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Societe General: comments on EUR/USD Technical analysts at Societe General claim that despite the negative event background the single currency keeps gaining versus the greenback. In their view, the pair EUR/USD may rise to $1.3795 and even to $1.3850. The outlook for euro is positive as long as it’s trading above support at $1.3435.

Slovakia didn’t ratify the EFSF Slovakia didn’t ratify the EFSF bill yesterday. The ruling coalition didn’t manage to gather enough votes from the Slovak parliament in favor of the measure: there were only 55 votes in favor, while the necessary majority is 76. The other 16 member nations have already approved the bill, while the EFSF expansion has to be ratified unanimously. Prime Minister Iveta Radicova was trying to persuade the lawmakers that the whole euro area is now in danger, so it’s necessary to unify efforts. As Radikova associated the EFSF vote with the vote of confidence to the government, the coalition collapsed. Still the Prime Minister who is leaving her post proposed a compromise that may allow the parties to reach agreement at the second vote that will take place in a few days. Richard Sulik, leader of the dissident Freedom and Solidarity party, said that it would be better to allow Greece default rather than waste enormous amounts of money for loans that may never pay back. Sulik said that Slovakia’s participation in the bailout deal isn’t in proportion with its small economy and showed his intention to fight for changing that. Never the less, some experts say that as the debt crisis is continuously deepening the plan might not offer enough support for indebted nations, especially taking into account the fact that the fate of such big economies as Spain and Italy may soon come at stake.

Troika authorized sixth bailout tranche for Greece The so-called Troika – the European Union, the International Monetary Fund and the European Central Bank – sanctioned providing Greece with the sixth tranche of the bailout package at the beginning of November. Now it depends on the approval of the Eurogroup and the IMF. According to Troika’s statement, the indebted nation keeps making progress in such areas as fiscal consolidation, privatization, the banking system and structural reforms. Never the less, Greek economic outlook is considered to be pessimistic: the recession will be deeper than it was seen in June and Greek economy will start recovering only in 2013. Greece won’t be able to meet its deficit target this year, partly because its GDP keeps contracting. Inspectors claim that the nation will probably have to conduct additional measures.

Mizuho: pound’s under pressure due to the weak data UK economic data surprised to the downside: manufacturing contracted in August for the third month in a row declining by 0.3% versus the expected contraction of 0.1% confirming that Britain’s economic recovery’s under threat. In the second quarter the nation’s GDP expended only by 0.1% (q/q). Last week the Bank of England raised the ceiling for bond purchases from 200 to 275 billion pounds billion pounds. According to the British Chambers of Commerce, additional monetary easing may not be enough to prevent recession, so there’s the need for more radical measures. The pair GBP/USD dropped from 1-week minimum at $1.5688 to the levels in the $1.5630 area. If pound closes below 1.5500, it will slide to the key support at $1.5330. Analysts at Mizuho Corporate Bank believe that by the end of 2011 sterling will fall below $1.50 versus the greenback and lower than 0.85 per euro.

Trichet warns of systemic crisis European Central Bank President Jean-Claude Trichet claimed that the euro zone financial crisis has become systemic and called for decisive political action. «The high interconnectedness in the EU financial system has led to a rapidly rising risk of significant contagion. It threatens financial stability in the EU as a whole and adversely impacts the real economy in Europe and beyond,» claimed Trichet cited by Reuters.

Analysts about EUR/USD future Many leading currency experts believe that the Federal Reserve will launch the third round of quantitative easing in order to encourage the national economy and that the greenback will stop strengthening. Analysts at JPMorgan Chase reduced their average forecasts for the greenback in the fourth quarter from $1.3387 to $1.34 per euro and from 77.06 to 76.6 yen. In their view, the Fed may begin discussing QE3 by the end of 2011 and begin asset purchases at the beginning of the next year. The specialists expect EUR/USD to end the year at $1.38 and the USD/JPY – at 75 yen. Strategists at Westpac think that the bears won’t be able to push EUR/USD below $1.30. In their view, the pair will trade at $1.31 at the year-end. All in all forecasters surveyed by Bloomberg project euro to appreciate to $1.40 by the end of 2012. Never the less, there still are those who prefer US currency. Economists at Credit Agricole think that the risk of recession is exaggerated. In their view, in the medium term the greenback would benefit from the fact that US economy is in the better condition than the other major economies. According to the bank, EUR/USD will end the year at $1.33 and then drop to $1.26 by the end of 2012. Analysts at Wells Fargo say dollar will end the year at $1.32 per euro pointing out that they are more optimistic on dollar’s future than on euro’s prospects.

