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UBS: demand for Japanese debt will remain high Japanese 10-year bond yield rose yesterday 3-month maximum at 1.055% from the record minimum of 0.94% hit last week. As a result, the pair USD/JPY tested levels above 78 yen. Analysts at UBS think that the greenback will remain trading 75.00 and 80.00 yen unable to get higher as the demand for yen and Japan’s debt will remain high amid concerns about the euro area. The specialists point out that 95% of Japanese government bonds are held by domestic investors which prefer the home currency distrusting other major countries' sovereign debts. Strategists at Societe Generale see only 2 risks to Japan’s safe haven status: either household and corporations will start to save less than what the government needs to borrow or the country would have to suffer a capital flight. In their view, for now both these outcomes aren’t likely.

EUR/USD: comments on trading day The single currency has managed today to test the levels above $1.3400. The market’s sentiment improved as Italy was able to sell 7.5 billion euro in bonds meeting its target, even though the nation’s borrowing costs keep rising: the country paid almost 8% to sell 3-year bonds (critical level) and 7.56% for 10-year bonds (record maximum), but thankfully lower than the actual average yield levels were all lower than market levels. However, the relief didn’t last long – the European currency erased its today’s advance easing down to $1.3300 as the ECB failed to attract enough deposits from banks required to offset its purchases of bonds from the indebted euro zone’s economies. The central bank attracted 194 billion euro in 7-day bank deposits versus 203 billion needed. This way it may be regarded as a form of quantitative easing as the supply of euro went up, though analysts at Credit Agricole that QE will occur in case the shortfall repeats and grows. Analysts at Deutsche Bank remain bearish on euro claiming that the situation is still very serious. Strategists at Lloyds Bank expect EUR/USD to test this week the levels below $1.3150.

Fitch Ratings: negative outlook for US rating Fitch Ratings changed the outlook for US top credit rating to negative. The agency doubts that American authorities are able to act in time in order to put the nation’s public finances in order. According to Fitch, the probability of a downgrade now exceeds 50%. Last week the Congressional Supercommittee didn’t manage to reach agreement on the deficit cuts and the country now faces $1.2 trillion in automatic spending cuts. The failure of the committee will delay any major deficit- reduction agreement until after the next presidential election that will threaten US economy. “The scale of any subsequent budget cuts are probably going to have to be larger than they otherwise would have been and certainly implemented in faster manner,” said Fitch. The economists underline that US needs more the reforms of entitlements and taxation than simply discretionary cuts. The agency expects that American federal debt held by the public will get over 90% of GDP by the end of the decade, while interest on the debt will require more than 20% of the tax revenue.

Euro area, China: economic outlook deteriorated Analysts at UBS reduced China’s 2012 GDP forecast from 8.3% to 8%. The specialists expect exports growth to slow as the demand for Chinese products weakens due to the euro zone’s debt crisis. In their view, the nation’s exports will stagnate the next year, while earlier they expected 5.5% growth. The outlook for European GDP growth was earlier cut from 0.7% to 0.2%. According to the bank, the currency union has chance to avoid collapse of euro and banking crisis. However, UBS points out that the region’s economy will nevertheless be in recession in 2012. Strategists at Deutsche Bank cut projections for euro area’s economic growth from +0.4% to -0.5%. The specialists underline that as Europe’s economic prospects deteriorate, the European authorities will be more motivated to act. The OECD also lowered 2012 forecast for euro zone’s economic growth from 2.0% to 0.2%.

Commerzbank: comments on EUR/USD The single currency managed to recover versus the greenback from more than 1-month minimum at $1.3211 to the levels above $1.3300. Technical analysts at Commerzbank claim that EUR/USD is facing strong resistance at $1.3418 (resistance line) and $1.3457 (23.6% Fibonacci retracement of the recent decline). In their view, the pair won’t be able to get above $1.3615 (November 18 maximum) in the near future remaining in the $1.3457/3615 area. According to the bank, if euro breaks below $1.3145 (October 4 minimum), it will be poised down to $1.2860 (2011 minimum). On the downside the longer term target lies at $1.20.

