Comments and forex-analytics from FBS Brokerage Company

Euro’s prospects: opinions are divided

Traders and strategists are more divided than at any time since 2011 over whether European officials will be able to keep the currency from tumbling.

On the one hand, markets are generally optimistic about the ECB’s response to the crisis. On the other hand, the expected bond purchases will likely debase the currency.

Analysts at Morgan Stanley expect euro to slide to $1.1900 by the end of 2012. In their view, EUR/USD’s advance to $1.2700/$1.3000 would provide a good level to sell. Strategists at Wells Fargo think EUR/USD may climb to $1.3000 by the end of October and then slide to $1.2000 in a year as euro zone’s economy will underperform the US one.

The most bearish view is that of Bank of America Merrill Lynch which expects EUR to weaken to $1.15 by the end of the year. The most bullish forecast for EUR is given by HSBC which believes in the policymaker’s efforts to save euro: the banks projects that euro will rise to $1.3500 by the end of the year and $1.3700 by March 31 underlining that current levels are a buying opportunity.

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Chart. Daily EUR/USD

Commerzbank: NZD/USD will fall to 3-month low

Here’s one more forecast from Commerzbank. The analysts expect NZD/USD to slide to 3-month minimum at $0.7458.

The specialists underline that last week kiwi slipped below the key support of the 200-day MA at $0.7986. The pair may find initial support at previous minimums of $0.7969 and $0.7928 (100-day MA).

“We would allow for some profit taking here, however given that technical indicators are negative, rebounds should remain tepid. Once last week’s low at $0.7969 cents is fallen through, the July low at $0.7811 will be back in play. Failure here will mean that a medium-term top has been formed and that a drop back towards the $0.7458 June low is underway,” said the bank.

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Chart. Daily NZD/USD

Bloomberg: tip about EUR/USD

According to Bloomberg, EUR/USD is trading 3.3% higher than the median year-end estimate of more than 50 analysts at $1.22. Last week this gap expanded to 3.8%. The last time the single currency exceeded the consensus by that much was in July 2011, and euro lost 9.4% in the next 10 weeks. This gives us some food for thought, doesn’t it? The broad technical picture allows further gains (see MACD at the weekly chart), so the scenario that euro will firstly rise up to $1.3000 and then decline seems credible enough.

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Chart. Weekly EUR/USD

RBS: thoughts about GBP

Analysts at RBS claim that British pound is overvalued at the current levels. In their view, GBP/USD’s fair value lies closer to $1.5650.

The specialists say that the next couple of weeks seem set to be important in determining how currencies and financial assets trade into early December.

According to them, further easing by the Fed should help limit the downside in GBP/USD over the next month. RBS underlined that Bernanke appeared to open the door a little more to further easing and even a better than expected payroll number on Friday seems unlikely to change this.

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Chart. Daily GBP/USD

UBS: bearish view on AUD/JPY

Analysts at UBS think that AUD/JPY may continue to decline. The specialists note that the pair’s testing 80.10 (38% retracement of the advance from June 1 minimum to August 21 maximum).

In their view, if Aussie breaks this support, it will head to 79.50 (July minimum) and 79.03 (50% retracement).

“With the recent weakness seeing daily and weekly trending tools turn negative, the picture is bearish,” says the bank.

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Chart. Daily AUD/JPY

MIG Bank: trading USD/CHF

Analysts at MIG Bank note that USD/CHF continues to move down within declining channel. In their view, the pair will slide to strong support area between 0.9420 (June minimum) and 0.9366 (May 21 minimum). In addition, the bank considers the broader technical picture to be positive. The specialists think that one should enter longs at these levels. So, their recommendation is to place buy limit at 0.9423 targeting 0.9556/0.9800/0.9972 and stopping at 0.9290.

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September 5: forex news

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Demand for riskier assets shrank due to the signs of global economic slowdown. MSCI Asia-Pacific index of shares outside Japan tumbled 1.2% to a 5-week low.

AUD/USD slid to 6-week minimum below $1.0190 as Australia’s GDP added only 0.6% in Q2 (cons.: 0.8%; prev.: 1.4%). Moreover, a private survey showed the nation’s services industry contracted in August at the fastest pace in 4 months. NZD/USD remains under pressure testing support at $0.7925. USD/JPY rose to 78.53 in Asia, but then dropped below the opening price to 78.38.

EUR/USD slid from the recent highs above $1.2600 declining for the second day. Investors await the ECB’s meeting tomorrow: a lot of expectations about the central bank’s acting to help the European countries fight the debt crisis have been built and now the pair’s pricing in the risk of disappointment.

