberg, Associated Press, Dow Jones and many others.

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