Societe Generale: forecast for QE3 Currency strategists at Societe Generale believe that the Federal Reserve will decide to conduct the third round of quantitative easing by March 2012. As the reasons for such forecast the specialists cite the projected US weak economic growth in the first quarter of the next year and the slowing inflation in the country. The specialists claim the Fed will buy mainly mortgage-backed securities and QE will be worth about $600 billion over 6-8 months. As a result, the central bank’s securities portfolio will increase by the end of 2012 from $2.65 to $3.25 trillion.

BBH: European policymakers meet this week European finance ministers meet twice this week: today at the Eurogroup meeting and tomorrow at the Ecofin one. Analysts at Brown Brothers Harriman believe that if the policymakers don’t come up with specific proposals of how to deal with the crisis, investors will resume selling euro and stocks. As for the talk that the region’s leaders may be negotiating a new pact, the specialists note that earlier there were many times when the markets were lightened with hope but got disappointed as nothing happened. According to the BBH, it’s also necessary to take into account surging bond yields in Europe and the warnings from the OECD and Moody's Investors Service that the way out of the escalation debt turmoil should be found urgently.

Citigroup: recommends selling EUR/CAD The single currency managed to recover versus the greenback from more than 1-month minimum at $1.3211 to the levels above $1.3300 on the speculation about the new plan which implies stronger integration of the core economies. Never the less, analysts at Citigroup are bearish on euro and recommend selling it on the rallies. In their view, such plan would be difficult to realize as it will likely meet opposition of different European nations. As a result, the hopes that the ECB will increase bond buying may be unjustified. The specialists advise investors to open shorts on EUR/CAD. In their view, the outlook for Canadian dollar as more bullish as Canada has rather credible fundamentals, is closely connected with the United States which seem to be resilient enough despite the negative effects coming from Europe, and, finally, because loonie is able to gain from advance in commodity prices.

Commerzbank: comments on AUD/USD Technical analysts at Commerzbank note that Australian dollar managed to find support versus its US counterpart in the $0.9660/70 (78.6% Fibonacci retracement) and open on Monday with a positive gap rising to the levels above $0.9900. However, the specialists think that the current rebound is only a correction and that the outlook for AUD/USD will remain negative as long as it’s trading below resistance line at $0.9985. According to the bank, if the pair gets below the previously mentioned support it will fall to October minimum at $0.9388. In the longer term Commerzbank expects Aussie to slide to $0.8545.

UBS, Deutsche Bank, Nomura on potential collapse of euro Many experts from the major banks and ratings agencies agree that the euro area may break up unless the region’s policymakers find solution to the euro zone’s debt crisis. Analysts at UBS underline that the currency market’s beginning to price in the collapse of the currency union. Strategists at Deutsche Bank and Nomura agree that the European debt turmoil has entered a very dangerous phase as investors started worrying about the euro zone’s core economies such as Germany. Agency Moody’s Investors Service said today the “rapid escalation” of the crisis threatens all of the region’s sovereign ratings and that the risks will keep rising if no steps are taken to stabilize the situation. Last week was full of negative events: Germen government failed to draw bids for 35% of 10-year bunds, while Spain decided not to sell 3-year bonds and Italian 2-year yields surged above the 10-year ones. In addition, Standard & Poor’s cut Belgium’s credit rating and Fitch Ratings lowered Portugal’s one to the junk grade. The IMF rejected the talks provoked by La Stampa that it’s preparing to lend Italy 600 billion euro. Among the coming political news there are Ecofin meetings on Tuesday and Wednesday and EU leaders’ summit on December 9. I(t seems that the measures previously rejected by the region’s authorities such as the increase of the ECB bond buying and governments issuing common securities in a deeper fiscal union are now the only possible steps to save the monetary union. Strategists at Morgan Stanley note that it’s possible that the European policymakers won’t be able to present credible solution at the summit. Analysts at UBS note that the surging bind yields will hit Germen and other euro zone’s banks which may require additional capital. According to Bank of America Merrill Lynch, if Germany left the bloc, the fair value of EUR/USD would drop by 2%, while if Italy quits it would increase by 3%.

