Mitul Kotecha is the author of the forthcoming ''Chronology of a Crisis'' (Searching Finance September 2012)
The weaker than expected US August non farm payrolls data at the end of last week punished the USD and reinforced expectations that the Federal Reserve will announce a fresh round of quantitative easing at this week’s FOMC policy meeting.
The shift in expectations for QE has been rapid over recent weeks and the jobs data acted as the icing on the cake. In part USD weakness reflects both QE expectations and the positive reaction to the European Central Bank’s bond buying plan announced last week. In this respect a lot is already priced in to currency markets and EUR/USD will struggle to sustain a move above 1.28 in the short term.
From a risk / reward perspective there are potentially plenty of stumbling blocks this week aside from the FOMC meeting that could skew market direction towards risk rather than reward. These include the German constitutional court decision on the ESM permanent bailout fund and Dutch elections both of which take place on Wednesday. The German court decision is the last needed before the ESM comes into force. Legal experts expect the court to approve the ESM but with tough conditionality. Should the ESM not be approved it would leave any more bailout funds to come only from the cash left in the temporary and dwindling EFSF. Separately the Dutch elections look set to end in weeks if not months of coalition building. These events occur gainst the backdrop of talks between the Greek government and its creditors following failure to agree on spending cuts between Greece’s coalition partners.
Ahead of these events the European Commission will reveal details of plans towards a single banking supervision mechanism. The G20 meeting in Mexico and Ecofin meeting at the end of the week will also garner attention, with any discussion on a European banking union of interest. Meanwhile, following the ECB’s announcement last week the ball is in the court of Spain and Italy to formally request An EU bailout and in turn accept various conditions and targets necessary to receive a bailout. Only then will the ECB commence its ‘unlimited’ bond buying. No date or deadline has been set for such requests for a bailout but given the sharp drop in peripheral Eurozone bond yields over recent weeks in anticipation of ECB bond purchases there is certainly scope for disappointment, with market patience likely to run thin.
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.