fallenDC

Analysts: USD/CHF will reach parity

On Monday the greenback keeps strengthening vs. the Swiss franc as risk aversion dominates the global markets and concerns continue to weigh on the euro area. According to analysts at largest Swiss banks, USD/CHF is moving up towards parity following the depreciating euro.

Credit Suisse: If the euro weakens due to global risk aversion toward $1.20, we would expect USD/CHF to reach parity.

UBS: If the SNB is intervening to defend the cap, they are essentially recycling the euros into a series of other currencies, 50% of which are going to be dollars, what is going to push USD/CHF higher.

Last week the pair reached its highest level since December 2010. The next resistance for USD/CHF lies at 0.9873 and 0.9904, while support - at 0.9838, 0.9807, 0.9772 and 0.9741.

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Chart. Daily USD/CHF

Westpac: NZD/USD and the Fed

NZD/USD remains flat and close to a 200-day MA since July 9 after trading in an upward channel since the end of May. Specialists at Westpac expect the pair’s further movement to depend on the Ben Bernanke’s testimony on Tuesday and Wednesday.

According to analysts, NZD/USD will move higher to $0.8075 before Wednesday. Any positive outcome (a hint on QE3 or a verdict) would likely push it to $0.8200, while negative – to pull it down to $0.7840 and then to $0.7000 during the weeks ahead.

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Chart. Daily NZD/USD

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 - $1.2175, $1.2200, $1.2250, $1.2300, $1.2325, $1.2350

USD/JPY - Y79.25, Y79.70, Y80.00

GBP/USD - $1.5500, $1.5490, $1.5450

AUD/USD - $1.0150, $1.0165, $1.0190, $1.0300

EUR/AUD - A$1.2000

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Westpac: the Fed won’t signal easing

The Fed Chairman Ben Bernanke is going to testify to the Congress on Tuesday and Wednesday.

Analysts at Westpac point out that Bernanke has said he is ready to take action as warranted, but so far he has been vague about what that means. If the Fed’s chief doesn’t signal that monetary stimulus is inevitable, the demand for riskier assets will fall. In this case the specialists recommend selling AUD/USD. On the other hand, if US central banker signals that there may be more easing, one should buy Aussie.

Westpac thinks that the first outcome is more likely as the Fed may decide to wait for more reports on employment and, probably, Greek bond redemption before deciding on a course of action. As a result, the bank’s recommendation is to sell AUD/USD at $1.0250 targeting $1.0100 and stopping at $1.0330.

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Ben Bernanke, chairman of the Federal Reserve

Photo: Bloomberg

UBS: bearish outlook for EUR

Analysts at UBS note that euro fell to the record minimums versus Australian, New Zealand and Canadian dollars, but remains well above the all-time lows against US dollar, Japanese yen, British pound and Swiss franc. Such dynamics reflects foreign exchange intervention by the SNB and loose monetary policy of the Fed, the Bank of Japan and the Bank of England.

According to specialists, if the Fed and the BoJ continue to disappoint investors looking for further easing then the euro’s further decline will become likely. Analysts continue to target EUR/USD falling to $1.15 this year.

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Image: Bloomberg

July, 16: economy and currencies

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On Monday the single currency remains close to a two-year low vs. the greenback ahead of today’s releases. European inflation is likely to stagnate, while consumer confidence – to weaken. According to the latest comments of Angela Merkel, Germany hasn’t changed her position about the austerity measures for the problem European nations. However, Merkel said she is confident the majority of German members of parliament will support aid package for Spain’s ailing banking sector.

The MSCI Asia Pacific added 0.3% as Asian shares rose. Japan’s financial markets are closed for a holiday. Safe currencies benefit from a risk aversion as markets are expecting more easing from the world’s major central banks. Investors are looking forward to Ben Bernanke’s semi-annual report on US economic outlook to Congress tomorrow. Market participants will also pay special attention to today’s IMF growth forecasts.