Concerns about euro zone’s future strengthen The single currency hit 7-week minimum versus US dollar sliding to the levels in the $1.3250 area. The risk environment seems to be quite unfavorable. Yesterday German Chancellor Angela Merkel spoke against the idea of joint euro bonds and the bigger role for the European Central Bank in solving the crisis. Alarm signal came on Wednesday when German government was able to sell only 3.644 billion euro ($4.92 billion) in 10-year bunds of the planned amount of 6 billion euro for an average yield of 1.98%. After auction the yield rose to 2.09%. Analysts at Commerzbank warn that if German bunds lose their safe haven status, this will be a very hard blow for euro. The specialists underline that even during the severe times of 2008 and 2009 these securities were trading stable enough. The fears about the region’s future are mounting. Italy’s 2-year yield climbed to the record high testing the levels above 7.5%. The majority of specialists are bearish on EUR/USD. Support for the pair now lies at $1.3145 (October 4 minimum) and $1.3045 (61.8% retracement of euro's advance in 2010-2011).

EUR/USD is on its way down to October low Currency strategists at Morgan Stanley and Commerzbank think that the single currency is moving down versus the greenback towards October 4 minimum at $1.3145. Analysts at Societe Generale are very bearish on EUR/USD. In their view, after the pair hits $1.3145, the next downside target will lie at $1.1875 (June 2010 minimum). In their view, support levels are found at $1.3240 and then $1.2860 and $1.2590.

Analysts on the AUD/USD prospects Analysts at NAB expect Australian dollar to trade versus the greenback between $0.95 and $1.03 in the near term. The risks for AUD/USD are to the downside as the market’s risk sentiment is affected by the euro zone’s debt crisis. Economists at ANZ Bank believe that it’s becoming more and more likely that the Reserve Bank of Australia will cut interest rates in December. Strategists at JP Morgan, RBC, BNP Paribas and Citi are also almost sure in such outcome. Analysts at Deutsche Bank, on the contrary, sound optimistic. In their view, earlier fall in oil prices and more stimulatory policy will lead to better growth and risk sentiment in the final quarter of the year. The specialists expect equities to gain reducing demand for the greenback. As a result, the economists believe AUD/USD will advance to $1.06 or even to $1.10.

MIG Bank: US dollar may advance to 94 yen Technical analysts at MIG Bank believe that if the greenback manages to overcome resistance at 83.30 and 85.50 yen, it will be able to add more than 20% and rise to 18-month maximum at 94 yen. Such forecast is based on the Elliott Wave theory. According to this theory, any market’s lifecycle may be divided into 8 waves: 5-wave major trend cycle and 3-wave corrective cycle. The specialists claim that the 40-year cycle of the long-term impulsive wave on USD/JPY enters the phase of reversal. In their view, the fifth wave will end either in November or December and then dollar will start strengthening. The bank thinks that the pair may revisit the record minimums before beginning to advance and even dip below 74 yen forming a spike down that, in its turn, will trigger a short squeeze and reversal. If dollar manages to close above 80.60 yen, it will be the first sign that US currency is ready to rally.

J.P.Morgan: forecast for ECB rates Analysts at J.P. Morgan believe that as the euro area’s economy is in danger of recession the European Central Bank will lower its benchmark rate from the current level of 1.25% to 0.5% by the middle of the next year. In their view, the ECB will narrow the interest rate corridor to +/-25 basis points, so that the deposit facility rate will fall to 0.25%. In November the central bank reduced the rates from 1.5% to 1.25%. According to J.P. Morgan, in December the ECB will decrease rates to 1%. It’s necessary to note that even during the recession in 2008-2009 the central bank didn’t cut the borrowing costs below 1%.