EUR/USD: fundamental factors The single currency approached the 3-week maximum versus the greenback as it’s testing the levels in the $1.3700 area. It happened as the risk sentiment improved after Chinese state-run fund announced that it had started buying the shares of the nation’s biggest banks (Industrial & Commercial Bank of China (1398), China Construction Bank, Agricultural Bank of China and Bank of China). The fund intends to continue such practices without unveiling any details about the amount of investments. Analysts at Nomura note that Chinese government regards the equities of the domestic banks as cheap and its demand will encourage the entire Asian stock market. The specialists claim that the market in the risk-on mode, so one should stay away from the refuges such as US dollar and Japanese yen and move to the higher-yielding ones. The MSCI Asia Pacific index of shares added 2.1%. Yesterday the leaders of Germany and France pledged to come up with a plan to recapitalize the region’s banks by the G20 Meeting on November 3. At the same time, strategists at RBS doubt that European authorities manage to resolve all key issues by the end of the month. The negative factor is that Slovakia’s coalition hasn’t managed yet to come to agreement on the nation’s participation in EFSF. Slovakia is the only member of the currency union that hasn’t ratified the measure (Malta did so yesterday). Today the nation’s lawmakers vote again. Analysts at National Australia Bank warn that euro may slump in case Slovakia’s parliament votes against ratification.

RBS: Aussie may return to the parity versus the greenback Currency strategists at RBS note that though commodity currencies have been weakening so far (Australian, New Zealand’s and Canadian dollars all lost 8-10% in the third quarter) the situation is likely to change. The specialists who have developed “economic surprise index” believe that the markets’ sentiment in the fourth quarter is going to improve as the flood of the negative news will abate, even though the Europe will keep facing serious debt issues. In their view, the worst for AUD, NZD and CAD might be over, though they don’t completely rule out the risk that these currencies retest their Q3 minimums. Aussie seems to be especially attractive as Australia has the biggest interest rates that lure investors with yield and if the Reserve Bank of Australia doesn’t cut the borrowing costs, the nation’s currency would get additional driver. According to RBS, the pair AUD/USD will return to the parity versus the greenback by the end of 2011. As for the single currency, the strategists see further depreciation, but don’t expect the currency union to collapse.

Reuters’ poll: GBP/JPY prospects British pound declined versus Japanese yen from 2011 maximums in the 140.00 area to the levels below 117.00. The survey conducted by Reuters among more than 60 banks and currency analysts shows that the specialists expect GBP/JPY to bottom out at the current levels and then start rising. According to their median estimate, the pair will be gradually moving up during the next 12 months to trade 118.60 in a month and then reach 123.20 in 6 months and 128.6 in September 2012.

The market’s looking forward to NFP release The main piece of data for today is the US September Non-Farm Payrolls figure released at 12:30 GMT. Economists surveyed by Bloomberg News believe that the number of jobs increased last month by 55,000. The unemployment rate is expected to stay at 9.1% for the third month in a row. In August the number of employed remained unchanged versus the forecast of 68,000 increase. The current situation of uncertainly about the global economic prospects and the concerns about European and US debt ruins American consumer and business confidence that, in its turn, affects spending and hiring. Analysts at Goldman Sachs estimate the chance of recession in the United States during the next year by 40%. Specialists at TD Securities say that for the jobless rate to decline by 1 percentage point over a year payrolls should rise by 200,000 a month. During the 18-month recession that ended in June 2009 the nation’s economy lost 8.75 million jobs – only 1.9 million of them was recovered through August. US President Barack Obama proposed a $447-billion plan in September aimed to maintain growth and pushing down the unemployment rate next year. As the market thinks that the number of jobs added last month in the US won’t be enough to curb unemployment, the mood is far from optimistic that supports demand for the greenback as the safe haven.

ECB announced the measures to support euro area banks The European Central Bank announced new liquidity measures yesterday – 12- and 13-month loans in October and December, giving banks access to unlimited cash through January 2013, and the resumption of 40-billion euro covered bonds purchases aimed to encourage lending. Strategists at UBS say that the measures should bolster the prospects of renewed net inflows to the euro zone. The specialists also point out that the ECB President Jean-Claude Trichet didn't hint at a rate cut, so both the single currency and stocks will get support. In addition, the European Commission is pushing for a coordinated capital injection into banks, while German chancellor Angela Merkel claimed that Germany would not hesitate to recapitalize banks. On Sunday, October 9, Merkel is meeting French President Nicolas Sarkozy. The process of EFSF bill ratification is continuing: there are only 2 member nations left – Slovakia and Malta – who still haven't made the decision. The pair EUR/USD rose from the 8-month minimum at $1.3145 hit on October 4 to the levels above $1.3400. Analysts at Brown Brothers Harriman believe that euro will be able to climb to $1.36/1.37, but then the demand for it weakens again and it will start falling again to end 2011 at $1.29.