July 16: events to watch

Japan: Bank holiday

Euro area: CPI growth is to remain at 2.4% in June, while core CPI – at 1.6%. According to the ECB report, inflation rate will fall below the regulator’s 2% ceiling next year.

US: Core retail sales are expected increase by 0.1% in June, what is much better than a 0.4% drop in May, but still points at the weakness of the US economy. Retail sales demonstrate the similar dynamics: 0.2% growth in June vs. a 0.2% decline in May. Weak figures will add to investor’s concerns about a new QE.

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Cartoon: jeffreyhill.typepad.com

BoA Merrill Lynch: delusions about euro area

Analysts at Bank of America Merrill Lynch looked at the euro zone’s problems from the point of view of the game theory. The specialists analyzed the economic situation in each of the 11 largest euro zone countries and assessed the likely impact of their exit from the currency bloc.

Delusion #1: Strong countries like Germany and Austria could leave the euro zone without too much pain, while the weaker peripheral countries need the stability of the euro.

BoA has found out that “Italy and Ireland have the highest relative incentive to voluntarily exit the euro, while Germany has the lowest incentive of any country to leave.”

Conclusion: Italy has a stronger incentive to leave the euro zone than Greece and, consequently, will be less likely to accept tough conditions to stay.

Delusion #2: The euro zone will hang together because it's to the member countries’ collective advantage.

BoA recalls the famous prisoner’s dilemma (the game theory problem, in which individuals’ own incentives outweigh their joint interests) in the context of Germany and Greece and austerity-Eurobonds debate. It would be in both countries' interests to cooperate – for Greece to adopt austerity and Germany to agree to Eurobonds – but each country will ultimately try to maximize its own benefit: Greece would be better off with Eurobonds but no austerity, while Germany would benefit more from the opposite.

Conclusion: countries have not so many incentives not to cooperate on resolving the crisis, so euro’s future is really under threat.

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GBP/USD: technical comments

GBP/USD touched a new 5-week minimum in Thursday due to a risk-off market mode ($1.5392), but then started an upward correction to the $1.5440/50 area. Most technical indicators show the descending trend is likely to continue. Yesterday the pair broke through a flagpole of a bear flag pattern. All in all, GBP/USD trades in a downward channel since June 20.

It makes sense to sell GBP/USD on a pullback higher, targeting $1.5267 (June 1 minimum). The next support for the pair lies at $1.5233 (2012 minimum), while resistance – at $1.5450, $1.5510 (23.6% Fib. retracement of a May decline) and 1.5662/45 (38.2% Fib. retracement and a resistance of a downward channel).

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Chart. H4 GBP/USD

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: $1.2135, $1.2170, $1.2175, $1.2200 (large), $1.2235, $1.2300, $1.2350, $1.2375;

USD/JPY: 79.00, 79.25, 79.75, 80.00;

AUD/USD: $1.0000, $1.0100, $1.0195, $1.0200, $1.0220;

AUD/JPY: 83.00;

GBP/USD: $1.5500, $1.5650;

EUR/GBP: 0.7900;

USD/CAD: 1.0150.

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Analysts: trading EUR/USD

Analysts at Commerzbank expect EUR/USD to decline to $1.2053 (200-month MA) after having reached $1.2187. According to specialists, the descending triangle figure paves the ground for a decline to $1.1934 and to $1.1876 (2010 minimum). Resistance for the pair lies at $1.2287 (June 1 minimum), $1.2367 (200-day MA) and $1.2475 (triangle support line).

Strategists at Aspen Trading Group are also bearish on EUR/USD and recommend going short at $1.2150 with a stop at $1.2300 and a target of $1.1850. In their view, this level is close to fair value of the pair.The specialists claim that being bearish on euro is the best risk-off trade these days.

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Chart. Daily EUR/USD

July 13: economy and currencies

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The markets were apathetic to China’s GDP release: everyone has already submitted to the fact that the growth pace of world’s fastest growing economy is slowing down. Even the consensus was dragged lower before the release from 7.9% to 7.7%. The data released today showed that Chinese GDP increased by 7.6% in Q2 after extending by 8.1% in the first 3 months of the year. Chinese industrial production and retail sales grew a bit less last month than in May, while the advance in fixed asset investment was slightly bigger.

