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RBC: euro managed to recover a bit versus dollar The single currency has managed to recover a bit versus the greenback after it slumped earlier this week to the minimal level since October 10 in the $1.3420 area. Analysts at RBC claim that euro got lift from short-covering and the advance of US stock futures. The specialists say that the further dynamics of EUR/USD today will depend on the results of Spanish and French bond auctions. In addition, the pair’s rebound may be explained by the speculation that the Fed will do additional quantitative easing. It’s recommended to pay attention to the speech of New York FRB President William Dudley at 5:50 p.m. GMT. The market is also looking to see the increase in US Jobless claims (1:30 p.m. GMT). At the same time one should remember that the situation in the euro area remains very tense. Strategists at Brown Brothers Harriman warn traders that if euro breaks below $1.3400, it will slide to October minimum at $1.3145.

Commerzbank: comments on GBP/USD Technical analysts at Commerzbank believe that after British pound has broken support of the 55-day MA and 38.2% Fibonacci retracement at $1.5825 it’s poised versus the greenback down to $1.5632 (October 18 minimum) and then to $1.5271 (October 6 minimum). In the longer term the specialists expect sterling to slide to the support line of the uptrend from 2009 to 2011 at $1.5050. According to the bank, resistance for GBP/USD is found at $1.6060 (downtrend line) and $1.6136 (200-day MA). The outlook for the pair will remain negative as long as it’s trading below $1.6185, the 61.8% Fibonacci retracement of pound’s decline from August maximums.

HSBC, Rabobank on the factors influencing EUR/USD Analysts at HSBC claim that the fair value of the European currency is in the $1.20/$1.30 area. However, even despite the escalating crisis euro keeps trading above these levels. The specialists see 2 reasons for that. Firstly, euro is supported by monetary inflows even though some of them are the result of European banks bringing capital home in an effort to defend themselves against possible losses on their holdings of euro-zone bonds. The current account of the euro area as a whole is almost balanced and there are positive portfolio and merger and acquisition inflows. Secondly, as the consequences of the currency union’s break up are expected to be terrible, investors are betting that the policy makers will find a way to save the bloc. In addition, there is also a chance that the member nations will move to closer fiscal coordination. Analysts at Rabobank add that much may be explained by the weakness of US dollar which showed the worst performance among the other major this year but has regained some safe haven status because of the European turmoil. At the same time, there are pairs with much stronger downtrend for the common currency: EUR/JPY fell from April maximum at 123.32 yen to the levels in the 103 yen area.

Societe Generale: comments on EUR/JPY Analysts at Societe Generale warn that the single currency may keep declining versus Japanese yen and fall to October 4 minimum at 100.75 yen. The specialists underline that EUR/JPY has eroded support in the 104.90/104.75 zone. According to the bank, bearish pressure will ease only if the pair returns above 104.75. In such case euro will get chance to rise to October 31 maximum at 111.60 yen.

Feldstein: Greece will have to leave the euro zone Martin Feldstein, professor at Harvard University, who has foreseen in 1998 that the euro zone will end up with the necessity of bailing out its members, claims now that the currency union will survive, even though Greece will leave the bloc within a year. According to Feldstein, if Greece doesn’t default and devalue its currency, it will face constant economic slump. The specialists underline that even if the nation’s debt was wiped out Greece would have an unbearable a current-account imbalance which could be eliminated only by abandoning euro and devaluation. According to the European Commission, Greece’s debt will reach 163% of GDP this year. Feldstein claims that Italy is in better situation than Greece due to the stronger economy and budget and smaller current-account deficit. It’s also necessary to note that the economist advises the European Central Bank to resist pressure and avoid increasing purchases of Italian bonds as this would distort financial markets and reduce the urgency for the government to restore fiscal order.

