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Citi: comments on EUR/USD Analysts at Citi believe that traders will sell the single currency on any rallies versus the greenback unless we see a sustained improvement in euro zone’s fundamentals. The specialists say that EUR/USD may face resistance at $1.3500 marking the level where selloffs are likely to start. In their view, the ECB’s LTRO made euro often used as a funding currency. At the same time, Citi points out that on the downside, EUR’s decline will be contained as oil exporters convert their dollar revenues into euro and the fact that investors are extremely short on euro. As a result, some short-term short-covering advances may happen. So, Citi expects the pair to trade sideways for some time.

Yen will keep declining due to BOJ’s loose policy The greenback rose versus Japanese yen approaching February 27 maximum at 81.67 yen. Yen weakened versus the majority of its counterparts as, according to the data released today, the nation’s CPI fell by 0.1% in January (y/y) declining for the fourth month in a row. According to Bloomberg Correlation-Weighted Indexes, yen lost 6.9% during the past 3 months versus other developed-market currencies. Last month the Bank of Japan set inflation target at 1%, so the market expects that it will keep easing monetary policy in order to meet this goal. The central bank will meet on March 12. Analysts at Morgan Stanley increased forecast for USD/JPY for the first quarter from 75 to 80 yen citing “more aggressive dovish” approach of the BOJ. Strategists at UBS don’t agree with the widespread idea that yen may strengthen towards the Japanese fiscal year-end at March 31. The specialists think that Japanese investors won’t need to repatriate their profits as domestic financial sector looks quite healthy. In addition, Japanese investment flows were net buyers of foreign assets in the first quarter since 2007, and that trend seems unchanged. According to UBS, USD/JPY will rise to 85 7yen in 3 months. Among the reasons why to be negative on yen the bank names high likelihood of further monetary easing in Japan, the widening of the gap between the US and Japanese benchmark bonds and the increasing oil prices.

Ireland will hold referendum on the Fiscal Compact Ireland's Prime Minister Enda Kenny announced on Tuesday that he would sign the EU’s new fiscal treaty on Friday, but then the issue will be put on a public referendum. The date for that isn’t defined yet, but it may be scheduled for May or June. The outcome is uncertain as the Irish rejected the two most recent European Union treaties before passing them in repeat referendums only after concessions were offered. The fiscal treaty agreed in January by 25 of the 27 EU countries (except the UK and Czech Republic) proposes tough new deficit and debt limits for euro zone members in order to prevent future financial crises. The so-called Fiscal Compact will become binding once 12 of the euro zone's 17 members ratify it, so the Ireland’s decision isn’t critical for the treaty’s fate. However, as for Ireland itself it seems to be a matter of great importance as the fiscal treaty emphasizes that any members who fail to ratify the pact by March 2013 will be blocked from receiving funds from the future European Stability Mechanism. In 2010 Ireland got bailout from the EU and the IMF and will be funded until late 2013. Never the less, many experts think that the nation will need new loan package next year. Analysts at Danske Bank believe that the “yes”-vote is the most likely outcome of the referendum. In their view, the Treaty may be possibly ratified in a second vote like it was with the Lisbon treaty.

BofA revised forecasts for euro, pound Analysts at Bank of America claim that although the single currency declined yesterday versus the greenback after the LTRO results and Bernanke’s testimony, EUR/USD prospects have so far improved. The specialists expect the market’s risk sentiment to stay elevated as the situation at the European peripheral debt markets as well as the general state of global economy improved. The bank increased EUR/USD forecast from $1.25 to $1.30 by the end of the second quarter and from $1.30 to $1.33 by the year-end. In addition, the projections for EUR/JPY were revised up from 91 to 105 yen by June 30 and from 99 to 109 yen by the end of December. Bank of America thinks that Canadian, Australian and New Zealand’s dollars have good chances for appreciation. As for British pound, the analysts are pessimistic and lowered forecast for GBP/USD for the end of 2012 from $1.53 to $1.51.

Rabobank: comments on EUR, AUD, CAD Analysts at Rabobank believe that the single currency will fall to $1.25 versus the greenback by the middle of May and then return to growth targeting $1.40 in the longer-term as the specialists believe that US dollar will be weakened by the Fed’s policies and economic growth slowdown. The bank is bullish on the Australian dollar and the Canadian dollar. In their view, these commodity and growth-linked currencies are helped by the success of the LTRO which improved investors’ sentiment. The analysts aren’t sure that Aussie and loonie will be able to maintain the gains for the duration of the year, but for now they seem to be supported well enough.

