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Demand for EUR as reserve currency is illusive Despite the serious debt problems in the region, the common currency still remains resilient. The key support for the euro is created by the demand on it as on a reserve currency. However, according to analysts at Deutsche Bank, the euro’s status as a reserve currency may be more vulnarable than meets the eye. Specialists point the regulators increase reserves mainly in order to weaken its national currency and to support exports. For example, 35% of the overall allocated euro reserve growth in 2011 was achieved due to the Swiss National Bank, buying euro to maintain the 1.20 peg for the Swiss franc. The regulators do not have real confidence in the euro, and the shift in structure of central bank's reserves may badly influence the currency. Source: Bloomberg Have a profitable trading day with FBS! If you have any questions to our analysts, you’re welcome to ask for to this article!

To risk or not to risk? The markets remain in the cautious mode. The situation has become highly driven by the politics that immensely complicates any attempts to predict its further developments. The highest risks are currently concentrated in Greece (elections in June?), France (Hollande vs. Merkel?) and Spain (can it survive on its own?). With all that in mind it’s difficult to expect much risk appetite in the foreseeable future. Surely on Monday (G7 meeting) the leaders of the advanced economies won’t be able to avoid the discussion of European problems, but we’ve already seen that the European leaders tend to maintain uncertainty and deliver some measures only when there’s already almost no air for breathing. All eyes will be focused on Hollande-Merkel meeting on Wednesday, May 16. There is, however, some positive news. Though Greece will likely get stuck in political indecisiveness for weeks, the EFSF has agreed to pay out its next 5.2-billion-euro tranche, while Spain, nationalized troubled Bankia-BFA. The question is whether it enough to sustain positive risk sentiment. The answer is: hardly. The markets will likely continue pricing in grim prospects. Does that mean that we favor safe havens? Goldman Sachs thinks that the “currency of last resort” is still gold, not the safe-haven greenback as US economic recovery remains unstable. Both Goldman and Bill Gross from Pimco believe that the Fed is moving closer to announce additional asset purchases. Apart from gold and dollar vs. commodity currencies, we’re looking to yen, bearish on EUR/JPY and AUD/JPY. The Bank of Japan’s board member Sayuri Shirai claimed that sufficient firewalls have been set in Europe to prevent the crisis from going global, so the BOJ will have some time to take a thorough look at how its latest policy action will affect the economy. Note though that yen’s attractiveness is a very relative thing: the central bank’s still under heavy pressure from the real sector. We also recommend watching the RBA’s monetary policy meeting minutes on Tuesday, May 15. After the positive jobs report released this week, the central’s bank rate cut in June is no longer that evident, although with disappointing Chinese data (remember: main trading partner) Australian authorities may feel the need for stimulus all the same. Image from http://youngandthrifty.ca Have a profitable trading day with FBS! If you have any questions to our analysts, you’re welcome to ask for this article!

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: $1.2900 (also barrier), $1.2950, $1.2975, $1.3000 and $1.3100. GBP/USD: $1.6050, $1.6150 and $1.6200. EUR/GBP: 0.7970. AUD/USD: $0.9950, $1.0120, $1.0150, $1.0195 and $1.0200. AUD/JPY: 83.00. USD/JPY: 79.50, 80.00, 80.10 and 81.00. Image from http://seoklass.ru Have a profitable trading day with FBS! If you have any questions to our analysts, you’re welcome to ask for this article!

May 11: today's economic focus Risk aversion continues to dominate markets on Friday, weighing on the high-yield currencies. Data released in China confirms that the economy may extend losing streak. Industrial production in April rose by 9.3% compared with March's 11.9%, sharply underperforming expectations. Retail sales also underperformed forecasts for an annual growth of 15.2%, rising instead by 14.2% in April from a year earlier. China’s CPI slowed down from 3.6% in March to 3.4% in April. Now the nation has more scope for monetary easing. According to Reuters poll, the market consensus is for 150 bps of more RRR cuts this year. Nomura analysts claim that the policy focus will remain on promoting growth to support the economy. Risk sentiment was hurt during US session as JP Morgan announced $2-billion losses in credit derivatives trades. UK Nationwide consumer confidence fell from 52 in March to 44 in April. Later today watch British PPI Input data (decline’s expected), Canada’s labor market figures (forecast: lower increase of payrolls, higher unemployment rate) and US PPI and consumer sentiment (consult FBS economic calendar). Also note that there will be an Italian BOT auction around 9 a.m. GMT. Have a profitable trading day with FBS! If you have any questions to our analysts, you’re welcome to ask them in comments to this article!