Japan: monetary policy, economy, yen’s rate The Bank of Japan left its benchmark rate unchanged at the minimal levels of 0-0.1% and the asset-buying fund at 20 trillion yen ($260 billion) after increasing it by 5 trillion yen in October. As Japan’s economy strongly depends on the external demand for Japanese goods, deepening European debt crisis, the flood in Thailand and the risk of global economic slowdown will have a serious negative impact on the nation’s growth prospects. Analysts at Nomura claim that the central bank may augment monetary stimulus if the national currency which is regarded as a refuge keeps strengthening and once again approaches record maximums against its US counterpart. According to Japan Automobile Manufacturers Association, in the first half of 2011yen’s appreciation slashed Japanese carmakers’ profit by 330 billion yen. Japanese GDP rose by 6% in the third quarter on the year-to-year basis as the nation’s economy recovered from the March earthquake. However, during the first 20 days of October exports slashed by 1.6%. Credit Suisse believe Japan’s economy is losing upside momentum since August and that the readings of its indicators will soon start to deteriorate. As for Japan’s intervention policy, analysts at UBS don’t expect any changes. In their view, the nation’s monetary authorities will keep intervening only in case yen’s sharp bounces. As the European debt crisis escalates, Japanese investors trim their overseas assets – primarily euro zone sovereign debt holdings – and repatriate their money making demand for yen increase. That means that yen’s appreciation is caused not only by the speculative inflows, but also by the Japanese real money accounts. In such circumstances Japan will be forced to act, so USD/JPY’s decline will be likely limited.

Wells Fargo: negative forecast for EUR/USD Analysts at Wells Fargo are bearish on the prospects of the single currency versus the greenback during the next 12 months. The specialists believe that euro will be affected by the increasing borrowing costs for the peripheral euro area nations and the risk of recession in the region. According to the bank, EUR/USD will fall to $1.3000 in 3 months, to $1.2800 in 6 months and to $1.2600 in 9 months and hit $1.2400 in November 2012.

On RBA rates and Aussie’s prospects News about new technocratic governments in Italy and Greece brought only short-term relief to the market. Yesterday’s surge of euro zone bond yields threw investors into the risk-averse mode that affected such risk-sensitive pair as AUD/USD. Analysts at RBC Capital Markets believe that Australian dollar’s dynamics versus the greenback will remain extremely volatile as Aussie is closely correlated with the equity markets which are seized by uncertainty. In their view, the risks for AUD/USD are to the downside. Dow Jones reports that the interest rate swaps market is currently pricing in a 100% chance of a rate cut by the RBA in December, though the surveyed economists expect the RBA to keep the rates unchanged. This month RBA lowered its benchmark rate by 25 basis points to 4.5% citing the projected slowing inflation and the risks posed by the euro zone debt crisis. The central bank gave no hints on further rate cuts in its meeting minutes released yesterday. According to the document, the policymakers have also discussed the possibility of staying on hold. The RBA underlined that the mining industry could become the driver of the nation’s economic growth that would require more tight monetary policy in the medium term. Analysts at Westpac, however, claim that the mentioning of the risks connected with Europe means that the RBA left the door open for further easing, and look forward to 75 basis points of rate cuts starting in February.

Euro area: sovereign bond yields are surging The single currency got today under negative pressure. The pair EUR/USD dropped from the levels in the $1.3800 area where it started the week to the $1.3500 zone. The pair EUR/JPY hit 1-month minimum at 100.93 yen. European bond yields surged increasing concerns about the region’s debt crisis. Italy’s 10-year yield approached the critical level of 7%. The yield spreads between 10-year debt of Spain, France, Austria and Belgium and similar German bunds all widened to the maximal level since the euro was adopted in 1999. The economic data were also discouraging: German ZEW Economic Sentiment index declined this month to the lowest since October 2008 of minus 55.2. Strategists at Nordea warn that if euro falls below last week's minimum at $1.3480, the number of bears will sharply increase. Analysts at Bank of Tokyo Mitsubishi UFJ believe that the fate of the currency union is still vague as the European nations may move closer to fiscal integration or break apart. In their view, EUR/USD will drop to $1.25 during the next 6 months.

