Comments and forex-analytics from FBS Brokerage Company

UBS: G7 intervention will be a success

Analysts at UBS expect that the coordinated intervention of G7 nations to weaken Japanese yen’s rate will turn out to be efficient enough and manage to attain its goal.

After having analyzed the data for the last 30 years the specialists note that in 4 out of 5 cases the joint action helped to reverse the currency’s rate in the desirable direction. The bank says that the interventions were successful as G7 central banks were intervening in correspondence with the changes in the interest rates differentials.

So, during the mentioned period there were several interventions conducted:

1) 1985: Plaza agreement to devaluate US dollar. The result – the pair USD/JPY lost 50% in 2 years;

2) 1995: Washington agreement to strengthen the greenback;

3) 1998: Japanese Ministry of Finance and US Department of the Treasury asked the Federal Reserve and the Bank of Japan to intervene buying yen that brought US dollar below the 150 yen level;

4) September 2000: ECB, the Fed and the central banks of Japan, England and Canada performed joint intervention to stop euro’s slump;

5) 1987: Louvre agreement. The nations failed to support the greenback as German Bundesbank raised rates in summer of the same year.

UBS forecasts that the pair USD/JPY will rise to 83.00 yen in 3 months. In June the Fed will end the second round of its quantitative easing program. The European Central Bank is likely to lift up the benchmark rate already in April. The BOJ, on the contrary, is expected to keep its rate close to zero.

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US dollar is expected to decline in the long term

US dollar has been weak for many weeks. Even as the G7 nations conducted a joint intervention to weaken Japanese yen didn’t help US currency to gain versus its other counterparts.

Barry Eichengreen, professor of economics and political science at the University of California Berkeley, thinks that there is no longer a logical reason for the dollar to be the world's only reserve currency as the US accounts for only 20% of the world’s economy. The specialist expects that the European currency will become a global currency in 5 years. Eichengreen also believes in the Chinese government's plan to internationalize yuan by 2020.

Analysts at J.P.Morgan note that US dollar is close to the record minimums on the trade-weighted basis. In their view, there’s a structural shift in the currency markets. The strategists recommend diversifying 15-20% of the investment portfolio to non-dollar ***ets.

The specialists at BMO Capital Markets are bullish on American currency in the short term. During the next 1-2 years, however, emerging market countries will start regarding inflation levels as too high and will stop trying to depreciate their national currencies against dollar. As a result, the specialists see strong potential decline ahead of the greenback.

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Commerzbank: 1.4283/93 – resistance for EUR/USD

The single currency has at last overcome the 1.4200 level and is now consolidating below the 14-month maximum at 1.4281.

Technical analysts at Commerzbank note that the pair EUR/USD is facing strong resistance in the 1.4283/93 zone of November 2010 maximum and the 3-year resistance line. The specialists expect euro to fail at these levels.

If the European currency will somehow manage to rise above 1.4380, it will get strength to advance to the long-term double Fibonacci retracement at 1.4425 and 1995 maximum at 1.4535. The odds that euro’s rates will be rejected there are very high.

Strategists at Barclays Capital say that the bias for EUR/USD is bullish and upside pressure will ease only below 1.4040.

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Forecasts for Japanese economy in 2011

Economists expect that Japanese economy will rebound in the second half of the year. However, their views vary on the point whether Japan will slip into a recession or not.

Analysts at Mizuho Securities are sure that the country’s economy will contract, while the specialists at Barclays Capital don’t think Japanese GDP will drop in any quarter of 2011. The median estimate of Bloomberg survey is that Japan will add 0.4% in the second quarter on the annual basis.

The size of its decline in the first half will depend on the magnitude of electricity disruptions caused by the earthquake and tsunami, notes Goldman Sachs. The analysts underline that it’s very difficult to measure the negative effect on Japanese production, but it’s clear that various elements of the supply chain will be affected.

Economists at Deutsche Bank say that even if panic buying of daily necessities may temporarily boost the demand, the level of economic activity will be lower” because of fears of radiation from the power plant and electricity shortages. It’s necessary to remember that in the fourth quarter of 2010 Japanese economy will lose 0.3%. Deutsche Bank analysts now see a second straight drop in GDP, with a return to growth in April to June.

Analysts at Credit Agricole underline that a lot of wealth was lost as a result of the disaster and the country’s economy will find itself under negative pressure in the medium and long term.

