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Greece: the referendum story Everything about the euro area and Greece in particular seems to change with great speed. At the beginning of the week the markets were shaken by Greek Prime Minister George Papandreou’s unexpected announcement of the referendum on the bailout package. The EU policymakers’ reaction was abrupt as they froze credit payments to Greece and raised the question of the nation’s membership in the monetary union. Then Greek opposition expressed readiness to compromise, Papandreou backed away with the referendum idea and investors’ concerns ease. The head of Greek government has no intention to step down. Now Greek authorities discuss the prospects if setting up a transitional government with the participation of the opposition to make sure Greece will get aid payment. The analysts in Deutsche Bank caught the point claiming that trading EUR/USD has become so volatile that it has become too risky to open significant positions for longer than 5 minutes. The pair EUR/USD rose from 3-week minimum in the $1.3600 area to the levels above $1.3800. Strategists at Westpac say that the single currency has no strength for the sustainable rally but there is some relief as the threat of referendum that would very likely bring “no”-result has been removed.

UBS: technical levels for the major pairs EUR/USD: the major support is found at $1.3567. If the single currency breaks below this level it will fall to $1.3406. Resistance is situated at $1.3871 and then at $1.4003. GBP/USD: resistance lies at $1.6097. If the pair overcomes this level it will be poised up to $1.6167. Support is at $1.5825. USD/JPY: resistance is seen at 78.42 and 78.98 yen and support – at 77.43 and 76.94 yen. USD/CHF: support is situated at 0.8718 and 0.8568 (October 27 minimum). Resistance is found at 0.8960. Chart. Daily EUR/USD Chart. Daily USD/JPY

CIBC: 12-month forecast for EUR/USD Analysts at CIBC World Markets expect the single currency to trade between $1.3400 and $1.3800 during the next 12 months. According to the specialists, in December EUR/USD will consolidate in the $1.3800 area. Then it will fall to $1.3400 in March next year and rebound to $1.3500 in June and to 1.3600 in September to return back to $1.3800 in December 2012.

Morgan Stanley: euro and political factors Analysts at Morgan Stanley look into political factors which will determine dynamics of the single currency versus the greenback. Today German Chancellor Angela Merkel and French President Nicolas Sarkozy meet with the Greek government and the IMF officials ahead of 2-day G20 summit beginning tomorrow, but the specialists think that euro’s advance on this news won’t last long. The strategists urge traders to pay attention to the confidence vote in Greek government that is taking place on Friday. In their view, the most bearish outcome for euro would be if the Prime Minister George Papandreou wins as that will lead to the referendum with potentially negative results. If Greek say “no” to the bailout package, Greece will be doomed to announce default. If Papandreou loses, the government will fall and the new elections will be very likely. In such case the new budget reform measures and potentially delay the next round of bailout funds from the EU will be delayed. This scenario, however, would be more positive for euro as this way there will be no referendum. Anyway, the medium term outlook for euro, according to Morgan Stanley, is negative. According to the bank, EUR/USD has broken through the major support levels and is now poised down to $1.3365 and $1.3145 (October 4 minimum). Morgan Stanley expects the pair to end 2011 at $1.30 and then drop to $1.25 in the first quarter of the next year.

Agenda for the euro area in November – Wednesday, Nov. 2: French President Nicolas Sarkozy and German Chancellor Angela Merkel meet with Greek, IMF and EU officials in Cannes. Portuguese T-bill auction. Euro-zone manufacturing PMI data. – Thursday, Nov. 3: ECB policy meeting. Mario Draghi’s first press conference as ECB President. Spanish and French bond auctions. – Thursday, Nov. 3 – Friday, Nov. 4: G-20 leaders meet in Cannes. – Friday, Nov. 4: Greek government confidence vote. Euro-zone services PMI data. – Monday, Nov. 7: Eurogroup finance ministers meet. – Tuesday, Nov. 8: EU finance ministers meet. Greek T-bill auction. – Thursday, Nov. 10: Italian T-bill auction. – Friday, Nov. 11: 2.0 billion euro of Greek T-bills mature. – Monday, Nov. 14: Italian bond auction. – Tuesday, Nov. 15: Greek T-bill auction. – Wednesday, Nov. 16: Portuguese T-bill auction. – Thursday, Nov. 17: Spanish and French bond auctions. – Friday, Nov. 18: 1.3 billion euro of Greek T-bills mature. – Sunday, Nov. 20: Spain holds general election. – Thursday, Nov. 24: General strike in Portugal. – Friday, Nov. 25: Italian T-bill/bond auction. – Tuesday, Nov. 29: Italian bond auction. Final Portuguese budget vote.