Euro area: political situation Italy New Italian Prime Minister-designate Mario struggles to get political parties to agree to take part in his technocratic Cabinet as it would be hard for the government without political representation to pass unpopular laws through the government. Monti has to convince investors that the nation is able to reduce its 1.9 trillion debt ($2.6 trillion) and stimulate economic growth which was below euro area average during the last decade. Greece New Greek Prime Minister Lucas Papademos underlined that the country’s future is in the euro area. According to Papademos, the membership in the currency union guarantees Greece “monetary stability and creates the right conditions for sustainable growth”, reports Bloomberg. The new government formed on November 11 has to implement budget measures necessary to obtain the second bailout package of 130 billion euro ($177 billion) adopted on October 26 and conduct a voluntary debt swap by the end of February. For now the main goal is to secure the payment of an 8 billion-euro tranche of the first bailout program. In order to avoid default Greece needs this money before the middle of December. The EU waits for all Greek parties to give written commitment to structural reforms and austerity measures. So far opposition leader Samaras has been declining to do that. Germany German Finance Minister Wolfgang Schaeuble said that Merkel’s government wants Greece to remain a member of the European Monetary Union. At the same time, Christian Democratic Union party led by the Chancellor voted to allow euro states to quit the currency area.

Commerzbank: comments on EUR/USD Technical analysts at Commerzbank keep regarding the outlook for the single currency versus the greenback as negative. In their view, EUR/USD is likely to decline to $1.3380/60 (78.6% Fibonacci retracement of the October advance and September minimums) and then to $1.3145 (October 4 minimum). According to the bank, in the longer term the pair is poised down to $1.2000. The specialists say that bearish pressure on euro will ease if it manages to rise above $1.3870/80. If euro succeeds, it will be able to return up to the 55- and 200-day MA at $1.4013/1.4104. The major resistance is set at $1.4250/55.

BarCap: trading in the situation of uncertainty Risk aversion is expected to dominate the markets concerned about European debt crisis and weak economic data. Currency strategists at Barclays Capital see several ways to secure oneself against the elevated uncertainty. One of the strategies preferred by the bank is buying the greenback versus Swiss franc. According to BarCap, if the situation in the euro area deteriorates, the SNB will be forced to defend EUR/CHF floor selling franc. Such actions of the central bank will lift USD/CHF. In case of some positive surprises in Europe, demand for franc as a refuge will ease and USD/CHF will also rise. So, the specialists advise traders to open longs at USD/CHF stopping below 0.8920 and targeting 0.9300.

ANZ: negative outlook for NZD/USD Technical analysts at ANZ Bank claim that there us a “dead cross” on the NZD/USD chart formed in October by 50-day and the 100-day MAs – the former went below the latter – and that the figure is still in place. The specialists underline that this is a bearish signal that means that kiwi may weaken to $0.7335, the level representing 38.2% Fibonacci retracement from the pair’s advance from March 2009 minimum to August 2011 maximum. According to the bank, support levels for New Zealand’s currency are situated at $0.7550 and $0.7470 (October 4 minimum).

UBS lowered forecast for EUR/USD Analysts at UBS reduced forecasts for the single currency versus the greenback due to the escalating crisis in the euro area. Apart from deepening concerns that the European policymakers won’t be able to find the way out of the debt turmoil, euro will be affected by the region’s economic slowdown and ECB rate cuts. The strategists underline that even though the United States and Japan also have severe debt issues, the situation in the euro zone seems to be much worse, so the demand for dollar and yen will be higher. The specialists expect EUR/USD to drop to $1.35 in a month, $1.30 in 3 months, $1.25 in a year. At the beginning of November the analysts thought that the pair will end the year at $1.40. It’s also necessary to note that, according to the bank, the Swiss National Bank will lift the floor for EUR/CHF from 1.20 to 1.25 as it regards franc as still extremely overvalued.

BNY Mellon: US dollar is under pressure Analysts at Bank of New York Mellon point out that despite the ECB rate cut, the euro zone’s debt turmoil and unfavorable economic prospects, the single currency is still above October minimum at $1.3145 and 14% higher than June 2010 low at $1.1875. The specialists explain relative strength of euro by the weakness of US dollar. In their view, American currency is losing the market’s confidence as a store of value. According to the bank, as the political uncertainty in Greece and Italy fades, negative pressure on the greenback will build up. Never the less, the strategists don’t urge investors to buy EUR/USD as the euro zone’s politicians could bring negative surprises.