SocGen: China may lower GDP target The National People's Congress will convene in China on March 5 and last for a week discussing the Government Work Report which will reveal the nation’s targets for growth and inflation, detail the fiscal budget and the priorities for reforms in 2012. Analysts at Societe Generale believe that the general direction of Chinese policymakers will remain the same: the nation will continue being focused on “making progress while maintaining stability”. In their view, China will reiterate “prudent monetary policy” and “proactive fiscal policy”. According to the bank, China will likely diminish GDP target to 7.5% indicating increasing commitment to structural reforms and less appetite for aggressive investment stimulus.

Commerzbank is bearish on EUR/USD Technical analysts at Commerzbank think that the pair EUR/USD may have reversed downwards. The specialists claim that support for EUR/USD is situated at $1.3318 (February 1 maximum), $1.3293 (February 21 maximum), $1.3199 (late December maximum), $1.3126 (the uptrend channel support) and $1.3066 (55-day MA). According to the bank, resistance lies at $1.3389 (yesterday’s minimum), $1.3436 (50% Fibonacci retracement) and $1.3487 (February maximum). Commerzbank says that the outlook for euro will remain bearish as long as it’s trading below $1.3487. If the European currency overcomes this level, it will get chance to climb to $1.3550 (December maximum) and $1.3628 (61.8% Fibonacci retracement of the decline from October to January).

Comments on EUR/USD Today is the first day of EU economic summit. The meeting of the European leaders will be focused on the ways of reviving the region’s economy postponing the discussion of Europe’s financial-crisis firewall. Analysts at Mizuho Securities claim that the markets are still concerned about the future of the euro area. The specialists are bearish on EUR/USD expecting the pair to slide to $1.25 by June 30. The single currency dropped versus the greenback yesterday from nearly 3-month maximums in the $1.3480 area to the levels around $1.3315 after the ECB allotted 530 billion euro of cheap three-year credits to the European banks as investors were “buying on rumors, selling on facts”. Then euro was hit after the Fed’s Chairman Ben Bernanke didn’t signal another round of quantitative easing. Support for EUR/USD is currently situated at $1.3293 (100-day MA).

The essentials of Ben Bernanke’s testimony - The Fed’s Chairman confirmed that the interest rates are likely to stay low at least until the end of 2014 as unemployment level is still high and inflation outlook is subdued. - Bernanke didn’t mention additional monetary stimulus measures like QE3. - “Gasoline prices have moved up, primarily reflecting higher global oil prices – a development that is likely to push up inflation temporarily while reducing consumers’ purchasing power.” - Comments on the situation in euro area: “if Europe has a mild downturn… and if the financial situation remains under control that the effect on the US might not be terribly serious”. At the same time, there is “significant risk” of stress and contagion from “a major financial accident”. Analysts at Barclays Capital note that US central bank is passively moving away from excessive easing approach that will be a positive factor for US dollar. According to the data released yesterday, US GDP added 3% in the final 3 month of last year (vs. the consensus forecast of 2.8% growth). Conference Board said that confidence among US consumers climbed to a 12-month maximum in February. Beige Book, regional business survey, also published yesterday showed that American economy expanded at a “modest to moderate pace” in January and early February, the main driver of the expansion was manufacturing. Bernanke will continue giving its semiannual testimony to the House Financial Services Committee.

ECB allotted 530 billion euro to euro zone’s banks The single currency fell versus the greenback after the European Central Bank the injected a huge amount of three-year cash into the banking system. The ECB allotted 530 billion euro in 3-year contracts at 1% interest. The first long term refinancing operation (LTRO) in December accounted only for 489 billion euro. However, the figure was close to what the market has been expecting, so EUR/USD got limited on the upside. One may see that euro’s correlation with risky assets has broken as higher-yielding currencies such as Australian and New Zealand’s dollars rallied against US dollar. The reason is that increased liquidity may boost carry trades in which investors use lower-yielding currencies buy riskier assets, so that EUR will get under pressure. On the one hand, money from the ECB will help the region’s banks to meet their financing needs and continue easing tension at the euro zone’s bond market. On the other hand, LRTO can’t resolve the euro zone debt crisis and the excess liquidity could weigh on the single currency in coming months. Support levels for EUR/USD lie at $1.3400 and $1.3388, while resistance levels are situated at $1.3485, $1.3500 and $1.3547.

BOTMUFJ: EUR/USD technical forecast Technical analysts at Bank of Tokyo-Mitsubishi UFJ claim that the single currency may rise to the 200-day MA at $1.3722. The specialists note that EUR/USD’s 5- and 21-day MAs are both pointing up – long-term bullish signal. At the same time, the bank says that if euro doesn’t manage to overcome $1.3509 (38.2% Fibonacci retracement from the pair’s decline from the May 4 maximum at $1.4940 to January 13 minimum at $1.2620), it may slide to the 90-day MA at $1.3243. As the recent advance of the single currency was very rapid, EUR/USD may survive short-term correction.