RBS: Bank of England will do more QE in February This month the Bank of England's Monetary Policy Committee decided to keep the target level of quantitative easing at 275 billion pounds after raising it by 75 billion in October. According to the MPC November meeting minutes released yesterday, the risk that British economy will suffer from the European debt crisis increased as well as the chances of a worst-case outcome in Europe. Specialists at Markit underline that the euro zone’s drama will be the determinant of Britain’s monetary policy. The minutes showed that the policymakers expect UK economy to stagnate in the final quarter of 2011. Inflation is expected to fall significantly by the middle of the next year. Strategists at RBS were expecting that at least one of the MPC members will vote for additional purchases, but the decision to keep things as they are was unanimous. So, more easing in December is unlikely, the probability of more QE January has been reduced significantly, so one should expect the central bank to act in February when the current QE is completed. Analysts at Investec claim that taking into account the uncertain economic conditions the BoE will announce additional easing measures of 100 billion pounds over the course of 2012. Economists at Ernst & Young are sure that more QE is coming during the next months. Analysts at Capital Economics admit that not all members seem entirely convinced more QE will be needed as some of them said that “the risks to inflation around the target are balanced”. However, others thought that the Inflation Report forecasts mean that “a further expansion of the asset purchase program might well become warranted in due course”. According to Capital Economics, more QE in February is quite likely.

Commerzbank: comments on USD/JPY Technical analysts at Commerzbank note that the greenback has managed to break yesterday above the daily Ichimoku Cloud trading versus Japanese yen. The specialists think that even though today USD/JPY has eased down, it will be able to resume the recovery. In their view, the pair will be supported at 76.22 (78.6% Fibonacci retracement) and 75.94 (August 19 minimum). According to the bank, resistance for US currency lies at 79.56 (4-year downtrend line) and 80.37 (55-week MA). If US dollar overcomes these levels, the current trend will reverse.

Commerzbank, Wells Fargo: comments on EUR/USD Technical analysts at Commerzbank note that the outlook for EUR/USD is negative as long as it’s trading below resistance at $1.3526. The specialists say that support for the pair lies at $1.3360 and $1.3281. Currency analysts at Wells Fargo expect the single currency to fall in December to $1.2400 or lower. In their view, the European Central Bank will ease its monetary policy in order to help the region’s economy.

Deutsche Bank: comments on USD/CAD Analysts at Deutsche Bank underline that Canadian economic figures are as discouraging as the US ones. Never the less, the specialists don’t think that the Bank of Canada will ease its monetary policy, even though the market’s pricing in 25-basis-point rate cut through March 2012. According to the bank, loonie’s rate will as usual depend on the market’s risk sentiment. At the same time, all eyes are now focused on the euro area and the United States is no longer the epicenter of the crisis, while Canadian economy is closely connected with American one. As a result, Deutsche Bank expects USD/CAD to test 2010 maximums in the $1.0800 area. The greenback will be capped by these levels unless we see “hard-landing” in Europe. All in all, the analysts think that the next year the pair will fluctuate around parity.

Deutsche Bank: 2012 forecast for USD/JPY Analysts at Deutsche Bank claim that Japanese yen will keep being supported by the concerns about global economic slowdown. In their view, there are many factors pointing at yen’s appreciation, such as Japan’s current account surplus, high relative real yields and the inability of the nation’s policymakers to stem the advance of the national currency. According to the bank, by the middle of the next year the pair USD/JPY will drop to 72 yen and then consolidate in the zone of 75 yen by the end of 2012.