Will good jobs data keep RBA from cutting? The Australian dollar strengthens on the back of the unexpectedly positive employment data released on Thursday. The unemployment rate fell to 4.9% in April compared with 5.3% forecast and 5.2% in March. Australia’s economy surprisingly added 15K new jobs this month against a 4.8K decline forecasted and a 37.6K decline in March. Payrolls rose mostly due to the part time work, which added 26K jobs to payroll, while the full time employment declined by 10.5K. However, many analysts still expect the Reserve bank of Australia (RBA) to cut rates by 25 b.p. on its next meeting in June in order to stimulate economic growth. ANZ Banking and Westpac think that risk aversion together with loose fiscal and monetary policy will put Aussie under pressure. Societe Generale, on the other hand, claims that today’s positive employment figures change the game. According to the specialists, rate cut in June is not likely, so close to the recent 50 b.p. reduction; the next cut is expected in August. Employment figures show a large deviation from expectations, but the full-time employment still continues to decline. The April employment gain, therefore, will generate less additional household income than if it had come from full-time employment.

BOTMUFJ: comments on AUD/JPY Technical analysts at Bank of Tokyo-Mitsubishi UFJ believe that there’s a chance of Australian dollar to start gaining versus Japanese yen. Yesterday AUD/JPY hit 3 1/2-month minimum at 72.06, but today it returned above key support levels at 80.35 (50% Fibonacci retracement of the pair’s advance from October minimum to March maximum) and 80 yen (psychological level). The specialists think that if the bulls manage to hold the rate above these levels, the pair will get chance to strengthen to 84 yen (90-day MA).

2 ways of trading GBP/USD Danske Bank: sell GBP/USD at $1.6155 targeting $1.6055 and stopping at $1.6208. Commerzbank: try small longs at $1.6085 targeting $1.6300 with tight stops at $1.6065/50.

Barclays: bearish on EUR/GBP Analysts at Barclays are bearish on the single currency versus British pound. This week euro hit the minimal levels versus sterling since 2008. In their view, EUR/GBP will weaken to firstly to 0.7960 and then to 0.7700 (October 2008 minimum) and 0.7300 in the medium and long terms. According to the bank, the pair’s prospects will remain negative as long as it's trading below 0.8075/0.8100.

Merkel’s firm on austerity plans In her speech to Bundestag today German Chancellor Angela Merkel said that: · Europe's only hope is to implement structural reforms alongside austerity measures. · Economic growth may be reached through structural reforms. The calls for growth through debt would throw the region back to the beginning of the crisis. · It would take a long time to overcome the crisis. Germany keeps favoring austerity measures in the euro area, but will anyone follow its lead now when Merkel’s main ally – France – no longer supports such approach? Image from debatepolitics.com

Bloomberg Poll: hard times for Europe ahead The market is always about sentiment. During the last 2 years we have been continually discussing the possibility of disintegration in Europe. More than half of the experts surveyed by Bloomberg think that the 17-member currency union will once again become 16-memer one and that this will happen in 2012. According to Bloomberg Global Poll, 57% out of the 1,253 investors believe that Greece will quit euro zone this year. In addition, 80% of respondents foresee more stress for the European bond markets. Note that 47% of interviewed expect Spanish default, 63% – the one of Portugal and about 25% – the one of Italy or Ireland. As for Greece, 94% of investors said it will default on its debt. The nation has already restructured its debt to private bondholders. The survey was conducted on May 8. Lloyds Banking: “Another flare-up of the crisis is likely. The key variable for Europe is domestic politics.” Photo by Bloomberg