BNP Paribas, ING: leave euro for pound British pound has strengthened this month versus the single currency by 3% since the end of October. Sterling gained despite the release of weak economic data in the UK: the nation’s trade deficit widened from 8.6 billion pounds in August to 9.8 billion pounds in September. It’s also possible to say that the effect of additional quantitative easing wasn’t as great as it could be. Strategists at ING believe that British currency is slowly moving to safe haven status as it is perceived as an alternative to more troublesome euro. Analysts at BNP Paribas justify such assumption by the high demand for British debt. According to the Bank of England, net inflows into UK government bonds held by non-residents bounced in September when the fears about the euro zone’s future escalated to 12 billion pounds, the maximal level since June 2010. Unlike Australian dollar which is declining against euro pound isn’t that affected by the commodities prices and investors’ risk sentiment. As a result, sterling may count as a refuge in times of high risk aversion, though it can’t compete with the greenback – at least now when the Federal Reserve remains on hold and doesn't do more easing.

The odds for euro area’s breakup increased Last week European leaders for the first time raised the possibility of Greece leaving the currency union if it keeps violating its commitments. That triggered the speculation that German policymakers are already preparing to exclude the peripheral nations out of the euro area. Even though Germany and France denied the reports that they had discussed a possible breakup of the euro zone, the option has become real. As a result, it will likely become much harder for indebted members to convince investors in their ability to get their finances in order and for Merkel, Sarkozy and ECB President Mario Draghi to defend the single currency. The questions concerning currency bloc’s future will be discussed at the EU summit on December 9. Some experts say that the European leaders will probably talk about introducing an exit clause. Analysts at Brown Brothers Harriman still think that European authorities will do anything to save the monetary union. In particular the specialists see the way out in increasing integration. Strategists at HSBC warn that the euro zone’s breakup would cause something similar to the Great Depression. The quitting country will face collapse of the banking system, capital outflow and the surge of inflation. Deutsche Bank says that if one nation exits, investors will expect other problem states to do the same.

BBH advises traders to sell EUR/USD Analysts at Brown Brothers Harriman note that although the European currency is trading with high volatility versus the greenback, it’s closely correlated with the dynamics of S&P500 index – the specialists estimated the correlation by 80%. The bank claims that in the stock markets are likely to decline in the current state of uncertainty and recommends selling EUR/USD in the $1.3650 area stopping above $1.38, expecting the pair to fall to $1.30 by the end of the year.

Commerzbank still expects EUR/USD to decline Despite euro’s recovery from 1-month minimum at $1.3483 hit yesterday technical analysts at Commerzbank expect the single currency to fall versus the greenback to $1.3380/60 (78.6% Fibonacci retracement from its October advance and September minimum). The specialists see resistance at $1.3685 and $1.3870.

Wells Fargo about USD/JPY prospects Currency strategists at Wells Fargo note that the moves of the pair USD/JPY are no more strongly correlated with the dynamics of stock market. The specialists underline that the greenback is falling, while stocks in the US are rising. In their view, the mentioned relationship had been growing less and less pronounced since 2009 and was finally broken in the past year due to continuous Japan’s interventions and contracting interest rates differential between the US and Japan. As a result, the advance of the equity market won’t help to bring Japanese yen lower. According to the bank, the greenback will be trapped between 78 and 80 yen during the next 6-12 months. Any attempts to weaken yen won’t be effective in the longer term until US economic prospects remain dim and interest rates – extremely low.

Goldman Sachs lifted forecast for NZD Analysts at Goldman Sachs increased forecasts for New Zealand’s dollar from 0.74 to 0.77 in 3 months, from 0.78 to 0.80 in 6 months and from 0.82 to 0.84 in a year. The specialists point out that kiwi has managed to recover from October minimums in the 0.7470 area, though its dynamic was volatile. In their view, the currency is doing pretty well despite the looming concerns about global economic slowdown and New Zealand’s credit rating downgrade by Standard & Poor's and Fitch at the end of September. According to Goldman, the coming 12 months will be characterized by US dollar’s weakness.

