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BBH on trading EUR/USD Analysts at Brown Brothers Harriman are bearish on the single currency versus the greenback. The specialists think that the pair EUR/USD will drop to $1.20 by the middle of 2012. At the same time, the bank doesn’t recommend investors to sell euro at the current levels noting the large number of euro shorts: US economic outlook is gradually improving, so the demand for US dollar as the safe haven will decline. According to BBH, it’s necessary to wait for euro’s rebound to $1.2900 and then start selling EUR/USD with a stop in the $1.3050 zone and targeting $1.2600 and $1.2000.

RBS: loonie will strengthen against yen Analysts at Royal Bank of Scotland advise investors to buy Canadian dollar versus Japanese yen. The specialists justify such recommendation but the fact that US economic outlook is getting better, while the prospects of Japanese economy seem rather dim. It’s also necessary to note that the bank’s fair-value model, which takes into account the 5-year bond yield difference, oil prices and the S&P 500 Index, also indicates that Canadian currency has upward potential against yen. Japan’s current account surplus is moderating, weakening the outlook for yen. According to RBC, loonie may rise to 79.5 yen in 3 months where it traded last time on October 31.

Byron Wien: forecasts for 2012 Byron Wien, vice chairman of Blackstone Advisory Partners, sees Europe’s future this way: Italy and Greece will default but stay in the European Union, because Europe “has much too much to lose if the European Union dissolves”. Wien says that European authorities will likely manage to come up with a long-lasting plan to solve its financial problems. The specialist is optimistic about US economic prospects expecting the S&P 500 index to get above 1400. In his view, the unemployment rate will fall below 8%, while the economic growth will top 3%. If these predictions come true, Barack Obama will likely win president elections. The economist claims that oil price will drop to $85 a barrel as the supply increases due to the extraction from shale and rock in the United States. Wien remains bullish on gold and says it will trade at $1,800 a troy ounce. Note that last year 8 out of 10 Wein’s predictions were right, reports CNBC. Wein predicted the S&P would end the year at 1500 and the yield on the 10-year Treasuries would close out 2011 at 5%.

Citigroup: emerging markets will rebound in 2012 2011 was an unhappy year for the emerging markets: MSCI emerging markets index slumped by 20%. Analysts at Citigroup, however, believe that in 2012 the situation will be different and expect 25-30% rebound in emerging markets’ equity. In their view, negative factors which affected these markets – much sharper interest rate cycle and inflation cycle – will ease. The specialists forecast soft landing in China: inflation will decline to the average level of 4.1%, so that Chinese monetary authorities will be able to conduct more loose monetary policy. The bank thinks that China will make as eight 50-basis point cuts in the reserve requirement ratio this year, with the first coming before Chinese New Year. According to Citigroup, the country’s growth rate will decrease to 7.5-8% in the first quarter before rebounding by the end of the year. The outlook for the emerging markets will be influenced by the global economic environment, particularly Europe. Citi isn’t expecting a worst-case scenario in the euro area. The bank thinks that the emerging market currencies will stabilize against the greenback.

Pound: comments and forecasts According to Bloomberg Correlation-Weighted Indexes, this year British currency added 0.7% versus the developed nations’ currencies (US dollar increased by 1.1%, while euro lost 1.4%, the Index shows). Sterling added 2.3% against euro and ended the year almost unchanged versus the greenback. Pound will be helped by the fact that the effects from the VAT increase are disappearing and, consequently, the inflation pressure might decrease. In addition, Olympic Games 2012 will encourage tourism and consumer spending. Among sterling-negative factors one should name the consequences of the severe austerity measures, the slump of the world’s business activity and the negative effects of the European debt crisis on British economy. The pace of wage growth in Britain falls behind the pace of the price growth. As a result, disposable income of British people is declining and causes contraction of retail sales provoking general economic weakness of the United Kingdom. This year the pair EUR/GBP was steadily declining under the influence of debt problems in Europe. The European currency fell from the year maximums in the 0.9080 area to the levels in the 0.8300 area hit so far. For now pound’s appreciation doesn’t bother UK monetary authorities. Most likely, the Bank of England will think of taking some measures to curb sterling only if the pair drops to the 3-year minimum at 0.8000. The pair GBP/USD has been trading in a more volatile way: during the past 6 months the British currency has reached the maximum at $ 1.66 and hit the minimum at $ 1.53. Pound is expected to stay above support at $ 1.52. If this level is broken, the pair may test $ 1.50. The rebound may take the pair to $ 1.6150. Depending on what course the things will take in the first quarter of 2012, both Britain and the United States may get into another round of quantitative easing. The experts think that British central bank will increase its asset purchase program in February when the current stage of the purchases is finished. Until that moment the currency moves will be determined by the market forces.