Specialists at Morgan Stanley Mitsubishi UFG Securities expect that Japan’s GDP will decrease by 6-12% in the second quarter on the annual basis. All in all, the economists think that Japanese economy will lose 1-3% in 2011. The forecasts for 2012 differ from contraction by 1% to 3% recovery.

BNP Paribas: negative factors for EUR/USD

Analysts at BNP Paribas believe that the European currency is beginning to lose upside momentum trading versus the greenback.

The specialists note that there are no factors that could push the pair EUR/USD above resistance at 1.4280. The Bank of Japan made no new actions, while the positive outcome of the upcoming EU summit has been already priced in euro’s rate as well as the April rate hike. According to the bank, the bank may ignore more hawkish comments from ECB.

Moreover, BNP Paribas expects that Portugal's debt problems will force the country to apply in April to the EFSF for bailout.

In addition, the analysts say that German IFO economic sentiment index that is due on Friday may show a sharp fall in the market’s expectations.

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J.P.Morgan: strategy to buy loonie

Analysts at J.P.Morgan expect oil price to advance. In their view, there can be no doubts that if the crisis in Libya continues, oil prices will stay high. Moreover, the specialists think that even if the tensions in the Middle East ease it will encourage economic growth, which will eventually stimulate demand for oil.

As Canada is the world's sixth largest oil exporter, J.P.Morgan is bullish on the Canadian dollar.

The bank recommends waiting until after Tuesday, when Canada is discussing its budget to eliminate the event risk. Then the strategists advise to sell US currency and buy loonie at 0.99 expecting that the pair USD/CAD will fall to 0.95. Stop orders should be placed in the 1.0150 area.

It’s necessary to remember, that the Canadian currency is highly correlated with the S&P 500 index, so loonie’s purchases mean betting on higher US stock market. J.P.Morgan, however, doesn’t worry about this saying that US stocks will rise as the American economy recovers.

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Mizuho: EUR/JPY may break higher

Technical analysts at Mizuho Corporate Bank note that the single currency is consolidating at the upper border of the broad range in which it was trading versus Japanese yen during the past year.

The specialists claim that the technical picture says that the pair EUR/JPY is likely to break higher soon. In their view, this may also happen in other yen crosses.

According to Mizuho, it’s necessary to buy euro at 115.00 adding on dips to 114.55. The bank recommends placing stop orders well below 114.00. The targets for EUR/JPY are found at 115.50 and 116.00.

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Investec: pound may rise to $1.66

Analysts at Investec claim that if British pound closes today above $1.64, it will get chance to rise to $1.66.

The specialists note that, according to the data released today, UK inflation pace has increased to the highest level in more than 2 years encouraging speculation that the Bank of England may raise interest rates.

In February CPI added 4.4% on the annual basis, while the economists were looking forward to only 4.2% growth.

The pair GBP/USD rose today to the highest level since January 19, 2010 at $1.6401.

The minutes of the BOE’s March decision will be published tomorrow.

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Analysts on franc’s strengthening versus euro

The single currency fell below 1.2800 versus Swiss franc ahead of the summit of EU leaders on March 24-25. Franc keeps resumed its strengthening path as investors concerned about Japan and the tensions in the Middle East buy it as a safe heaven.

Analysts at BayernLB claim that the pair EUR/CHF may fall down to 1.2500 in the medium term.

Strategists at Zuercher Kantonalbank think that euro is currently consolidating and note that it may find support at 1.2750 and then at 1.2703. The euro zone’s currency will remain under bearish pressure below 1.2850. If euro manages to overcome this level, it will get chance to rise to 1.2887.

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Commerzbank: pound on its way up to $1.6425/65

British pound reached yesterday new 14-month maximum in the 1.6400 area versus the greenback.

Technical analysts at Commerzbank note that as the pair GBP/USD managed to overcome the 4-year resistance line at 1.6300, it’s now heading to the 1.6425/65 zone. This area contains a long-term double Fibonacci retracement (the 38.2% retracement of the decline from 2007 to 2008 and the 78.6% retracement of the move in 2009-2010) and the 2010 maximum.

If sterling rises above 1.6425/65, it will be able to climb to 1.6880 and 1.7040/50 that may hold the initial bullish attacks.

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Euro under pressure of concerns about Portugal

Investors’ attention has returned to Portugal where the parliament votes today on budget cuts, the issue that caused difference in views among the lawmakers.

