fallenDC

Societe Generale: China’s inflation reached new maximum

According to the data released today, China’s inflation pace rose to the maximal level in 3 years. Consumer prices increased in July by 6.5% on the annual basis, while the economists expected the CPI to rise by 6.4% as it was in June. The nation’s PPI added 7.5% last month from the previous year, showing the biggest gain in almost 3 years, while food costs climbed by 14.8%. The Shanghai Composite Index fell by 20% from its maximum in November.

Analysts at Societe Generale note that in normal conditions rising inflation would make Chinese authorities raise the borrowing costs, but given the current uncertainty at the global financial markets the policymakers will likely delay tightening.

Analysts at Royal Bank of Canada expect one more rate hike in the next few months, while UBS and Standard Chartered forecast no more rate increases this year. The specialists at UBS claim that the pace of CPI growth may decline to 4% by the end of the year. Analysts at Mizuho Securities believe that the average inflation this year will be at 5.3% that’s 1.3 percentage points higher than the government’s target.

Economists at Credit Suisse remind that China will get vulnerable if the global economy slows down sharply as that will have negative impact on Chinese exports and consumption. Strategists at Bank of America Merrill Lynch think that in order to support national economy China may use fiscal measures such as increase of spending on social housing and water infrastructure instead of easing its monetary policy.

UBS: bearish view on USD/CHF

Technical analysts at UBS are bearish on USD/CHF. The pair is currently trading just above the record minimum at 0.7359. The specialists say that there isn’t much support for the greenback until the psychological level at 0.7000. Resistance for American currency is found at 0.7741.

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Jyske Bank: EUR/USD will break down current range

Technical analysts at Jyske Bank believe that the pair EUR/USD will continue trading within the recent range between 1.4055 and 1.4450 for some time. Then the specialists expect the single currency to break down falling to 1.3746 in the middle of August.

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Rabobank: Swiss franc will keep strengthening

Currency strategists at Rabobank believe that the demand for Swiss franc as a refuge will remain high and the Swiss National Bank is unable to prevent the strengthening of the national currency.

The central bank has already cut the borrowing costs last week narrowing the range of the interest rates from 0.00-0.75% to 0.00-0.25%. Another reduction simply won’t have much impact at the currency market, while the intervention will be too costly, says the bank.

According to the specialists, there’s a strong risk that the situation in the euro zone deteriorates, so the odds that franc will keep appreciating are high.

The single currency has renewed today the record minimum versus franc sliding to 1.0476. Analysts at Commerzbank note that as long as the pair EUR/CHF is trading below 1.1020, it will remain under bearish pressure. The pair USD/CHF has also dropped to the all-time low at 0.7359.

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Kenneth Rogoff: the Fed may relaunch QE

Harvard University economist Kenneth Rogoff sees the possibility of the third round of monetary easing in the United States as high. In his view, the Fed is likely to act to support US economy. The specialist says that US central bank has to be more decisive in this.

At the same time, Rogoff claims it’s not clear whether the Federal Reserve’s Chairman Ben Bernanke will manage to immediately gain the support of Federal Open Market Committee members for more easing. Last month after QE2 ended in June Bernanke outlined policy options including additional asset purchases or strengthening the commitment to low interest rates.

The FOMC meeting takes place today and its statement is released at 10:15 pm (GMT+4).

Analysts at JPMorgan Chase, BNP Paribas and Goldman Sachs also believe that the Fed will pledge to maintain record monetary stimulus. According to them, the central bank will probably make commitment to hold its $2.87 trillion balance sheet steady for an extended period.

BBH about potential rating’s cuts

Economists at Brown Brothers Harriman believe that France, Belgium, UK, Japan and the most of peripheral euro zone’s nations are the next in the list of potential downgrades.

The specialists expect British pound and the single currency to get under bearish pressure. In their view, it’s necessary to buy Swiss franc as the demand for the safe havens is likely to remain high.

In addition, the bank thinks that US dollar won’t be affected from the S&P’s move as hard as many think as the market doesn’t have better alternative than Treasuries.

RBS, SocGen on ECB's decision to buy Spanish and Italian debt

As the euro zone’s policymakers failed to stop the spreading of Greek debt crisis the European Central Bank had to start acting to save euro: yesterday it began buying Italian and Spanish assets.