Commerzbank: technical comments on EUR/USD Concerns about Greece’s future made euro test the levels below October minimums in the $1.3655/52 zone hitting the $1.3600 area yesterday. Technical analysts at Commerzbank expect EUR/USD to through consolidation during the coming sessions. Resistance levels at $1.3855 and $1.3930 are going to limit euro’s advance today. Support is found at $1.3610 and $1.3550. Then the pair will resume its down move. The specialists think that the European currency will slide to $1.3381/60 (late September minimums) and then to $1.3145 (October 4 minimum). The bank advises investors to avoid trading the pair until the fate of the latest bailout package becomes clear.

J.P.Morgan: euro versus yen and US dollar Analysts at J.P. Morgan claim that in the situation of uncertainty caused by the announcement of the Greek referendum one should sell the single currency versus Japanese yen at 107.00 stopping at 109.25 and targeting 102.00. According to the economists, the unilateral intervention in Japan won’t be effective. Chart. Daily EUR/JPY As for EUR/USD, the specialists think that it will decline to $1.36. The bank underlines that the volatility index is high, about 20%, so in the short term the trade is going to be extremely choppy. The strategists advise investors who are trading the pair to pay great attention to today’s FOMC meeting results and US Non-Farm Payrolls data on Friday. In their view, euro will keep losing to the greenback during the coming months and quarters and may hit $1.30. Chart. Daily EUR/USD

Westpac, HSBC on the outlook for kiwi New Zealand’s dollar weakened this week versus its US counterpart as investors’ risk sentiment was affected by the news about the referendum in Greece. Currency strategists at Westpac believe that NZD/USD will keep declining during the next few weeks moving down to the levels in the $0.7000 area. In their view, support for the pair is situated at $0.7910, while resistance stays at $0.8050. Analysts at HSBC, however, think that there won’t be any clear trend for kiwi until the FOMC and ECB meetings and US payrolls this week. It’s necessary to note that the specialists don’t expect the Fed to trigger the QE3 as there should be a deflationary environment for that.

Citigroup: Japan’s intervention is unlikely to be a success On Monday Japan intervened at the currency market for the third time this year in order to weaken its national currency. There’s no official information about of the amount spent, but the market’s speculating that Japan may have sold about 7 trillion yen ($92.31 billion) breaking the previous record of a 1-day intervention of 4.5 trillion yen (August 4, 2011). Never the less, many analysts are skeptical doubting that the move will be able to succeed in preventing yen from appreciation and easing pressure on Japanese exports. The economists cite the results on the previous unilateral attempts of Japan’s government when after a jump the pair USD/JPY slid down again. Citigroup specialists believe that this time everything will be the same. Economists at BNP Paribas say that the intervention policy is losing effectiveness. Among the factors which may cause the demand for yen increase one should name the risks connected with the euro area and the possibility that the Federal Reserve may ease its monetary policy. Specialists at Westpac underline that in the current situation investors will crave for safe havens. Another thing that seems likely to undermine the efforts of Japanese monetary authorities is the profit repatriation of Japanese companies which buy yen during this process. US dollar bounced yesterday by 5% from the record minimum at 75.56 yen to the maximum at 79.53, but then eased down to the levels around 78 yen.