Yen: comments and forecasts Japanese yen has strengthened this year versus all major currencies gaining 4.2% against the US dollar and 6.7% against euro, although Japanese authorities have sold at least 14.3 trillion yens ($183 billion) trying to stem the appreciation of the national currency. It’s necessary to remember that the fiscal year in Japan ends on March 31. Usually yen tends to rise in the first months of the year. The advance of Japanese currency accelerates through March. Then in early April the trend changes in the opposite direction as Japanese companies finish seasonal repatriation of profits and the funds start flowing out of Japan. This time, given the prevailing risk aversion environment, Japanese companies may decide to leave their money at home in April. However, if risk sentiment improves, the outflow from yen will strengthen. Until that happens, yen will remain strong and continue to consolidate. So, the future of Japanese currency depends on investors’ risk sentiment and on whether the greenback will be attractive as a safe haven. The pair USD/JPY still stays within the longer-term downtrend which has been developing since the middle of 2007. During the last few months US dollar has been consolidating between 75 and 80 yen. One will be able to speak about the long-term trend reversal only if the pair consolidates above the psychologically important point of 80 yen and then overcomes 100-week MA in the 84 yen zone.

UBS, Commerzbank: bullish on EUR/CHF Analysts at UBS advise investors to buy the single currency versus Swiss franc expecting the pair EUR/CHF to rise to 1.25. According to the bank, “the franc is now largely flat on a structural basis” and “the SNB should take note of this before they manage their next step”. As a result, the specialists think that the odds that the Swiss national Bank increases floor for EUR/CHF are now higher. Analysts at Commerzbank also think that the speculation about EUR/CHF floor-raising will help to strengthen euro ahead of the important inflation data release in February.

UBS: euro’s unlikely to rebound Analysts at UBS give several reasons why they think that the single currency won’t be able to rebound at the beginning of 2012 as it has done this year gaining several thousands of pips. 1. The ECB is likely to cut rates to a new historic low of 0.50% and might well then embark on outright QE. 2. Greek PSI will last till March 20. However, revenue shortfalls due to the deeper-than-forecast recession may result in additional financing needs, which in the absence of new official money might mean a larger haircut and hence the need of more PSI. 3. If Greece is forced to impose an involuntary restructuring on investors, the crisis will spread to other problem economies – Portugal, Spain and Italy. The measures conducted by the European authorities are arguably not yet powerful enough to stop the contagion. 4. The above Greek scenario would result in Greece’s default. This will trigger credit default swaps (CDS) which imply payouts of more than 80 billion euro. This alone would make the market highly stressed. 5. High possibility of resistance to ESM ratification in some countries as well as more serious social unrest in both debtor and creditor nations.

ECB balance extended to the record maximum The pair EUR/JPY fell to 10-year minimum at 100.30 yen, the pair EUR/USD dropped to the minimal level since January at $1.2887. Investors are concerned that European Central Bank will inject more cash into the financial system to avoid a credit crunch from the region’s debt crisis. The ECB announced yesterday that after last week’s lending to the euro zone’s banks its balance sheet climbed to the record level of 2.73 trillion euro. Analysts at Westpac think that euro will stay under pressure due to the signs of more formal quantitative easing.