Today watch for Spanish, Italian, euro zone’s and British services PMI data. European retail sales released at 9:00 GMT may show contraction.

In the evening all eyes will be on the Bank of Canada’s meeting. USD/CAD lifted from the 3-month lows but still remains close to these minimums. The BOC is expected to leave interest rates unchanged, so investors are focused on whether Governor Mark Carney will change the message that the central bank may need to hike rates.

Key options expiring today

Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).

Here are the key options expiring today:

EUR/USD: $1.2500, $1.2530, $1.2535, $1.2550, $1.2585, $1.2650;

GBP/USD: $1.5825;

USD/JPY: 78.00, 78.60;

AUD/USD: $1.0250, $1.0400;

EUR/JPY: 97.60, 97.70, 99.00;

EUR/GBP: 0.7940;

AUD/USD: $1.0250, $1.0400.

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Greece: a 6-day working week?

It seems that hard times for the Greek population are only beginning.

According to the leaked letter from the Troika (the European commission, the ECB and the IMF) to the Greek finance and labor ministries, Greece’s creditors are demanding that the nation’s government introduce a 6-day working week and increase working time as part of the terms for a second bailout.

The Troika inspectors return to Athens this week after a long delay caused by political turmoil in Greece. The officials are expected to deliver a verdict in October that will determine whether Greece will get the next trance of financial help worth 30 billion euro.

Greece is in the midst of a 5-year recession, with nearly 2 million people currently unemployed (the unemployment level is almost 30%). Greek authorities are trying to enact spending cuts of a further 11.6 billion euro which were to have been implemented in June. The nation’s government is pleading for more time – 4 years instead of 2 – to fulfill debt reduction targets and spending cuts. At the same time, such extension of time would require more help from the euro zone and this looks problematic.

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Photo from churchillsboot.com

Forecast Pte: year-long downtrend’s intact

Technical analysts at Forecast Pte underline that EUR/USD is still trading within the downward channel.

The resistance line of this channel is connecting $1.4549 (August 29, 2011 maximum) and $1.4247 (October 2, 2011 maximum), while the support line is going through $1.3146 (October 4 minimum).

The specialists underline that during the past year euro has never climbed above the channel. For today EUR/USD’s upper limit is situated around $1.2674. Forecast Pte expects the pair to retest $1.2040 (July minimum).

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BarCap recommends selling GBP/USD

Barclays Capital recommends selling GBP/USD with target at $1.5600 and stop at $1.5950. The pair faces technical resistance at $1.5915.

The specialists reason this way: if ECB disappoints the markets on Thursday with no further details on debt purchases, EUR/USD is vulnerable to a correction. GBP/USD is highly correlated with EUR/USD. If US non-farm payrolls come above the forecast of 121K, for example, at 150K, US dollar will have a lift. The analysts don’t expect QE from the Fed.

Barclays underlined that UK PMIs have been mixed but official data remains very weak, so the Bank of England will ease its policy. According to the bank, in November the BoE may announce 50 billion pounds of QE and cut its benchmark rate by 25 bps.

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BarCap: why USD/JPY may turn up

1) Reduced tail risk in the US and the euro area economies and potentially higher US yields.

2) Room to catch up to widening yield gap.

3) Relatively easy Japanese monetary policy.

4) Japan’s sovereign downgrade risk: 10% hike in consumption tax in 2015 alone is not enough to bring Japan’s fiscal deficit back to surplus. Also, there is a non-negligible implementation risk.

5) Worsening external balance for Japan.

6) Continued outflow from Japan through overseas M&A by Japanese firms.

7) High intervention risk below 78 yen: since the massive JPY selling intervention last October, Japanese officials have indicated that the level of the JPY rather than the speed or volatility is their concern and the reason for the intervention.

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Chart. H4 USD/JPY

Commerzbank: USD/CAD may rebound

Technical analysts at Commerzbank claim that despite the fact that the outlook for USD/CAD is negative as long as it’s trading below 0.9948 (August 23 maximum), they expect the pair to level out in the support area of 0.9843/00 and then start rising once again.

The specialists say that if USD/CAD closes the day above 0.9948, one may expect it to reach 1.0045 (61.8% Fibonacci retracement of the advance from April lows to June highs). Also note that there’s bearish convergence on the daily MACD – a bullish signal.

On the downside, the decline below 0.9800 will bring USD/CAD to 0.9725 (August 2011 minimum).