Euro area: economic and political news The single currency rose today versus the greenback helped by the high demand for Italian T-bills: the bids exceeded offer in about 2 times making the market’s concerns ease. It’s necessary to say that there are enough reasons for concerns. Yesterday Italy’s 10-year yields rose above the critical 7% level – the point when Greece, Ireland and Portugal asked the EU for financial help. Today the yields retreated, but remained elevated. In addition, there was a talk about the European Central Bank buying Italy’s government bonds. Ever the less, European Central Bank policymaker Juergen Stark warned European governments on Wednesday against asking the ECB for support in dealing with the region's sovereign debt crisis, saying this would put the central bank's independence at risk. Analysts at JPMorgan Chase warn that Italian problems could make Japanese investors sell the nation’s bond. In such case EUR/JPY is poised to decline. The European Commission warned of a “deep, prolonged recession” in the region reducing its euro zone economic growth forecast in 2012 from 1.8% to 0.5%. Lucas Papademos, former vice president of the European Central Bank, was named new Greek prime minister. Elections are scheduled on February 19, 2012.

Bank of England left policy unchanged The Bank of England’s meeting passed today in line with the forecasts: as it was expected, the Monetary Policy Committee left its benchmark rate at 0.5% keeping the ceiling for the asset purchases at 275 billion pounds ($437.3 billion). Minutes of the meeting will be released on November 23. The BOE said it will take up to four months to make the additional quantitative easing of 75 billion pound sanctioned in October. The central bank aims to keep the scale of the program under review. Despite the fact that inflation reached 5.2% in September British monetary authorities will decline sharply the next year. Analysts at Nomura International note that the MPC is extremely concerned by the debt crisis in the euro area and potential contagion. In their view, British central bank is very likely to announce more easing until the end of February. According to the European Commission, UK economy risks contracting at least in one of the next few quarters affected by the government’s spending cuts. The pair GBP/USD rose from the weekly minimums in the $1.5890 area to the levels in the $1.5970 zone.

Merrill Lynch on US credit rating Analysts at Bank of America Merrill Lynch believe that other major rating agencies – Moody's or Fitch – will lower US top credit rating by the end of the year after Standard & Poor's downgraded the world’s leading economy in August. As the reason for such dim outlook the specialists cited concerns about the nation’s huge budget deficit and debt. In their view, the second downgrade will seriously hit weak American economy. If the so-called supercommittee fails to reach a deal to reduce the US deficit by at least $1.2 trillion by November 23, the rating agencies will make their move at the end of November-beginning of December. Merrill Lynch decreased US economic growth forecasts for 2012 and 2013 to 1.8% and 1.4% respectively. At the same time, it’s necessary to note that the agencies don’t intend to hurry with their judgments. Moody's Investors Service plans to take into account such factors as the results of presidential elections and the expiration of the Bush-era tax cuts late in 2012, but not only the committee. Fitch Ratings still has a stable outlook on its AAA rating on the United States, so before any downgrades it will probably revise outlook to negative.

BBH is concerned about US debt issues So far the market’s attention has been focused on the euro zone’s debt problems, investors have almost forgotten that the US also has much to deal with. The United States created special congressional committee – or supercommittee – in order to the debt-reduction measures. The deadline is on November 23. If the policymakers don’t come up with the plan how to decrease debt by $1.2 trillion before the time runs out, America’s spending will be automatically cut in 2013. Analysts at Brown Brothers Harriman underline that there is a serious split in the opinions of the committee’s members. In their view, this is one of the factors why the single currency has been performing relatively well versus the greenback so far. By their estimates, traders are pricing in only a 7% probability that the supercommittee will reach a deal by the end of the month. BBH specialists underline that in case of supercommittee’s failure fiscal tightening and sluggish economic growth could make Federal Reserve’s policy more accommodative. That, in its turn, will put the greenback under negative pressure. US dollar, euro and sterling will be competing in weakness, so US currency want lose much to the latter. Taking into account the euro area’s issues the bank still thinks that EUR/USD will fall to $1.29 by the end of the year. At the same time, other G10 currencies are quite likely to outperform dollar.