Westpac: recommendations ahead of NFP On Friday comes an important release – US Non-Farm Payrolls for October. Currency strategists at Westpac Institutional Bank think that if the number of jobs increased last month by more than 95K (the consensus forecast is of 98K increase after September growth of 103K), it would be wise to buy USD/JPY. If the reading is below 60K, the specialists recommend buying USD/CAD pointing out that Canadian economy which has close ties to the one of its neighbor will also suffer. Westpac analysts regard the first scenario as the most likely. That’s why they advise investors to open dollar longs at 77.00 yen stopping at 76.00 yen and targeting 79.50 yen.

Euro: events and comments The single currency fell versus the greenback on the expectations that European Central Bank cuts its benchmark interest rates on Thursday, November 3. According to Bloomberg, Credit Suisse Group AG index shows that yesterday traders expected the ECB to reduce the borrowing costs by 26.1 basis points during the next 12 months, while at the end of July this figure was equal to 11.1 basis points. Euro was also affected by the weak Chinese Manufacturing PMI data which dropped from 51.2 in September to 50.4 in October. In Addition, the single currency weakened against its US counterpart ahead of the FOMC statement later today (4:30 p.m. GMT). Apart from the ECB meeting the major coming events are: - G20 summit on November 3-4; - Referendum on the EU latest bailout plan for Greece that includes the agreement of the private creditors of the nation to accept 50% loss on their holdings of Greek government bonds or 100 billion euro, the increase of EFSF (European Financial Stability Facility) to 1 trillion euro and support for the region’s banking sector. According to Greek Prime Minister George Papandreou, the referendum will take place after all the details of the bailout package will be set. According to the polls, nearly 60% of Greeks oppose the debt deal; - The vote of confidence in the ruling Socialist party government will also take place in Greece on Friday. The pair EUR/USD plunged from October 27 maximum at $1.4247 to open today at $1.3860 and then slump below $1.3750. Analysts at Commonwealth Bank of Australia believe that euro is on the way down to the levels around $1.35. Support for euro is found at 1.3650/60 (October 18-20 minimums).

UBS increased forecasts for EUR, GBP, AUD and NZD Currency strategists at UBS increased their 1-month forecast for the single currency versus the greenback from $1.30 to $1.40 and 3-month one from $1.20 to $1.35. In their view, the pair EUR/USD will be trading between $1.35 and $1.45 during the next few weeks. The predictions for GBP/USD were also lifted up from $1.51 and $1.40 to $1.60 and $1.55. In addition, the specialists raised their 1- and 3-month estimates of future AUD/USD rate from 0.95 and 0.90 to 1.04 and 0.97 and of NZD/USD from 0.76 and 0.72 to 0.80 and 0.74 respectively. As the reason for the revisions the analysts cited the improvement of the market’s sentiment after the European authorities took actions to safe Greece from default.

RBA lowered the benchmark interest rate The Reserve bank of Australia lowered its benchmark interest rate from 4.75% to 4.50%. The majority of the economists now agree that the RBA is unlikely to start the easing cycle. Analysts at HSBC claim that as long as Aussie remains strong, the central bank will be less concerned about inflation that will prevent it from decreasing the borrowing costs. In addition RBA’s statement doesn’t contain hints at further rate cuts. According to the specialists, RBA’s approach has switched to neutral. Strategists at ANZ aren’t sure about the central bank’s neutral position but say that they don’t expect another easing move in December naming February as the potential time when the next cut arrives. Analysts at St. George Bank look forward to only one more rate reduction in March. Australian dollar fell versus its US counterpart from today’s maximum at $1.0566 to the levels below $1.0450.

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Commerzbank: technical comments on USD/CHF The greenback went down from the multi-week maximum versus Swiss franc at 0.9315 reached on October 6 to find support in the 0.8927/18 area (September 12 maximum, September 29 minimum). Technical analysts at Commerzbank believe that dollar’s decline will likely to limited by the 1-month uptrend support line and USD/CHF may return up to 0.9150. If the bears manage to breach the mentioned support, the pair will be poised down to 0.8783/0.8778 (the 3-month support line and the 200-day moving average). Wells Fargo: forecast for USD/CHF Analysts at Wells Fargo are bullish on the greenback versus Swiss franc in the coming months. The specialists underline that the Swiss National Bank has managed to weaken its national currency by keeping EUR/CHF above 1.2000. In addition, the bank expects US dollar to strengthen against euro that, in its turn, may give USD bulls more powers to push up the pair USD/CHF. According to Wells Fargo, USD/CHF will reach 0.9175 in 3 months, 0.9375 in 6 months, 0.9700 in 9 months and reach the parity in a year from now.