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Chart. Daily USD/CAD

September 6: forex news

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EUR/USD has been trading between $1.2470 and $1.2625 since August 23. The market’s waiting for the ECB meeting and its mood swings between optimism and cautiousness. Today the former dominated during the Asian trade after a leaked report from Bloomberg unveiled the central bank is to announce unlimited, sterilized buying of bonds with maturities less than 3 years. According to a member of Angela Merkel’s party, the Chancellor told lawmakers yesterday she can accept temporary ECB bond buying.

Some analysts say that now there isn’t anything the ECB may surprise the markets with. In their view, the market will be instead focused on ADP employment report, unemployment claims and the ISM non-manufacturing index released in the US in the evening ahead of the NFP figures coming on Friday.

Bank of England also meets today, though it’s not in the highlight. The BoE is expected to keep its monetary policy unchanged for now – benchmark rate at 0.50% and asset purchase program at 375 billion pounds ($584 billion). There may be more QE when the current program is completed in November. GBP/USD is trying to hold above $1.5900.

AUD/USD rallied from almost a 7-week minimum around $1.0160 as unemployment unexpectedly fell in August (Actual: 5.1%; cons.: 5.3%; prev.: 5.2%). USD/JPY is trading sideways, though moving up very gradually, still below resistance of 78.45. USD/CAD managed to rise above 0.9900 but was capped by the resistance at 0.9915.

Key options expiring today

Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).

Here are the key options expiring today:

EUR/USD: $1.2500, $1.2525, $1.2550, $1.2625, $1.2635;

GBP/USD: $1.5865, $1.5900, $1.5925;

USD/JPY: 78.50, 78.70;

USD/CHF: 0.9600;

AUD/USD: $1.0150, $1.0200, $1.0220, $1.0300, $1.0250;

USD/CAD: 0.9900, 0.9925

EUR/GBP: 0.7865, 0.7935, 0.7950;

EUR/JPY: 98.60.

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ECB’s decision: analysts in anticipation

EUR/USD returned to the recent highs above $1.2600 as leaked report from Bloomberg unveiled that the central bank is to announce unlimited, sterilized buying of bonds with maturities less than 3 years.

NAB: The market is pleased by the fact that we have some details and that the ECB is going to follow through with what was hoped that they would do. The euro can at least remain around current levels and possibly be a little bit supported into the ECB meeting.

Bloomberg survey: 30 of 58 forecasters expect the ECB to cut benchmark rate by 25 bps to 0.5%.

UBS: There’s 60% probability of the ECB’s rate cut today.

Nomura: Calls for a rate cut will be justified by the ongoing deterioration in the growth outlook and in spite of slightly firmer inflation projections. The ECB may once again cut GDP forecasts.

Westpac: Low chance of a rate cut right now. The more important question for markets is what President Draghi will say at his news conference. If the anonymous central bank sources are correct on the key points, then EUR reaction should be limited. We doubt any attempt to “sell the fact” will last long, as the ECB is set to take important and welcome action to stabilize euro zone’s bond markets and sharply reduce risk premiums related to EMU exit(s).

RBS: Rates will be left on hold with the latest set of projections to paint a gloomier picture on growth the inflation outlook unchanged.

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USD: NFP will make the Fed decide

Market expectations for additional monetary stimulus from the Fed strengthened after Ben Bernanke said last Friday the central bank was ready to act if needed. The US is struggling to show economic recovery. US manufacturing survived in August the biggest decline in more than 3 years: the ISM manufacturing PMI index came at 49.6 (cons.: 50.0; prev.: 49.8). The main focus now is on the labor market.

According to consensus forecast, US non-farm payrolls grew in August less than in July (cons.: 121K; prev.: 163K), while American unemployment rate stayed above 8% for the 43rd month in a row. The data is released on Friday, September 7, at 12:30 GMT. Watch for the ADP employment report today at 12:15 GMT for the hints (cons.: 142K; prev.: 163K). The FOMC meets next week, on September 12-13.

Credit Agricole: “The Fed is likely to ease further this month but exactly what options it will take will depend on data. So until we see the jobs report, we can’t push markets either way.”

BBH: “The outcome of next week’s FOMC meeting and thus the timing of QE3 may very well rest on Friday’s NFP data for August. We expect that a number close or higher to the July print will keep the Fed adjusting its future guidance rather than initiating a new asset purchase program. This will probably translate into a dollar positive and equity negative outcome.”

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Photo: Victor J. Blue for Bloomberg

AUD: skeptical views on labor market

AUD/USD rallied from almost a 7-week minimum around $1.0160 as unemployment unexpectedly fell in August (Actual: 5.1%; cons.: 5.3%; prev.: 5.2%).