Investors are now much more preoccupied with what’s happening in Europe, particularly in Italy. The nation holds a 10-year bond auction. Overnight Moody's ratings agency downgraded Italy's government bond rating by two notches to Baa2 from A3. According to experts, Italy’s near-term economic outlook has worsened: weaker growth and higher unemployment creates risk of failure to meet fiscal consolidation targets. On Thursday, however, Italy raised 7.5 billion at a lower rate than previously, indicating improved investor confidence.

US is to release PPI (forecast: a 0.5% decline in June), core PPI (forecast: a 0.3% growth in June) and preliminary UoM consumer sentiment index (expected to increase to 73.5 in July).

Risky currencies are trading on the upside today, though they are set for the weekly declines due to the general pessimism. The MSCI Asia Pacific Index of shares added 0.6% after falling by 0.2%. Analysts at Westpac underline that the growth momentum is still slowing down, though there may be more of a short squeeze in the currencies like Aussie in the near term.

China's GDP is to disappoint markets

China’s GPD release on Friday attracts investors’ attention as will define the risk sentiment and influence the commodity currencies. Most analysts expect the second largest economy in the world to grow below the expectations in Q2 (consensus: 7.9%; previous print: 8.1%).

Experts at Development Research Centre expect China’s economy to grow by 7.5% in Q2. In the second half of 2012, however, the economy is likely to recover modestly as the monetary policy measures will bear fruit. China’s economy could grow around 8% in 2012. Specialists believe the world's second-largest economy is entering a phase of more modest expansion in comparison to the 10% annual average rate in the past three decades, but it could still maintain a 7-8% annual rate in the next 10 years. Still, any reading below 8% tomorrow will hit the market's risk sentiment.

According to Barclays Capital forecasts, China’s June industrial production may exceed the 9.8% forecast, but this small positive result will be offset by the negative GPD surprise. In their view, the weaker-than expected GDP will hurt the Aussie.

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Chart. China's GDP (2003-2012)

Source: forexfactory.com

EUR/USD: fundamental & technical

Fundamental

- Spanish Prime Minister Mariano Rajoy announced yesterday 65 billion euro ($80 billion) of new austerity measures in a renewed effort to meet EU budget targets after the nation was granted another year to reduce the budget deficit. Now Spain has until 2014 to bring its deficit within the EU’s 3%. This is Spain’s fourth austerity package in 7 months and the new flashpoint for supports and the opposition.

- Finland is in discussions to get shares in Spanish banks as collateral in exchange for its contribution to the bailout.

- Euro zone May industrial output +0.6% m/m, -2.8% y/y, better than consensus forecast.

- ECB monthly bulletin: heightened uncertainty, some downside risks to growth outlook have materialized.

Spanish 10 year yields are up by 3 bps on day at 6.61%.

Technical

Strategists at RBS recommend selling EUR/USD up to $1.2290 (June minimum) targeting $1.1875 (2010 minimum) stopping above $1.2350 (the recent cluster of daily maximums).

Analysts at UBS claim that key support for EUR/USD lies at $1.2152. If euro breaches this level, it will slide to $1.2000. Resistance lies at $1.2336 and $1.2402.

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Chart. H4 EUR/USD

NAB: AUD/USD to fall below parity

Analysts at NAB expect AUD/USD to drop below parity by the end of 2012 on the back of the slowed global growth and lower prices on raw materials.

Specialists devote considerable attention to weak economic releases coming from China lately. China’s slowed economic growth could pull AUD/USD to $0.97.

According to CFTC report, traders remain in net short positions on AUD for six consecutive weeks (the longest stretch since 2009) as falling export prices raise concerns the RBA will cut rates further.