To do this, the ECB will need to expand massively its balance sheet. Moreover, the central bank risks being accused of breaching a key principle in the euro’s founding treaty by bailing out the nations that didn’t abide the terms of Stability and Growth Pact.

Since starting its bond purchases in May last year, the ECB has bought about 74 billion euro of assets to help stabilize Greek, Irish and Portuguese markets. Four months ago the ECB ceased bond purchases trying to force the governments to find the solution of the debt issues on their own and engaged in counter-inflation moves.

Daiwa Capital Markets notes that the ECB may lose its credibility. According to the analysts, the euro area’s central bank will have to buy about 200 billion euro ($287 billion) of Italian bonds and 60 billion euro of Spanish securities to ease the pressure on these nations.

Strategists at ING warn that as the ECB will have to spend very large sums – about 50 billion a week – to make an impact on the market, it may not be able to continue to sterilize its purchases by absorbing the equivalent amount from banks via term deposits. That would significantly increase the money supply in the region stimulating inflation that opposes the central bank’s principles.

Economists at Royal Bank of Scotland expect ECB to buy on average about 2.5 billion euro of bonds a day – that would make 600 billion euro in a year. The specialists note that the European Central Bank may keep doing that until the European Financial Stability Facility is allowed to purchase bonds on the secondary market and could end with the half of the traded Italian and Spanish debt in its assets.

Analysts at Societe Generale believe that the ECB purchases may do some good, but won’t solve the fundamental problems. In their view, the euro area has to become fiscal union for that.

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Moody’s once again confirmed top US rating

Moody’s Investors Service confirmed US top Aaa rating for the second time in a week. It happened after another major rating agency, Standard & Poor’s, downgraded the world’s largest economy.

It’s necessary to note that Moody’s left the outlook for American debt ranking negative. The agency underlines that the greenback remains the main reserve currency and this fact allows the United States to have higher debt levels than other countries. In addition, Moody’s notes that US authorities have made much effort to fix the debt & deficit issue. The agency also pointed out that the nation has “unparalleled size and diversity” and enjoys “political and institutional stability”.

According to Moody’s, to keep the top rating the US has to hold its debt at “not far above” 75% of GDP by about 2015 – this ratio is forecasted for 2012, this year it’s expected to be 69.8%. The downgrade may happen before 2013 if US fiscal discipline or economic outlook deteriorates.

American stock markets fell by the most since December 2008. By the end of Monday’s US trading session Down Jones Index fell by 5.55%, S&P 500 contracted by 6.66%, while Nasdaq 100 lost 6.11%. At the same time, US dollar rose as even now it’s still perceived as a refuge. Yields on Treasury 2-year notes reached a record low.

BBH: dollar won’t suffer much from US downgrade

Currency strategists at Brown Brothers Harriman believe that US downgrade won’t strongly affect US dollar’s rate. According to BBH, American currency will be driven by the rating cut only in the shortest term.

The specialists expect the greenback to consolidate versus its main counterparts. In their view, the pair EUR/USD will stay in the recent broad range between $1.4000 and $1.4600. The analysts think that the pair GBP/USD will keep trading between $1.6200 and $1.6600.

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UBS: the pair AUD/USD will fall to parity

Technical analysts at UBS give bearish outlook for AUD/USD. In their view, Australian dollar will go down well below the parity with its US counterpart.

The specialists note that S&P’s decision to downgrade the US will strongly increase the market’s risk aversion in the coming days.

Aussie may get under significant downside pressure due to the weaker equities and falling commodity prices as well as due to the general increase in forex volatility, claims UBS.

On the downside, support levels for the pair are found at 1.0330 and 1.0290. On the upside, resistance levels lie at 1.0440 and 1.0470.

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Commerzbank: comments on USD/CHF and EUR/CHF

Technical analysts at Commerzbank claim that below the 25-year support line in the 0.7554/0.7550 area the greenback has no support versus Swiss franc until 0.7410 and then 0.7160, the base of the 2010-2011 channel.

In the near-term the divergence in 4-hour charts and the divergence of the daily RSI indicate the possibility of an upside correction.

The specialists note that resistance for USD/CHF is situated at 0.7725. In order to strengthen to the 6-month downtrend line at 0.8285, US dollar has to overcome the accelerated downtrend at 0.7944.

The bank recommends squaring trades, attempting tiny shorts on a rebound to 0.7725 adding at 0.7825, stopping at 0.7945 and covering position at 0.7410.