Never the less, analysts at NAB aren’t optimistic at all. In their view, the jobless rate declined only because many people have stopped looking for work due to the glut of negative news and low levels of consumer confidence. Australian employment fell by 8.8K last month (cons.: 5.1K; prev.: 11.7K). According to NAB, “it was a fairly soft labor force report, with the level of employment back to where it was in April 2012, so no jobs (in net terms) have been created in the past four months.”

Strategists at ANZ are almost sure that Australian unemployment rate will move higher in the near future. “We find it very difficult to believe that the unemployment rate declined in the month given that job ads and measures of hiring intentions have trended lower over the past six months, and the number of unemployment benefit recipients has trended higher.”

Bear that in mind ahead of further RBA meeting and employment data releases. The data might not support Aussie for long.

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Chart. H4 AUD/USD

EUR/CHF took off from 1.20

One year passed since Switzerland limited the ability of EUR/CHF to decline by 1.2000. EUR/CHF rose today to 1-month maximum of 1.2062 before recoiling down from the 200-day MA to the levels around 1.2050.

Note that the current advance of the single currency is unlike the few, sharp rallies and reversals of the past four months which were caused by merely speculative activity. This time euro is moved by hopes of the ECB’s bond purchases. The less is the risk of euro zone’s collapse, the less is demand to buy franc versus euro. If the ECB does something to ease pressure on the European bond markets and it looks like it will, we’ll see short covering in EUR/CHF.

In addition, there are the rumors that the Swiss National bank might lift the EUR/CHF peg up. Analysts at Rabobank claim that this time the rumors may have some substance behind. In their view, the odds of the SNB lifting the peg to 1.25 are greater than the possibility of the central bank abandoning it. Such assumption seems sensible enough: if the ECB decision triggers euro’s short covering, it would be easier for SNB to lift the floor. Remember that Switzerland does need weaker franc. Swiss economy contracted in Q2 by 0.1% q/q and deflation surely played its role in that. On the other hand, the downtrend in EUR/USD may resume in the near future. That would put EUR/CHF under negative pressure.

You may see on the H4 chart that the pair has some support and euro isn’t in a hurry to return to 1.20. The key event is, with no doubts, the ECB meeting: if the markets are satisfied by its results and the central bank manages to pull down peripheral bond yields, the chances of EUR/CHF for gradual advance will increase. If not, euro will be pulled back to 1.20 and the market will once again test the SNB’s resolve to defend this level. Better stand aside for now.

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Chart. H4 EUR/CHF

ECB Draghi: unlimited sterilized bond purchases

- Economic growth remains weak. Projections for the euro area are lowered: 2012 GDP growth projection is diminished form -0.5%/+0.3% in June to -0.2%/-0.6% and 2013 growth estimate – from to 0.0%/2.0% in June to -0.4%/1.4%.

- “Monetary Outright Transactions” (OMTs) program – purchases of government debt – will be an effective backstop for the single currency.

Features of the OMTs program:

• Conditionality attached to EFSF/ESM program.

• ECB will purchase bonds with maturities of 1-3 years.

• There are no amount/time limits set for the bond purchases.

• Liquidity will be fully sterilized.

• ECB will be free to terminate the program when its goals are achieved or if the required conditions aren’t met.

• ECB won’t break its mandate as it will operate on the secondary market, not the primary one.

• The Eurosystem won’t be a preferred creditor will have the same treatment as other bondholders.

• The purposes of the purchases are monetary: to ensure the price transmission mechanism in the euro area is functioning.

• ECB is seeking the IMF insolvent, but can’t force the fund.

- Euro is irreversible.

- ECB retains its independence.

- Governments must push on with budget consolidation and activate EFSF and ESM for the ECB to intervene in bond market.

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Photo by Hannelore Foerster/Bloomberg

USD/JPY jumped close to 79 yen

USD/JPY rallied to the upper border of its trading channel, up from the opening level by about 60 pips.

The greenback was helped by the positive news from the euro area and the United States. The ECB will effectively act on the debt markets through unlimited bond buying of bonds with 1-3 maturities conditioned to the EFSF/ESM. US unemployment claims dropped from 377K to 365K vs. the forecast of 369K. ADP employment change jumped from 173K to 201K in August vs. the forecast of 142K.

Commerzbank: as long as USD/JPY is trading above support of the trend line and 77.90 (August minimum), its medium-term forecast will be bullish with the psychological 80.00 region remaining in focus.

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Chart. Daily USD/JPY