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Chart. Daily AUD/USD

Barclays Capital: bearish on USD/JPY

Analysts at Barclays Capital are bearish on USD/JPY and recommend going short on the pair at 79.6, setting a stop at 80.0 and targeting at 78.0. In their view, slowed global growth and European woes are likely to push the Japanese currency up, while the BoJ is unlikely to extend the asset purchase program.

However, improving risk sentiment and more aggressive BoJ easing could threaten the yen’s strength. Japan’s monetary authorities claim they are ready to loosen policy in order to reduce the deflationary pressure on the economy. Core consumer prices contracted for the first time in 4 months sliding by 0.1% y/y in May, while Tokyo core CPI fell by 0.6% in June – the BOJ’s 1%-inflation target seems like very hard to attain.

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Chart. Daily USD/JPY

Commerzbank: forecast for GBP/USD

Technical analysts at Commerzbank note that GBP/USD has recently completed consolidation.

In their view, British currency will return to $1.5600 and then slide from this point firstly to $1.5403 (June 8 minimum) and eventually to $1.5268/33 (June 1 minimum and 2012 minimum) and then possibly to $1.5000/1.4990.

According to the bank, resistance lies at $1.5593/1.5600 (June 25 maximum, June 7 peak) and $1.5750/85 (200-day, 200-week MAs, 50% Fibo retracement of the decline in May).

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Chart. Daily GBP/USD

Aussie hit by poor jobs data

Australian dollar dropped versus the greenback from the levels close to the 200-day MA breaching uptrend support line from the beginning of June.

Aussie got hurt due to the discouraging Australian labor market data: the number of jobs contracted by 27K last month (vs. + 0.2K expected). Australian currency is also affected by the expectation of Chinese growth slowdown. China’s GDP is released tomorrow and its growth rate is forecasted to decline from 8.1% in the first 3 months of the year to 7.9% in Q2.

Analysts at Westpac claim that Australian jobs report is “pretty horrible”. The specialists underlined that all jobs that were added were part-time and that’s a bad sign. Strategists at NAB, on the other hand, think that things as not as gloomy as they seem. In their view, the unemployment rate of 5.2% remains low by historical standards. The odds of another RBA rate cut increased, but such move in August still seems unlikely as Australia’s monetary authorities will like to watch for the effects of their recent rate cuts. The central bank cut rates in May and June to 3.5% and stayed on hold in July.

AUD/USD set the daily minimum at $1.0135 and then recoiled up to $1.0150. Support lies at $1.0125 (June 28 maximum), $1.0090 and $1.0055. Resistance lies at $1.0200, $1.0225 and $1.0240.

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Chart. H4 AUD/USD

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: $1.2200, $1.2215, $1.2225, $1.2230 (large), $1.2400, $1.2550;

USD/JPY: 78.75, 79.00, 79.85, 80.00;

AUD/USD: $1.0200, $1.0350;

EUR/AUD: 1.2065;

EUR/GBP: 0.8020, 0.8030, 0.8070;

NZD/USD: $0.8000.

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Bank of Japan: no easing, only technical changes

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REUTERS/Issei Kato (JAPAN)

The Bank of Japan has made a technical change to its asset purchase and lending program. The total size of the program was maintained at 70 trillion yen ($879 billion). The BOJ expanded its asset-purchase program by 5 trillion yen to 45 trillion yen ($564 billion) cutting the loan facility by the same amount to 25 trillion yen. As a result, the total amount of the asset purchase and lending program remained unchanged at 70 trillion yen.

The BOJ pledged to increase its purchases of short-term public debt – previous extensions of the program had been mostly for long-term government bonds. As for the benchmark rate, the central bank left it in the 0-0.1% area.

Japanese Finance Minister Jun Azumi called for more support from the central bank for growth and inflation to meet a 1% price goal. Azumi expects BOJ policy effect to emerge gradually.

The market weren’t much impressed by the move which is not regarded as monetary easing. USD/JPY has briefly spiked to 79.96 before sliding to the levels below today’s opening around 79.50 yen. Investors bought yen as a refuge ahead of the release of the euro zone’s industrial production later today and important Chinese data tomorrow.