Analysts at Deutsche Bank say that in the worst case Portuguese government will fail leaving the county without the leading power until April. This would mean, in its turn, that there will be no legitimate government to negotiate EFSF bailout terms. The specialists are sure that the country will be soon forced to ask for the external financial help. In their view, it’s necessary to take into account the high amount of funding Portugal will need in April. The bank points out that there’s the risk of the dangerous situation when the ECB has to buy very aggressively at any auction even though it's not permitted to buy the primary issuance that may fail at auction.

Economists at JPMorgan Chase claim that Prime Minister Jose Socrates tried to reach a compromise with the opposition, but no progress was made. According to the bank, the odds that Portuguese government will fall this week seem to be high.

The yield spread between 2-year Portuguese and German bonds added 20 basis points to 479 bps with Portuguese 2-year paper yielding 6.487%.

Analysts at Mizuho Corporate Bank note that the huge bailout funds don’t resolve the euro zone’s debt problem that has to be treated at the root. In other words, the specialists suggest that the region’s fiscal consolidation will be necessary anyway no matter how much funds the EFSF disposes.

Buffett: US economy’s improving

Warren Buffett, the head of Berkshire Hathaway, believes that American economy is improving month by month.

US GDP gained 2.8% showing the maximal advance since 2005. The unemployment rate fell from 9.8% in November to 8.9% in February. The Standard & Poor’s 500 Index increased by 3.2% this year after climbing by 13% in 2010 and 23% in 2009, though it’s still about 14% below its level at the end of 2007.

The famous billionaire investor says that although there will be some commercial disruptions due to the Japan’s earthquake, the consequences of the disaster won’t seriously affect US economy and global economy as a whole.

It’s also necessary to note that Buffet expects Japan’s stock market to rise and advised investors buying the nation’s stocks on the dip.

MIG Bank bets on EUR/USD decline

Technical analysts at MIG Bank advise investors to sell the European currency versus the greenback as it has broken below the March 21 minimum in the 1.4140 area.

The specialists note that if the pair EUR/USD closes the day below this level, short-term bearish bias will be confirmed and euro will be poised for a decline to 1.4085, then to 1.40 and possibly to the previous reaction minimum at 1.3867.

According to the bank, the single currency will be able to resume its way up only if it rises above November 2010 maximum at 1.4282.

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MIG Bank expects USD/JPY to correct downwards

Technical analysts at MIG Bank believe that dollar’s recovery from historic minimum versus yen is showing signs of weakness. In their view, it’s very difficult for the pair USD/JPY to regain the base of the broken triangle in the 81.70 area after it didn’t manage to rise above 82.00.

The specialists expect the greenback to survive downward correction to support levels at March 21 minimum of 80.69 and the psychological level of 80.00. The decisive bearish move may bring American currency to March 18 minimum at 79.07 and test the postwar record minimum at 76.31.

According to the bank, dollar will be able to make the longer-term upside reversal if it overcomes March 18 maximum at 81.99 and then March 11 maximum at 83.30.

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New Zealand will post current account surplus in 2011

According to the data released today, the ratio of New Zealand’s current-account deficit to GDP hit 2.3%, the smallest level since 2001. It happened as the country’s economy grew due to rising milk, meat and lumber exports, as well as reinsurance payments after a magnitude-7 quake that occurred in September. It’s expected that the effects of more damaging February earthquake will push the nation’s current account into surplus this year.

Analysts at RBC Capital Markets believe that the country’s current account will post a surplus of around 1% of GDP in 2010/11 fiscal year on the back of these flows and higher dairy prices. However, New Zealand’s fiscal position will worsen as the government has to fund earthquake-related expenses and there the nation’s credit ratings will be threatened.

New Zealand’s fourth quarter GDP will be published tomorrow. Analysts at Commonwealth Bank of Australia say that investors are ready to the discouraging results and don’t expect much, so kiwi won’t decline much. The specialists say that the market is focused now more on the reconstruction that will certainly contribute to the future expansion of the country’s economy.

Economists surveyed by Bloomberg News expect that New Zealand’s GDP added 0.1% in the final quarter of 2010 after dropping by 0.2% in the third quarter of last year.

The Reserve bank of New Zealand reduced the borrowing costs from 3% to 2.5% on March 10.

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Morgan Stanley about the consequences of Japanese quake

Analysts at Morgan Stanley claim that Japan’s disaster will seriously affect the country’s economy that may contract by 3% this year, while before the temblor the bank was looking forward to 2% growth. In 2012 Japan may either add 3% or lose 1%, it’s hard to make a clear forecast now.