EUR/USD: technical comments from Commerzbank Analysts at Commerzbank claim that there is considerable divergence on H4 chart, so they expect a corrective rebound today. Chart. H4 EUR/USD At the same time the situation on the daily chart remains negative. Commerzbank targets $1.2624 (January minimum) with support at $1.2809 (January 17 maximum). Rebound will become possible if EUR/USD overcomes resistance at $1.3080 (May 4 minimum) and $1.3233/50 (late April/ early May highs area). Chart. Daily EUR/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: $1.3000, $1.3085, $1.3100, $1.3130 and $1.3150; USD/JPY: 79.05,80,00 and 80.25, 81.00; EUR/JPY: 106.35; GBP/USD: $1.6060, $1.6300; AUD/USD $1.0000, $1.0195, $1.0200; AUD/JPY: 83.00. Have a profitable trading day! Image from http://idenull.blogspot.com

RBS: betting on USD/CHF advance The current turmoil in Europe makes analysts come up with more and more ideas of how to avoid exposure to risks associated with the single currency. Strategists at Royal Bank of Scotland propose selling US dollar versus Swiss franc. In their view, the Swiss National Bank will continue to maintain EUR/CHF floor, so that franc won’t have chance to appreciate. At the same time, the bank is bullish on the greenback due to relatively positive economic reports released so far. RBS thinks USD/CHF may strengthen to 0.9950.

Euro may rise against… Aussie Analysts at Commerzbank believe that the single currency may rise versus its Australian counterpart to 1.2906/1.3004 (200-day MA, 2010-2011 minimums, April 2012 maximum). The specialists say that euro’s advance is likely to end there. However, if the resistance is breached, EUR/AUD may climb to 1.3111. The bank remains bullish on the pair in the short-term as long as it’s trading above 1.2646. According to the bank, if euro slips below 1.6246 (April minimum) and 1.2641 (55-day MA), it will slide to 1.2571 (April 30 minimum), the level below which the pair’s prospects will become negative.

Scotia Capital: better to sell EUR vs. GBP Analysts at Scotia Capital recommend selling the single currency versus British pound as an alternative for trading volatile EUR/USD which has been fluctuating this year in the $1.30/35 area, so that many traders burned their fingers. “EUR/GBP is still really euro, but the risk/reward is better than with EUR/USD.” The specialists note that Europe’s future looks dim in both cases: either the currency union will continue with austerity measures and there will be a long period of slow growth in the region, or it won’t, so the crisis will dramatically escalate. According to Scotia Capital, EUR/GBP will slide to 0.77 by the end of 2012.

Analysts: BoE may extend QE program On Thursday, May 10, the Bank of England holds its monthly meeting. Some analysts expect the regulator to extend its asset purchase program tomorrow. According to the BoE governor Mervyn King, the inflation in the U.K. is too high and the nation's economic recovery too slow. The annual rate of inflation, which was 3.5% in March, remains well above the BOE's 2% target. Mervyn King said last week that the current crisis is far from over. Investec: In conditions of sticky inflation versus stuck economy the BoE may add another £25bn to its £325bn program of QE on its Thursday meeting. The committee will worry more about low growth than an inflation rate that is taking longer to come down than it predicted. Capital Economics: The BoE may add £25bn to its asset purchase program in autumn. Commerzbank: The BoE may adopt the wait-and-see approach: despite the fact that in a longer term the QE extension is possible, now we expect the bank to leave the room for maneuver in case if the markets require support. Photo: Daniel Jones

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: 1.2700 (large), 1.3000, 1.3050, 1.3065,1.3075 1.3095, 1.3105, 1.3210; USD/JPY: 79.65, 76.75, 75.80, 80.25, 82.50; GBP/USD: 1.6100, 1.6125, 1.6295, 1.6300; AUD/USD: 1.0200, 1.0230, 1.0275, 1.0300; AUD/JPY: 83.65; USD/CHF 0.9100, 0.9250. Have a profitable trading day!

Deutsche Bank: outlook for USD/JPY The yen strengthens against the greenback this week as the Japanese currency benefits from its “safe haven” status. Analysts at Deutsche Bank, however, recently revised their forecast for USD/JPY to bullish after being bearish since 2008. They now expect the pair to rise to 82 yen by the end of 2012, compared with previous forecast 75 yen. In their view, USD/JPY may strengthen in a short term, but the trend is descending.