BBH: demand for yen will remain high next year Analysts at Brown Brothers Harriman believe that in the first quarter of 2012 the demand for Japanese yen will remain high. In their view, yen will remain among the top performers in the G10 in the first quarter of the next year due to such factors as: - demand for safe havens; - Japan’s inability to recycle its current account surplus. According to BBH, the Bank of Japan could conduct new currency interventions. At the same time, the specialists don’t expect the BOJ to establish a definitive floor in the USD/JPY.

The FOMC will become dovish the next year The Federal Open Market Committee is expected to become more dovish due to the annual rotation. As a result, the Federal Reserve Chairman Ben Bernanke will get chance to pursue his active loose monetary policy if he thinks that American economy needs help. The FOMC consists of 12 members – 7 Fed board governors and the president of the New York Federal Reserve Bank have – permanent vote, while the 4 remaining seats are shared by the other 11 FRB presidents which change places on the annual basis. This year 3 out of the 4 rotating seats was occupied by the hawks – Richard Fisher, the president of the Dallas Federal Reserve Bank, Charles Plosser of Philadelphia, Narayana Kocherlakota of Minneapolis. That means that these policymakers don’t think that monetary policy can be used to stabilize economic conditions and would prefer setting long-term target for inflation. Doves, on the other hand, believe that the central bank has to keep interest rates low to support the national economy. Fisher, Plosser and Kocherlakota voted against the pledge to keep short-term rates close to 0 until the middle of 2013 and against the Operation Twist. The old distinction, with hawks concerned about inflation and doves worried about weak growth, has subsided over the past 20 years. Fed officials agree that keeping inflation low and stable is a necessary precondition of good economic performance. This year, a “tough group” of hawks occupied. These officials had little sympathy for the Fed’s innovative efforts to try to lower long-term interest rates, said Brian Bethune, a Fed expert at Amherst College in Massachusetts. In 2012, the Fed is losing 3 hawks and only getting one: Jeffrey Lacker, the president of the Richmond Fed. The other 3 new members: John Williams, the president of the San Francisco Fed, Dennis Lockhart, the president of the Atlanta Fed, Sandra Pianalto of Cleveland are viewed as more consensus-minded and likely to vote with Bernanke.

UniCredit: forecasts for EUR/USD and GBP/USD EUR/USD: the single currency will keep weakening in the first quarter of 2012. The pair may slide to $1.25. If the tensions at the market ease, euro will be able to rebound, though sustainable rally seems unlikely. GBP/USD: British pound may decline versus the greenback in the first half of the next year as US currency will keep enjoying strong demand, while the bank of England will continue asset purchases. In the second part of 2012 the outlook for pound is less negative, though UK economic growth will remain sluggish. As a result, the pair GBP/USD will be capped by the levels in the $1.60 area. Chart. Daily EUR/USD Chart. Daily GBP/USD

Analysts expect Aussie to weaken early in 2012 Analysts at Commonwealth Bank have so far lowered forecast for AUD/USD to $0.9800 by March 2012 and to $0.9500 by June 2012. Reasons: — general strength of US dollar due to improved US economic data (opposite views to Citigroup); - funding demand for the US dollar in response to Basel III capital requirement; - central banks slow down their diversification efforts out of US dollar into euro as the European debt problems persist. Strategists at TD Securities expect Aussie to slide to $0.9500 by the end of the first half of 2012. Reasons: - slowing growth in the global economy with the deep recession in the euro zone and the United States; -China’s economic slowdown. Westpac economists think that AUD/USD will rise to $1.0200 in the near term as it’s supported by foreign direct investment inflows. Never the less, Aussie has been trading above its fair value in the $0.91 area for a long time and the odds are that it will depreciate. Analysts at National Australia Bank also claim that Australian currency will end December at $1.0200, then drop to $0.9600 by March before rising gradually to $0.9800 by June and then to parity by September. Barclays thinks that AUD/USD will weaken to $0.9800 by the first quarter and then rise to $1.0100 by June. In the short term Aussie will stay under pressure as the euro zone governments failed to commit to faster fiscal consolidation and the ECB refused to extend bond purchases. In the medium term, however, the bank retains a constructive view due to many factors including limited impact on Australia's macro fundamentals from deteriorating euro zone’s growth, expectations of more easing from China, stability in local-currency commodity prices which are helped by weaker currencies.