Wells Fargo: comments on AUD/USD Australia’s dollar finds itself under the impact of both positive and negative factors. On the one hand, the payrolls in Australia increased in September by 20,400 exceeding the median forecast by more than in 2 times. On the other hand, Chinese exports increased last month at the slowest pace in 7 months, while the trade surplus of Australia’s main trading partner declined from 17.8 billion yuan in August to 14.5 billion in September. Analysts at Wells Fargo see moderate strength for Aussie. In their view, the currency will be appreciating taking onto account accommodative policy of the Federal Reserve, but will underperform other commodity currencies as the rate hikes of the Reserve bank of Australia are unlikely, while rate cuts are possible. The pair AUD/USD rose from 1-year minimum in the 0.9390 area hit on October 4 to the levels above the parity. Resistance levels for Aussie are found at $1.0377 (200-day MA), $1.0398 (September 16 maximum), $1.0664 and $1.0767 (September maximums). Support levels are situated at $0.9866 and $0.9388 (October minimums).

Commerzbank: technical comments on EUR/USD Technical analysts at Commerzbank expect the single currency to stay today below resistance in the $1.3838/48 area (July minimum/50% Fibonacci retracement of the decline from the August maximum) trading versus US dollar. If EUR/USD managed to overcome the mentioned levels, it would be able to rise to $1.3936 (September 15 maximum) and $1.4013 (61.8% Fibonacci retracement) before another move down.

Minutes of FOMC September meeting Last month, the Federal Reserve decided to perform Operation Twist or, in other words, replace $400 billion of Treasuries in the central bank’s portfolio with longer-term debt to reduce borrowing costs. According to the minutes of the US Federal Open Market Committee’s last meeting that took place on September 20-21, the majority of FOMC members are in favor of unveiling more information about the Fed’s goals and how they influence the central bank’s decisions. In addition, many policymakers think that it’s necessary to establish specific levels of inflation and unemployment as conditions for keeping interest rates near zero. Some FOMC officials including Fed’s Chairman Ben Bernanke believe that asset purchases would be a more efficient tool than the Operation Twist and that QE should be retained as an option, while others warned that further expansion of the Fed’s balance sheet would more likely raise inflation and inflation expectations than stimulate economic activity. The Fed has also Fed bought $2.3 trillion in housing and government debt in two rounds of QE from December 2008 to June 2011. However, US economy still remains weak. The FOMC was also discussing the possibility of communicating its decisions through other way than the post-meeting statements. Analysts at Daiwa Capital Markets America believe that most FOMC members would like to save QE as the last measure in case the economy starts contracting and there is the risk of deflation.

BoA Merrill Lynch: forecast for euro The single currency has made a significant advance versus the greenback during the last several days. The pair EUR/USD climbed from the 8-month minimum at $1.3145 hit on October 4 to the levels in the $1.3800 area. Analysts at Bank of America Merrill Lynch explain euro’s gains by squaring of excessive short positions. In their view, the up move is a correction and the European currency won’t be able to grow on the sustainable basis. The specialists claim that EUR/USD may rise to $1.4000 in the next 1-2 weeks and then the bears will once again take the situation in their hands. So, investors are to look for the chance to resume selling the pair. The bank also points out that the dynamics of euro is strongly correlated with the oil prices: when the latter increases, oil exporters tend to convert their dollar earnings in euro to keep their assets balanced. As a result, it’s necessary to take into account that as long as China’s economy stays in a good shape and the demand for commodities is high, the single currency will be supported against its US counterpart.