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As for the pair EUR/CHF, Commerzbank expects in to consolidate in the near-term underlining that the single currency hasn't broken up the first resistance level. Then euro will survive another slump to 1.0550. If the ECB doesn’t manage to support euro and franc keeps appreciating, the Swiss National Bank will intervene, thinks the bank.

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S&P reduced US credit rating

Standard & Poor’s reduced US credit rating by one notch on August 5 stirring up concerns about the nation’s fiscal health.

The agency kept negative outlook for American rating as it’s not clear whether the Congress will end Bush-era tax cuts or tackle entitlements. According to S&P, if spending reductions are lower than agreed to, interest rates go up or the general government debt rises, the rating may be cut from AA+ to AA within 2 years.

The other leading agencies – Moody’s Investors Service and Fitch Ratings – confirmed their top estimates of US debt on August 2 when President Barack Obama signed a bill that helped United States avoid default. Moody’s and Fitch also underline the possibility of downgrades if lawmakers fail to enact debt-reduction measures and the economy weakens.

The pair USD/CHF hit the record minimum in the 0.7530 area. The pair USD/JPY dropped from the intervention maximum at 80.23 hit on August 4 to the levels in the 77.80 zone.

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BOTMUFJ: EUR/USD may fall to $1.39

Technical analysts at Bank of Tokyo-Mitsubishi UFJ claim that the single currency may fall versus the greenback to the 3-week minimum at $1.39 (200-day MA, orange on the chart) in a week.

The specialists note that EUR/USD formed the “dead cross” yesterday: the 5-day MA (green) for the pair went down below the 20-day MA (brown) – the bearish signal.

In addition, there are 3 declining trend lines: the first one connects May 4 and July 4 maximums, the second – daily minimums since July 28, and the third – July 27, August 1 and August 4 maximums.

According to Bank of Tokyo-Mitsubishi UFJ’s forecast, the pair that’s declining since May is likely to keep falling during another several months, though the odds of breaking below $1.39 aren’t high.

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UBS: Japanese authorities will remain active

Analysts at UBS believe that Japanese monetary authorities understand that they won’t be able to reverse yen’s uptrend, so they have more modest goals.

The specialists think that the nation’s Ministry of Finance is trying to push USD/CHF to the range within it was trading before the US debt limit debates escalated negative pressure on the greenback. In their view, the realistic short-term target for the pair is situated in the 79.00 zone.

The bank underlines that 2 days ago Takehiko Nakao succeeded Rintaro Tamaki as Vice Finance Minister for International Affairs inheriting operational responsibility for intervention. That may mean that the MoF and the Bank of Japan may elaborate more active approach.

Japan’s Finance Minister Yoshihiko Noda has already pointed out that the nation’s monetary authorities may turn to the tactics widely used in 1995 that involved the chain of interventions that lasted 8 months. So, investors should be prepared to see the BOJ continuously acting at the forex market.

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Commerzbank: EUR/CHF remains under pressure

The single currency remains under pressure versus Swiss franc due to the global risk-off sentiment. The concerns are partly caused by risk that the debt crisis will spread to other euro zone nations.

Technical analysts at Commerzbank underline that EUR/CHF didn’t manage to rise above the 38.2% retracement of the recent decline at 1.1216.

According to the specialists, the pair will slide to support in the 1.0550 area.

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BNY Mellon: euro will get support from interventions

Analysts at Bank of New York Mellon believe that while both the BOJ and the SNB are making enormous efforts to weaken their national currencies will make investors less certain about buying them.

The specialists note that the interventions will give the European currency some support. According to the bank, euro performed well enough when Japan intervened in September.

At the same time, it’s necessary to note that Bank of New York Mellon isn’t bullish on euro. The analysts just think that the pair EUR/USD won’t sink to $1.30 or lower during the next few months.

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Citigroup: buy yen and franc though with caution

Japanese yen and Swiss franc are traditionally seen as the safe haven currencies. However, the Bank of Japan’s intervention made yen slump by 300 pips in several hours ruining investors’ positions, while the Swiss National Bank’s pledge to keep the interest rates near zero also hit the market players. That’s not what one expects from the refuge currencies.

Currency strategists at Citigroup claim that the speculators will now get more cautious, but the demand for yen and franc will remain high in times of extreme risk aversion such as the one that would occur in case of a global double-dip recession.

As a result, yen and franc may be still used to avoid high risk, but one should watch out for central banks.

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