Citigroup: sell EUR/GBP According to the Confederation of British Industry, the gauge of retail sales growth improved from minus 22 in January to minus 2 in February (versus -17 forecast). British pound declined by 1% versus the single currency since February 21, the day before Bank of England minutes showed two policy makers voted for a larger increase in asset purchases than agreed at this month’s meeting. Analysts at Citigroup think that now there’s a good chance to buy pound n the dips. The specialists advise traders to open shorts on EUR/GBP at 0.8473 targeting 0.8250 and stopping at 0.8555.

Nomura: forecast for euro is still bearish Nomura has made the best 3-month forecasts for EUR/USD and USD/JPY, according FX Week. Such conclusion was made due to the comparison of the bank’s 3-month projections made in the middle of November and the actual rates at the middle of February. What does the bank expects next? Nomura is still bearish on the single currency. According to Nomura, the pair EUR/USD will fall to $1.20 by the middle of this year. The analysts think that the sovereign debt crisis will continue in spite of last week's bail-out package for Greece as other European economies may find themselves in need of bailouts as well. The specialists think that the European Central Bank's second longer-term refinancing operation LTRO on Wednesday will be lower than expected: the banks will get only 200-300 billion euro from the ECB. At the same time, according to the survey of Nomura’s clients most people are expecting ECB to grant the region’s 500 billion euro in credits. As a result, the bank thinks that euro will start sliding in case of the lower number.

Barclays: comments on USD/JPY Technical analysts at Barclays note that the pair USD/JPY tested the levels above the weekly Ichimoku Cloud and are now looking for confirmation of the bullish trend. The specialists claim that the greenback may add about 10% versus Japanese yen if it managed to close the month above 21-month MA at 80.90 yen. In this case American currency will climb to 88 yen.

Westpac: trading ahead of LTRO The European Central Bank will conduct its second LTRO operation on Wednesday, February 29. The first round of low-cost refinancing operation took place in December: European banks got 489 billion euro in 3-year credits. Analysts at Westpac claim that if the region’s banks borrow less than 480 billion euro, investors will worry that the markets are too illiquid and will buy the safe-haven greenback against Canadian dollar. At the same time, if banks borrow more than 480 billion euro, one should sell US dollar versus its Canadian counterpart. The specialists favor the second outcome and recommend traders to take risk. Westpac advices to go short on USD/CAD stopping at 1.0060 and targeting 0.9770. At the same time, the bank warns that one has to be careful as investors could soon change course if they reevaluate and decide that a large take-up implies weakness in the system.

BBH: US dollar’s under pressure due to oil prices Analysts at Brown Brothers Harriman note that as oil prices are rising, US dollar will find itself under pressure. The specialists say that the current oil price’s advance is caused by several factors. Firstly, supply from Sudan, Syria and Yemen has sharply contracted due to political instability if not to mention Libya and Iran. Secondly, Japan’s increasing oil consumption replacing nuclear fuel. Moreover, the unusual cold in Europe may be fueling demand as well. According to BBH, high oil prices increase the risk that the Federal Reserve will launch another round of quantitative easing as the economy of the United States will suffer as oil import becomes more and more expensive. The Fed’s Chairman Ben Bernanke will be testifying before Congress on Wednesday and Thursday, so the bank recommends watching his comments for the hints of the central bank’s opinion on the issue.

Forecast Pte: USD/JPY is facing correction Yesterday the greenback spiked to 81.67 yen reaching the maximal level since May 31. Since the end of January it gained more than 5%. However, technical analysts at Forecast Pte claim that the pair USD/JPY may lose about 1.5%. The specialists base their conclusions on the momentum indicators. The greenback’s 14-day relative strength index was at 72 yesterday, above the 70 level some traders see as a sign an asset’s price is set to change course. “The candle formation looks to signal a possible reversal,” say the analysts noting that American currently seems to be extremely overbought. As a result, the specialists think that US dollar will go though correction in the short term. In their view, USD/JPY may drop to 78.85 yen (50% retracement of dollar’s advance from the February 1 minimum to yesterday’s maximums). Then the pair may climb to 85 yen in the next 1-3 months.