Wells Fargo: comments on EUR/USD Technical analysts at Wells Fargo are neutral/positive on the single currency in the short-term. In their view, among the positive factors there are significant short positions on euro and favorable readings of the technical indicators, such as the momentum ones. In the longer perspective, however, EUR/USD remains within downtrend due to the euro zone’s economic growth slowdown and potential ECB’s easing. According to the bank, resistance for the pair is situated at $1.3936 (September 15 maximum), $1.4061 (200-day MA) and $1.4247. Support levels are found at $1.3566, $1.3145 (October minimum) and $1.2874 (January minimum).

Bank of Montreal: USD/CAD may fall to parity Canadian dollar strengthened versus the greenback making the biggest advance in 2 months as the markets seem to be optimistic on the plan of the European authorities to recapitalize banks. The pair USD/CAD declined from 1-year maximum at 1.0657 set on October 4 to the levels below 1.0200. Analysts at Bank of Montreal claim that loonie may reach parity versus its US counterpart.

Greece: budget deficit in figures During the period from January to September Greece’s central government budget deficit (without local authorities and social security spending) increased by 15% in comparison with the first 9 months of last year rising from 16.65 to 19.16 billion euro. Greece’s debt load is expected to reach 173% of GDP in 2012 as its economy will shrink for the fifths year in a row. Greece’s Cabinet approved a 2012 draft budget on Sunday which sees the next a deficit of 6.8% of GDP (versus the previous estimate of 6.5% of GDO) and 8.5% shortfall this year (versus earlier projection of 7.6% of GDP). There are significant chances that the second bailout for Greece agreed on July 21 will be renegotiated. Greece is missing its budget deficit targets and the bigger the budget gap requires more financing, so the amount of loan (109 billion euro) has to be increased.

BNY Mellon: euro's prospects have improved The single currency rose to the 3-week maximums versus its US counterpart in the $1.3820 area. The markets are waiting for the European Commission President Jose Barroso to make proposals about the recapitalization of the regional banks, on Greece and the participation of private sector in the bailout and the EFSF. Barroso is expected to announce its plan speaking to the European Parliament at 3 p.m., as Bloomberg cites the information from the unnamed official. There was also some positive data released in the euro area: industrial production unexpectedly rose in August adding 1.2% from July level and showing the biggest increase since November 2010. In addition, the inspectors of Troika indicated yesterday that Greece will get an 8 billion-euro ($11 billion) loan at the beginning of November. More details here http://www.fbs.com/analytics/news_markets/view/8908. Analysts at Bank of New York Mellon note that the level of uncertainty has subsided. Even despite the internal political tensions – Slovakia failed to ratify the EFSF extension (see http://www.fbs.com/analytics/news_markets/view/8911) – the prospects of euro area have improved in comparison with what was seen a week ago.

Deutsche Bank about yen as a refuge Currency strategists at Deutsche Bank note that Japanese currency has depreciated during the last few weeks. The pair USD/JPY kept trading sideways, but it seems that investors are no longer tempted to leave everything for yen assets: there have been foreign equity outflows, and foreign bond buying by the Japanese which weren’t of much help to yen so far. The more important thing is that the declining current account surplus and low interest rates bring the situation in Japan closer to what’s seen in other developed nations. The bank points out that the number of short positions on yen has increased. In their view, that presents an opportunity to resume buying yen and selling US dollar

Senate rejected Obama’s job plan More news from the policymakers: US Senate blocked Barack Obama’s $447-billion plan aimed to promote jobs creation. 2 Democrats joined the Republican minority criticizing stimulus measures for being costly and inefficient and voted against the bill. The legislation includes the reduction of the payroll taxes for workers and employers and provides new funding for roads, bridges and other infrastructure. Parts of the plan may still be pushed through if Obama finds enough support for specific provisions. US political parties can’t agree on the measures that could have to decrease the unemployment that stays at 9.1%. Republicans are in favor of permanent tax cuts and deregulation, while the President and congressional Democrats propose more federal spending and short-term tax reductions. The inability of American lawmakers to reach agreement on the key economic and financial issues increased the uncertainty on the global financial markets making investors worry about the recovery prospects of the world’s biggest economy.