The specialists note, however, that the impact on the world’s economy isn’t going to be very significant. Morgan Stanley expects the earthquake to reduce the global economic growth in 2011 by 0.5 percentage point to 3.8%. The decline of Japan’s GDP may lead to about 0.25-0.5 percentage point, of the estimated cut to 2011 global economic growth, while the rest of the reduction reflects negative effects to other economies through goods and services trade, capital flows, financial system contagion and commodity prices.

According to the economists, the world’s recovery won’t be derailed as conditions were relatively favorable before the crisis and the governments and central banks are ready to increase support for growth if needed.

Among the other risks to the global growth there are surging oil prices stemming from unrest in the Middle East and Northern Africa, monetary tightening in emerging markets to stem rising inflation and contagion from euro zone’s sovereign debt crisis that spreads to the US and other developed nations.

Barclays Capital: GBP/USD may rise to 1.82 in a year

British pound weakened after yesterday’s release of the Bank of England’s March MPC meeting minutes and the Chancellor of Exchequer George Osborne’s presentation of UK 2011 budget. The pair GBP/USD fell from the March 22 maximum at 1.6400 to 1.6200 today.

Never the less, analysts at Barclays Capital regard sterling’s weakness as temporary and believe that it will eventually rise. The specialists still think that the BoE may raise interest rates already in May as the policymakers will be concerned about inflation staying above the central bank’s target and the country’s first quarter economic growth is likely to be acceptable.

According to Barclays, British currency will rise versus euro and euro will advance against the greenback when the EU summit-related risks are eliminated. As a result, the strategists project GBP/USD to strengthen to 1.82 in a year.

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Euro zone: all attention to Spain and Portugal

Moody’s Investors Service cut the ratings on 30 Spanish banks by at least one step after sovereign downgrade to Aa2. Portuguese Prime Minister Jose Socrates tendered his resignation yesterday after parliament’s rejection of plans to cut the budget, pushing the country closer to an international financial bailout.

Analysts at Royal Bank of Scotland claimed today that euro’s decline versus the greenback won’t last long as Spanish bond yields aren’t rising against benchmark German bunds at the same rate as Portuguese debt does. According to the specialists, if Portuguese Problems don’t spread to Spain, euro’s weakness will be relatively limited.

Analysts at Societe Generale don’t seem so optimistic on the single currency. In their view, Moody's downgrade of Spanish banks, Portugal's failure to accept a more austere budget and the upcoming elections in Germany this weekend, which will harden the German position lead to the squeeze on EUR/USD. In their view, the pair may retest 1.40.

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UK budget 2011: analysis of Osborne’s presentation

Chancellor of the Exchequer George Osborne presented yesterday UK 2011 budget. It’s necessary to note that the plans to conduct the huge fiscal consolidation were left intact, while the coalition government is now emphasizing its intention to stimulate British economic recovery.

Let’s outline some essential points of Osborne’s speech.

Forecasts:

UK GDP is expected to add 1.7% in 2011, down from the previous forecast of 2.1%.

Cuts:

Fuel duty was cut: the tax on gasoline pump prices was lowered by 1 penny a liter, while the planned increase in line with inflation for a year was delayed.

The amount a person can earn without paying tax was increased by 630 pounds ($1,024) to 8,105 pounds that means that most earners will get a 120-pound tax cut.

For households:

10,000 people earning less than 60,000 pounds a year who are buying their first home will get 250 million pounds in interest-free loans.

For corporations:

Corporation tax will be decreased next month by 2 percentage points and then by 1 point cuts in each of the next 3 years. That will take it to 23%, the lowest level in the G7.

How will all these cuts fit in the austerity plan? They are going to be compensated:

Oil production taxes are raised: the supplementary charge on North Sea oil profits went up to from 20% to 32%.

30,000-pound annual charge on people domiciled elsewhere for tax purposes who have lived in the UK for 7 years will rise to 50,000 pounds for those in the country for more than 12 years.

Effects and summary:

Business groups welcomed the budget, saying the measures will help the economy overcome a slump in the fourth quarter of last year.

The household incomes will still be on average about 1.5% worse than in May when Osborne became chancellor. The top and bottom deciles will suffer even more.