Citigroup: warning for USD bulls Currency strategists at Citigroup say that US economic data has so far been surprising the markets in a positive way referring to the recent labor, housing and trade figures. As a result, the Economic Surprise Index designed by the bank has risen from the record minimum in June almost reaching the record maximum at present. According to Citigroup’s experience, the upside moves of the index correspond to US dollar’s selling periods. It happens as the market becomes more optimistic and risk sentiment improves making the demand for US currency decline. The analysts don’t think that dollar will weaken this year as many traders have already closed their books for the year and others may be reluctant to take on big new positions right before the end of a quarter. At the beginning of 2012, however, if the economic data remains favorable, investors may decide that they have overestimated the negative effects of the euro zone’s crisis on the global economy. “The surge in data flow itself may be insufficient to reverse recent risk aversion, but it does suggest that dollar’s weakness could reassert itself more quickly and forcefully than many anticipate once conditions settle down,” says the bank.

Japan: government revised economic forecasts Japanese government reduced forecast for the nation’s real GDP growth in 2012 fiscal year which begins in April from 2.7%-2.9% to 2.2% (y/y). The estimate of this year’s growth were lowered from +0.5% to -0.1%. As the reason of the revision the officials cited negative impact of the yen's appreciation and the ongoing sovereign debt crisis in the euro area. At the same time, the next fiscal year Japan’s economy is expected to “recover moderately” on the assumption that the global situation starts improving. Consumer prices will add 0.1% in fiscal 2012 (y/y) after showing declines in the previous three years, says the government. In fiscal 2011 CPI will drop by 0.2% (previous forecast was the 0.2% rise).

St. George: 2012 forecast for AUD/USD Analysts at St. George believe that although Australian dollar will be affected in 2012 by the euro zone’s problems and potential slowdown in China, it will fall, but not much. The specialists note that Aussie has shown greater resilience during bouts of risk aversion this year in comparison to previous episodes of risk aversion due to its strong underlying fundamentals. The bank expects AUD/USD to trade around $1.0000 in March, in the $0.9900 area in June and near $1.0100 at the end of 2012.

Europe: event to watch today - Italy's government will hold confidence vote on austerity in Senate around 2 p.m. GMT: the lawmakers are set to give final approval today to Prime Minister Mario Monti’s 30 billion-euro ($39 billion) emergency budget plan, including a pension overhaul and a levy on primary residences. The draconian austerity measures will affect the nation’s weak economy. Data released yesterday showed that Italy’s GDP shrank contracted by 0.2% in the third quarter after 0.3% growth in the previous 3 months. The government forecasts contraction in the fourth quarter, 0.6% growth in 2011 and a 0.4% contraction in 2012. - European Central Bank President Mario Draghi speaks today in Frankfurt after a meeting of the European Systemic Risk Board which begins at 4 p.m. GMT. Yesterday the ECB made the region’s banking sector a Christmas present – the central bank lend a record sum of 489 billion euro ($638 billion) to 523 euro-area banks in 3-year loans. That was the first of ECB’s LTROs announced on December 8. The second one will be allotted on February 29, 2012. According to Goldman Sachs, the borrowings equal about 63% of the European bank debt maturing in 2012. The majority of analysts argue that the ECB’s move won’t be efficient as the region’s banks can decide on their own where to invest the obtained funds and they aren’t very likely to invest in the peripheral debt.