The pair remains supported above 200-day MA at 79 yen. Some market players say that Japanese exporters will sell the currency above 80 yen.

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Chart. Daily USD/JPY

Commerzbank: bearish on NZD/USD

NZD/USD remains strong after a FOMC meeting minutes didn’t give any clear hint on the additional policy easing in the nearest future. Analysts at Commerzbank, however, remain bearsh on NZD/USD and expect the pair to decline to 0.7844 (38.2% Fib of 2012 downtrend) and 0.7825 (55-day MA) after a 2-month upward movement.

In their view, a break below 0.7825 would pave ground for a drop to a 0.7469/0.7371 support zone. According to specialists, the New Zealand currency will remain under pressure while it trades below 0.8319 (April maximum). However, resistance at 0.8085 and 0.8255 (78.6% Fib) looks too strong for the pair to overcome it, so NZD/USD is likely to move on a downside.

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Chart. Daily NZD/USD

BofA: USD to rise regardless of FOMC

Specialists at Bank of America expect the greenback to remain strong regardless of the speculation the Fed will ease the monetary policy. They point that the overall trend for the US currency remains bullish.

According to their technical forecast, the Dollar index will increase to 85.32 (78.6% Fibonacci retracement from a 2010-2011 decline) if it manages to break above 83.54. A downward movement will become likely if the index falls below 83.00 and 80.73 support levels.

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Chart. US Dollar Index (DXY)

Source: marketwatch.com

FOMC: easing options remain open

The US dollar strengthens against the euro after the minutes of the FOMC June 19-20 meeting, in which Fed officials decided to extend the Operation Twist, revealed some members said additional stimulus may be needed to support the weak labor market. However, the greenback depreciates against the high-yielding currencies.

While several policymakers were in favor of the policy easing, the others believed that would only make sense if the economic rebound loses momentum or inflation drops. The Fed underlined that rates are likely to remain at "exceptionally low levels" at least through the end of 2014. Several Fed members said in an intriguing manner that it is necessary to develop "new tools" to ease financial conditions.

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Photo: Bloomberg

Credit Suisse: trading EUR/USD

Analysts at Credit Suisse recommend going short on EUR/USD at current levels with a stop at $1.2340 and an initial target of $1.2160.

In their view, the fact that yesterday EUR/USD didn’t manage to overcome the $1.2340 resistance creates potential for a further decline. The next support for the pair lies at $1.2150 and $1.1985. Only a break through $1.2401/$1.2408 will let the pair reach $1.2693.

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Chart. Daily EUR/USD

BoJ expected to leave the policy unchanged

On Wednesday the Japanese yen strengthens against the greenback for a fourth consecutive day. The Bank of Japan starts its 2-day meeting today and is widely expected to leave rates unchanged and not announce any new easing measures.

It seems that lately the regulator has become slightly more optimistic: the country's economy is headed for a moderate recovery as improvement in domestic demand eases the pain from slowing global growth. According to a Regional Economic Report released July 5 by the BoJ, in Q2 business conditions improved in all nine regions of Japan. Tankan manufacturing and non-manufacturing indices showed improvement in Q2 (-1 and 8 respectively).

Some analysts, however, expect the regulator to follow the central banks of Europe, Britain and China with its own monetary measures in a united effort to fight the global slowdown. Moreover, weaker national currency would be beneficial for the Japanese economy. Bank of The BoJ Governor Masaaki Shirakawa said on Tuesday that the bank is ready to undertake all the necessary measures to bring the nation out of its deflationary state. According to him, the BoJ has already accumulated 54 trillion yen of asset purchases, but is aiming for 70 trillion.

UBS: We continue to expect the BoJ to add more stimulus on a meeting and by this to weaken the yen. A deterioration of machinery orders and another drop in the current account confirmed the bad sentiment of economy watchers. Moreover, Japan is still struggling to recover after Fukushima.

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Bank of Japan Governor Masaaki Shirakawa

Photo: Reuters