So, it’s possible to see that the budget is oriented to the British population. Osborne tried to calm down voters concerned about deficit-reduction plans and a sluggish economy with money taken from oil companies, banks and the wealthy as he didn’t give up the plan to reduce the government’s expenditure. UK authorities made an attempt to find a compromise between the necessity to encourage the voters’ economic confidence and the need not to disappoint investors who want the deficit to be eliminated.

Analysts on the prospects of BoE rate hike

The pair GBP/USD keeps going down after British Chancellor of the Exchequer George Osborne presented the country’s 2011 budget. Pound went down from March 22 maximum at 1.6400 getting today below 1.6200.

The analysts have different opinions on the prospects of bank of England’s rate hikes.

Specialists at Brown Brothers Harriman underline that British authorities increased yesterday the borrowings forecast, while reducing the estimate of 2011 GDP growth from 2.1% to 1.7%. The analysts remind that the austerity plan is based on low rates. As a result, BBH believes that British central bank will have to keep the rates unchanged and that bearish pressure on sterling will strengthen. According to the bank, investors will soon realize that their expectations are exaggerated and pound will drop to $1.60.

BNP Paribas, on the contrary, thinks that the Bank of England will take into account mainly the inflation level that reached 4.4% in February. The MPC member Andrew Sentence notes that inflation may overcome 5% level this year. The analysts think that the UK central bank will be forced to raise its inflation forecast and note that the possibility of potential rate hike in May has augmented.

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Commerzbank: bullish forecast on EUR/GBP

Analysts at Commerzbank are strongly bullish on the European currency versus British pound. In their view, there is no sign of a reversal of the pair EUR/GBP that’s currently going up from the 0.8350 levels hit in the middle of February.

The specialists note that technical indicators show that euro has potential to break higher. According to the bank, the bulls will face resistance in the 0.8740/58 area where one can find 50% Fibonacci retracement of the decline from 2009 and the October 2010 maximum. If EUR/GBP closes the day above 0.8758, it will get a chance to advance to 0.8945.

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JPMorgan: China will keep rising rates

Analysts at JPMorgan note that HSBC's preliminary China PMI released today shows that the country has stepped on the path of moderate growth at the beginning of 2011 after the sharp acceleration in the final quarter of 2010. The index rose from February's final reading of 51.7 to 52.5 in March.

The specialists note that China's inflation rate will advance again. According to their forecast, in March it will overcome the 5% level. The bank analysts say that the People’s Bank of China will continue normalizing monetary policy and expect at one more RRR hike and two more interest rate hikes this year.

Bank Sarasin: fair rates for EUR/CHF and USD/CHF

Analysts at Bank Sarasin claim that Swiss franc is now overvalued versus the European currency and US dollar. In their view, the fair levels based on purchasing power parity are found at 1.40 for the pair EUR/CHF and at 1.12 for the pair USD/CHF. The specialists say that the demand for franc will decline with the revival of the risk appetite.

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Chart. Daily EUR/USD

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Chart. Daily USD/JPY

Europe: Portugal’s debt rating reduced, EU summit

Standard & Poor’s lowered Portugal’s credit rating by two notches from A- to BBB with the negative forecast 2 days after Fitch Ratings cut Portuguese long-term debt rating from А+ to А-.

Analysts at Credit Suisse claim that the country’s downgrade affected the market. In their view, investors don’t want to buy euro while they’re closely watching if there’s any progress at the EU summit. The specialists note that there are still many negative factors for the single currency.

According to Bloomberg, two European officials with direct knowledge of the matter claimed that the bailout for Portugal may total 70 billion euro ($99 billion). The country hasn’t asked for financial help yet.

On the first day of the summit yesterday the European leaders agreed on Germany’s proposal to spread contributions to the future permanent rescue fund – European Stability Mechanism – over 5 years. The initial amount of the fund will be equal to less than the expected earlier 40 billion euro of paid-in capital.

The pair EUR/USD is trading in the 1.4160/70 area.

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CharmerCharts: sell EUR/USD on advance to 1.4200/20

Specialists at CharmerCharts, analytical firm providing technical analysis, note that the single currency jumped yesterday to the 1.4200 area versus US dollar.

In the medium term, however, the analysts regard the outlook for euro as negative and advise investors to sell on the pair’s advance to 1.4200/20. According to the analysts, such trade should be stopped if EUR/USD manages to break above 1.4300.

CharmerCharts says that support for the pair is found in the 1.4030/50 zone. Below these levels euro will be poised for a decline to 1.3860.

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