Japan: monetary policy and efforts to stem yen Bank of Japan: monetary policy unchanged The Bank of Japan kept monetary settings unchanged at today’s meeting, but cut its economic assessment saying that the nation’s GDP growth will stagnate at least until spring next year. Japan's economy recovered from a recession triggered by the March earthquake but is expected to slow sharply in the fourth quarter as the initial rebound driven by companies restoring supply chains and production facilities dies out and the overseas demand decreases. BOJ Governor Masaaki Shirakawa underlined that the euro zone’s debt crisis and economic weakness have negative impact on the global economy in general and on Japan in particular. The central bank left the key interest rate below 0.1%. The BOJ didn’t increase asset purchases after 2 months of doing so, trying to save this option for future action. Analysts at Nomura expect more easing in January-March referring to the risk of a credit rating downgrade for European sovereign debt and the possibility of more stimulus from the Fed and the ECB. Japan’s government: intervention fund increased Yesterday Japanese government decided to boost its currency market intervention fund by 30 trillion yen ($385 billion) from 165 to 195 trillion yen – that’s the second biggest* increase and the sign that Japan’s officials are keen to prevent sharp advances of the national currency. Finance Minister Jun Azumi announced that Japan is ready to act at any moment if necessary. The increase was included in a fourth extra budget approved by the government Tuesday. The extra budget is aimed to revive Japanese economy and will be submitted to the regular parliamentary session starting January along with a main budget for the next fiscal year. Japanese authorities had to lift up the intervention fund as they spent 9.092 trillion yen between October 28 and November 28 trying to stem yen’s appreciation and support exporters, so it was needed to replenish it. Japanese government kept its economic assessment intact in its monthly report issued on Wednesday but cut its view on business sentiment, reflecting worsening confidence among big manufacturers in the BOJ's December Tankan survey. *The biggest one was 40-trillion increase in 2004 fiscal year which was conducted after yen-selling intervention campaign of 2003-2004. According to the estimates of Barclays Capital, the actual amount available to the central bank for selling yen may increase from about 40 to 70 trillion yen. The analysts say that taking into account the general strengthening of US dollar seen so far and better economic data, the intervention fund will be able to satisfy the need for selling yen during several months.

ECB conducted first 3-year LTRO, analysts’ comments The ECB has reported a strong demand for its 3-year longer term refinancing operation allotment. The central bank lend more than 489 billion euro to 523 financial institutions at the fixed rate of 1% and to be paid January 2015. The analysts were expecting the amount of about 300 billion euro. It was the first of the two 3-year loan auctions announced ECB president Mario Draghi at the central bank’s last meeting on December 8. The next one will be allotted on 29 February 2012. Reuters sited the following analysts’ comments: Societe Generale: “This is good. It's a positive number, at the top end of expectations. You have to regard it as a positive result. This is at least a solid 240 billion euro (net) increase for banks. But it is still short of covering all of the banks' financing for next year. So, it could ease fears of a credit crunch somewhat.” ING: “…the lower number of participating banks (523 versus 1121 previously) suggests that the take-up is currently less widespread — and probably more concentrated in banking systems in peripheral euro zone countries. We will be keeping a close eye on national central bank data over the next few weeks for further clues on which countries' banking systems tapped the three-year facility.” Analysts at UBS claim that though the LTRO will provide breathing space for banks it won't improve the long-term outlook for the European financial sector. The pair EUR/USD climbed to the weekly maximum in the $1.3200 area on the ECB’s announcement before sliding back to $1.3090.

GBP/USD: MPC minutes and technical comments Bank of England Monetary Policy Committee members voted unanimously at their December meeting to keep policy unchanged as uncertainty over the economic outlook remained high. All nine members of the MPC voted to continue with the current 275 billion pounds of asset purchases and to leave the benchmark interest at 0.5%. Divisions on the MPC remained over the outlook, with some members saying the November Inflation Report projections meant more quantitative easing was likely to be needed. UK Borrowing turned out to be lower than expected in November: 18.1 billion pounds versus the forecast of 19.6 billion. Although UK central bank left door open for more easing in February, pound strengthened versus the greenback. GBP/USD tested the levels in the $1.5773 zone. Support for British currency is situated at $1.5650. Watch the bullish “double bottom” pattern: it will be confirmed if sterling overcomes resistance in the $1.5768/77 area.