US employment forecasts improved US National Association for Business Economics announced today that the forecasts for US employment improved. According to NABE’s survey of the leading economists, payrolls will rise 170,000 a month on average in 2012. In November the consensus was of 127,000 new jobs a month. Unemployment will average 8.3%, down from 8.9% be the previous estimate. Such change in expectations reflects a potential positive shift in consumer confidence and better growth prospects for the world’s largest economy. At the same time, economists maintained forecasts for consumer spending, which may rise 2.1%, and predicted GDP to add 2.4% in the fourth quarter from a year earlier, unchanged from the November survey. In January US non-farm payrolls by 243,000, showing the biggest advance in 9 months, while the unemployment rate fell to the minimal level since February 2009 at 8.3%. US February labor data will be released on March 9.

CFTC trader positioning data The latest Commitments of Traders (COT) report, released on Friday by the Commodity Futures Trading Commission (CFTC), showed that: • Euro shorts declined from the previous week’s total of 148.6K to 142.3K contracts. • British pound shorts decreased from 40.6K contracts on February 14 to 31.3K contracts on February 21. Longs on sterling were cut by almost 8K contracts, while shorts were reduced by almost 11K contracts. • Japanese yen net longs declined from 29.4K contracts reported on February 14 to 17.3K as the data on February 21 showed. • Swiss franc net shorts extended from 15.9K net short contracts on February 14 to 19.8K contracts on February 21. Short positions increased surpassing small increase of longs. • The value of US dollar's net long position rose to $17.25 billion in the week ended February 21 from $16.98 billion the previous week. It’s necessary to note that the figures cited above are always a week old at the time of their release. Never the less, CFTC data gives a good oversight into how the market is positioned and if/how these positions are being unwound. Although the CME speculators represent a small fraction of trading in the currency markets, their trades are widely seen as typical of hedge fund investors' currency movements.

SocGen: EUR/USD will decline Analysts at Societe Generale claim that the single currency may weaken by 6% versus the greenback sliding to $1.2590. The specialists keep thinking that euro’s advance from this year’s minimum at $1.2624 hit on January 13 was only a correction within the middle-term downtrend. In their view, the resistance line of the descending channel at $1.3570 will likely cap euro on the upside. According to the bank, EUR/USD will decline to $1.2590/$1.2620.

Banks' forecasts for FX majors

Commerzbank: comments on USD/CHF Technical analysts at Commerzbank believe that the greenback may fall versus Swiss franc to 0.8788/71 (78.6% Fibonacci retracement and 200-day MA). According to the bank, key support for USD/CHF is situated at 0.8568 (October minimum). The specialists are bearish on US currency as it dropped below 0.8960 (61.8% Fibonacci retracement of the pair’s advance from October to January). In their view, the short-term outlook remains bearish as long as US dollar trades below resistance in the 0.9066/88 area. In the medium term Commerzbank expects USD/CHF to return to the levels around 0.9595 (January maximum).

USD/JPY again renewed maximums The greenback made a spike higher today spiking to almost 4-month maximum at 81.67 yen due to improved US economic data and the increased possibility that the crisis in the euro area will be contained. After reaching the new high dollar backed down correcting after a rapid advance. Analysts at Ueda Harlow claim that investors aren’t afraid to sell yen anymore as they believe that the worst case scenario for global economy will be avoided. The G-20 is making efforts to solve the debt crisis, note the specialists. Strategists at UBS think that the pair USD/JPY is now trending upwards. In their view, the Bank of Japan has finally shown its determination to use aggressive approach combating yen’s appreciation. Analysts at Westpac claim that US currency is currently overbought and will return to 79 yen and then resume growth. According to the bank, USD/JPY will meet resistance at 82 yen. If the pair breaks above this level, it will be able to rise to 85.60 yen.

Barclays Capital expects USD/JPY to consolidate Analysts at Barclays Capital claim that the greenback will consolidate between 78.50 and 80.50 yen ahead of the US February jobs report which is released on March 9. The specialists think that after the pair USD/JPY has made such an impressive progress this month rising from 76 to 80.50 yen it currently lacks strong indicators for further advance, so the market will likely stand still ahead of the labor market data. According to the bank, the risk of the Federal Reserve announcing another round of quantitative easing is low.

Nomura: USD/JPY forecast revised up Analysts at Nomura revised up their forecast for USD/JPY from 75 to 79 yen by the end of the first quarter of 2012. The forecasts for the end of Q2 and the year-end were left unchanged at 80 and 81 yen consequently. The specialists claim that odds that the greenback will resume its decline decreased due to the Bank of Japan’s additional quantitative easing, better US macroeconomic data and easing tensions in the euro area. Nomura draws investors’ attention to the fact that Japanese central bank decided to increase investment in the government bonds with maturity of 1-2 years. This would cap the possibility of 2-year yield growth. As a result, the yield differential between 2-year US and Japanese securities will increase encouraging USD/JPY. In addition, internal capital flows also point at yen’s gradual depreciation.