European currency is again under pressure The single currency declined today versus the greenback falling below $1.3400 and renewing more than 1-month minimum. Belgian newspaper De Standaard reported citing no sources that Belgium and France were renegotiating the distribution of the costs of the rescue deal for bank Dexia. That made the markets fear that France’s share in the bailout may increase that, in its turn, could affect the nation’s credit rating. Concerns about the euro area rose due to the unfavorable economic data. According to Markit Economics, financial survey company, the region’s composite manufacturing and services PMI rose from 46.5 in October to 47.2 in November, but remained below the 50.0 level that means that the European economy is expected to contract in the final quarter of the year. Economists at Markit note that the figures mean that the negative effects have spread from the peripheral economies to the core ones. Specialists at Capital Economics think that the euro zone will likely fall into deep and protracted recession. In addition, new industrial orders fell by 6.4% in September compared with August level showing the biggest decline since December 2008 when the index was hit by the global financial crisis. Analysts at Wells Fargo believe that EUR/USD will keep trading in a very volatile manner. In their view, low trading volumes this week due to the US holiday tomorrow will make the market moves even greater and sharper. Support levels are situates at $1.3370, $1.3315 and $1.3260, while resistance lies at $1.3410, $1.3475 and $1.3570.

Barclays Capital: survey about euro zone’s future Analysts at Barclays Capital conducted survey among 1,000 of its clients asking their opinion about the euro area’s future. The survey showed that the number of investors expecting at least one country to leave the currency bloc increased in 2 times since September: almost 50% of the respondents now think that this will happen the next year. The majority of the surveyed believe that if some nation quits it would be Greece. 5% of the bank’s clients say that all 5 troubled peripheral nations – Greece, Portugal, Ireland, Italy and Spain – will desert the monetary union. The region’s economic prospects are perceived as pessimistic: 70% of the respondents claim that Europe will fall into recession. Barclays underlined that investors don’t think that Greece’s leaving will stop the debt crisis. The bank’s clients expect the European Central Bank to act helping euro zone’s economy with additional stimulus.

Commerzbank: comments on GBP/USD Technical analysts at Commerzbank note that British pound fell versus the greenback below the $1.5615 level representing 61.8% Fibonacci retracement of its October advance. In their view, the outlook for GBP/USD is bearish. The specialists believe that the pair’s on its way down to $1.5463 (78.6% Fibonacci retracement) and $1.5271 (October 6 minimum). In the longer term, the downside target will be found at the uptrend line from 2009 to 2011 at $1.5050. This support level will likely hold the initial attack of the bears. According to the bank, resistance levels are situated at $1.5888 (November 18 maximum) and $1.6026 (downtrend line).

Societe Generale: commodity currencies are to decline Analysts at Societe Generale warn that the failure of US Congressional supercommittee to agree on the debt-reduction measures will heavily weight on American economy affecting the rest of the world. The specialists believe that the forced automatic spending cuts of $1.2 trillion will result in the fiscal drag of 1.5%. In other words, if US GDP growth is projected to be 1%, then the nation will face economic contraction. This combined with the European crisis will have a very negative impact on the global economy. As a result, the bank expects that commodity currencies which depend on the economic growth will get under pressure, while the greenback will restore its safe haven status. Societe Generale is bearish on Canadian dollar as Canada’s economy is closely tied to the US one and Australian dollar which will suffer as the situation in the US and China deteriorates. The strategists advise selling AUD/JPY being cautious about the Bank of Japan’s intervention risk. In their view, one may also open shorts AUD/USD and longs on USD/CAD.

Consensus Economics: seasonal effect on euro Consensus Economics, a macroeconomic survey firm, notes the demand for the single currency tends to pick up in December. It happens because portfolio managers buy euro as the riskier asset trying to get more profit to make their holdings look better ahead of the year-end. According to the data processed by the company, the European currency usually gains about 0.4% and US dollar retains its value, while Canadian dollar and British pound weaken. Strategists at BMO Capital Markets, however, underline that the euro zone’s debt crisis may change the situation and doubt that in the current circumstances euro will be able to get a lift from the seasonal effect. Some experts say that taking into account everything mentioned above, the market’s pressure on the ECB to ease policy will play the role of euro's rate determinant.