BBH: euro will decline to $1.24 Analysts at Brown Brothers Harriman expect the single currency to decline versus the greenback in the coming months to end the first 3 months of the next year at $1.24. The specialists note that euro is still overvalued as its fair value is in the $1.20 zone. The fact that EUR/USD was trading rather high may be explained by the repatriation and the ongoing diversification of reserve inflows which supported the European currency. At the same time, BBH says that these processes may slow down euro’s slump, but won’t stop it. According to the bank, the pair will find itself under pressure due to the euro area’s economic weakness amid tough austerity measures and the tensions at the peripheral band markets. Such outlook increases euro risk premium and the possibility of further rates cuts by the ECB.

NAB: forecast for AUD/USD in 2012 Analysts at National Australia Bank believe that Australian dollar will be fluctuating in 2012 between $0.9000 and $1.0500 versus its US counterpart. The specialists note that the pair AUD/USD, which has set this year’s maximum at $1.10 on July 27, will be capped by this level during the next year. According to the bank, in the first quarter of 2012 Aussie will drop to the $0.9600 zone as the global growth prospects deteriorate and then stay around parity in the second half of the next year. In the worst case, if some European nation defaults and the euro zone falls into recession making the global economy contract as well, AUS/USD will drop to $0.8500.

BofA: sell EUR/USD on the rallies Technical analysts at Bank of America believe that the single currency may fall to 1-year minimum versus the greenback at $1.2510 (last visited in July 2010). The specialists make such forecast as on December 14EUR/USD went below October minimum at $1.3145 sliding to $1.2945. In their view, support in the $1.2901/2859 area will be the last obstacle ahead of $1.2533. In their view, the pair is with no doubts trading within the downtrend. The analysts note that as the market's sentiment about euro is extremely bearish, short squeezes are possible and the pair has chances to rise to $1.3250. At that point Bank of America recommends opening short positions.

December 20: news and data to watch News: RBA meeting minutes (full text here): -comments are less dovish than expected; -Australian economy will keep expanding even though euro zone’s debt crisis has a negative impact on the global economic growth. So, RBA rate cuts in the near future are unlikely. Australian dollar has managed to gain a bit on the news rising from $0.9890 to $0.9950. UK consumer confidence improved in November (40 vs. 36 in October). Watch today: Germany: Ifo Business Climate (decline is expected); Spain: 3- and 6-month bills auction; The ECB begins longer-term refinancing operation (LTRO) in which banks can borrow unlimited funds in return for eligible collateral, including euro-region government bonds. The banks will be able to decide what to do with the funds on their own. The single currency may find some support in the short term as the LTRO may provide a new source of demand by banks for euro-zone sovereign debt.

Danske Bank: outlook for 2012 Analysts at Danske Bank shared their expectations about global economic development in 2012. The specialists advance several assumptions: - Concerns about recession are exaggerated – an overly negative economic and financial outlook is priced into financial assets; - The world’s central banks will keep easing monetary policy; - Euro zone crisis will continue, though the currency union won’t break up; - Volatility will remain high; - US dollar will experience structural weakness; - Currency interventions will continue. Danske give several arguments against euro zone’s break-up: - It’s consequences would be worse than those of Lehman Brothers’ collapse; - The costs of the break-up would be enormous both peripheral and core economies4 - The single currency is secured by political support as most of the member nations seem ready to give up more sovereignty. The strategists, however, don’t rule out the possibility that the euro area may split, the exit would be very risky and potentially very costly for any country. As for US dollar’s structural weakness, the analysts note that the greenback has been steadily depreciating during the last decade (with only a few interruptions like due to the introduction of the homeland investment act in 2005 and the global financial crisis in 2008). Among the reasons of such USD dynamics the specialists cite: - Euro’s initial strong undervaluation versus the greenback; - America’s persistent current account deficit; - Rising commodity prices; - On average easier monetary conditions. In the absence of a global recession the dollar will lose to stronger currencies, such as Australian, New Zealand’s and Canadian dollars. The Dollar Index may decline in such case by about 4%, though not more as Danske isn’t bullish on riskier assets, but expects weak US fundamentals to drive a dollar depreciation trend in a “normal” risk environment. As for EUR/USD, the analysts see the pair below $1.30 during the next few months until the market prices in new ECB monetary policy regime and then rebound end 2012 higher.