Taylor: Greece will abandon euro in June The resent changes on European political landscape made some analysts come up with more radical forecasts of euro’s future than they used to have before. For example, John Taylor, the head of the world’s largest currency hedge fund FX Concepts, now thinks that Greece may leave the euro area already in June. The specialist warns that the nation’s government will soon have no more cash, while European institutions won’t be able to give it more money due to the emerging political split between France and Germany. Greece itself is in the situation of uncertainty: if the policymakers fail to form a governing coalition, there will be other Parliament elections in the middle of the next month. “I think that people are feeling the implications of a Greek exit aren’t so bad. If Greece leaves the euro, Europeans will turn around and huddle together and say, ‘how do I help Portugal and Spain?” Taylor says.

BBH: outlook for AUD/USD The Aussie weakens against the greenback on Tusday after weak trade data report. Trade deficit in March reached 1.59B vs.1.38B deficit forecasted and 0.75B deficit in February. The Australian Government, however, remains forecasting a return to surplus by 2012/13, as promised last year. According to analysts, tight fiscal policy and eased monetary policy will continue pushing the AUD/USD pair down. Strong resistance for the pair lies at 1.0220 level. In a longer-term analysts expect the pair to fall to 0.9860.

CharmerCharts: trading GBP/USD The sterling continued weakening against the greenback on Tuesday after yesterday's growth. Bank holiday in UK on Monday hindered the reaction of the pound on the results of French and Greek elections. Analysts at CharmerCharts see the target dor the cable at 1.6110/085 levels. They believe the break below 1.6065 may cause another wave of selling pressure which should drive the price lower for 1.6005 to 1.5990. Resistance for GBP/USD lies at 1.6180, 1.6200 and 1.6245. On the downside, supports might act at 1.6135 and 1.6115.

UBS: outlook for the US dollar Last week the US Dollar Index increased from 78.60 on Monday to 79.60 on Friday. According to analysts at UBS, the greenback was supported by the worrisome data coming from Europe and by the low likeliness of new round of QE in US. According to analysts, poor Friday’s NFP were offset by an improvement in other key indicators. Specialists at UBS continue to believe in the greenback as they do not expect the US economy to slow down sufficiently to allow the Fed’s doves to push for additional asset purchases. Chart. US Dollar Index Source: Bloomberg

GBP/USD: is the demand back? Demand for sterling grows regardless of the increased risk aversion on the currency markets: GBP/USD strengthens on Monday after declining last week for five consecutive days. The cross has already overcome its Friday’s closing price and reached $1.6172 level. However, only a strong break above $1.6200 resistance will reverse the bearish trend. On Tuesday watch out for UK retail sales and housing prices data releases.

Analysts: outlook for AUD/USD The Australian dollar opened the week on a downside amid concern election results in France and Greece will deepen the euro zone’s crisis. However, throughout the day positive news from Australia improved the market sentiment. FX Prime: There are major concerns about the euro. What’s common to both Greek and French voting is that people aren’t feeling good about austerity measures, which are the crux to a resolution of Europe’s debt problems. Europe’s economic and political mayhem is may influence the economies, regarded as safe havens: policymakers may cut interest rates to weaken the currencies. Societe Generale: In a weakening global environment, countries that can cut rates will do so and their currencies can fall. Europe is an economy with a currency that isn’t expensive, with not much scope or appetite for cuts. Westpac Banking: We’ve got what may well prove to be the next wave of instability from Europe. There’s a clear voter rejection of austerity evident. We’d expect the Aussie and the kiwi to remain under pressure. Australia’s retail sales grew by 0.9% in March after a revised 0.3% gain in February. Number of new building approvals increased by 7.4% after an 8.8% decline in February, pointing that the housing market improved in March. Standard Chartered: The data was actually very strong, so it’s more like it’s putting a floor on the Aussie weakness that we’re seeing. It’s difficult to see the Aussie bouncing in this environment where risk sentiment is pretty weak. The AUD/USD pair is currently trading in the 1.0180 area. Analysts at ANZ expect the Aussie to trade at $1.07 by December versus the greenback. According to Bloomberg forecast, the currency will end 2012 at $1.04.

JP Morgan: trading EUR/JPY Analysts at J.P. Morgan Asset Management recommend selling EUR/JPY at current levels, setting a stop at 106.00 and a target of 102.50. According to specialists, the Hollande’s victory was already priced in, while Greece will weigh on the euro. They underline that the market is unstable: any comments from Hollande after the election or something later in the week may influence the pair.