Commerzbank: franc’s strengthening versus the greenback Swiss franc is declining versus its American counterpart on the talk that the Swiss National Bank may conduct more measures aimed at depreciation of the national currency. The SNB reported that its currency reserves rose from 253.4 billion francs in August to 282.4 billion francs ($306 billion) at the end of September. Last month the central bank pegged franc to euro and pledged to buy unlimited amounts of foreign currencies in order to keep the pair EUR/CHF above $1.20. Many investors now think that the SNB may raise this threshold, notes Commerzbank. It’s necessary to note that the interventions increase the money supply strengthening inflation pressure. Switzerland’s consumer prices added 0.3% in September on the monthly basis after declining by 0.3% in August. The annual CPI growth was 0.5% versus the forecast of 0.3% and 0.2% advance in August. The pair USD/CHF rose from the record minimum at 0.7064 hit on August 9 to the levels above 0.9200. Resistance for the pair is situated at 0.9370 (March 2010 maximum) and 0.9400 (50% retracement of the decline from 2010 to 2011). Support levels are found at 0.9220 (daily minimum), 0.9185 (September 22 minimum) and 0.9145 (October 4 minimum).

The BoE increased asset purchases. Analysts’ comments The Bank of England has surprisingly increased the amount of asset purchases by 75 billion to 275 billion pounds. The analysts burst out with comments on this point. BNP Paribas: there will be more QE in the coming months. Deutsche Bank: pound will drop to $1.50 and will stay under pressure until the Federal Reserve hints at QE3. Commerzbank: the size of QE2 shows that the BoE is really concerned with the nation’s economic situation. The specialists say that sterling’ slump won’t be as big as it was when the first round was introduced. The bank doesn’t see any inflationary risks. Commerzbank recommends being short on GBP/USD and expecting EUR/GBP to strengthen to 0.88. Morgan Stanley: bearish outlook for British currency as the market was expecting QE2 not earlier than in November. GBP/USD is on its way down to $1.5175/1.5125. Capital Economics: the threat of recession in Britain is bigger than the one of inflation. The analysts doubt that the measure will manage to improve economic outlook. Danske Bank: the increase in the amount of purchases it bigger that the bank projected. The pair EUR/GBP is on its way up to 0.8750.

Sakakibara: yen will strengthen versus euro and US dollar The market thinks that Japan could intervene to boost EUR/JPY and support national exporters with Europe’s consent if it pledged to lend the amounts of euro bought in the process of intervention to the European Financial Stability Facility through buying EFSF bonds. Eisuke Sakakibara, the former Japanese vice finance minister known as “Mr. Yen” for his ability to influence yen’s rate through both verbal and actual market interventions, believes that the United States and the euro area want to have weaker currencies in order to stimulate their economies. Sakakibara says that Japanese economy undermined by the devastating earthquake in March is recovering while the American and European ones are under threat of recession. As a result, in his opinion, European authorities would criticize any Japanese currency-market intervention meant to encourage euro. Sakakibara points out that yen’s appreciation versus the single currency is based on the economic fundamentals, so any unilateral steps of Japanese monetary authorities will be useless as they change the situation only for a very short period of time. According to the economist, the pair EUR/JPY that hit on Tuesday 10-year minimum at 100.74 yen will move down to the levels between 90 and 100 yen. As for the pair USD/JPY, Sakakibara expects it to drop below 75 yen and then below 70 yen in the coming weeks.

Reuters poll: expectations on USD/JPY The poll conducted by Reuters among more than 60 banks and currency analysts showed that the specialists expect the pair USD/JPY to stay in the 77.00 area during the next 3 months, then rise to 78.00 yen in 6 months and to 80.00 in September 2012.

BarCap: ECB will looosen its monetary policy Currency strategists at Barclays Capital believe that the European Central Bank will ease its monetary policy today through both conventional and unconventional steps. In their view, the ECB has several options, such as offering additional long-term refinancing operations, including 6 or 12 months' maturity, continuing of Italian and Spanish debt purchases, resume the covered bond purchase program, widening the interest rate corridor and reducing the benchmark interest rate. Barclays thinks that the central bank will employ all of the measures mentioned above. According to the specialists, the ECB will widen the interest rate corridor – the difference between deposit rate and refinancing rate – from 25 to 100 basis points and cut the borrowing costs from 1.50% to 1.25%.

HSBC cut growth forecasts for Asian economies Analysts at HSBC reduced its 2011 and 2012 economic forecasts for the most of the Asian economies – Hong Kong, Indonesia, South Korea, Malaysia, Singapore, Taiwan, Thailand and Vietnam. The specialists revised down their 2012 growth estimates for Japan and New Zealand. As the reasons for such revision the bank cited the potential decline in exports due to lower demand in indebted Europe and economically weak United States, as well as falling stocks and currencies. The predictions for China, India, Australia and the Philippines remained unchanged. Chinese GDP is seen adding 8.9% this year and 8.6% the next. According to HSBC, Chinese strength may help to ease pressure on other Asian economies. Specialists at Standard Chartered think that in case of another financial crisis Asian central banks will be able to save the region by monetary stimulus and get out of any deep recession. At the same time, the economists say that Asia along isn’t able to remove such threat of the whole world.

Commerzbank: comments on EUR/USD The single currency rebounded from Tuesday’s minimum at $1.3145 versus the greenback to the levels above $1.3300. Technical analysts at Commerzbank note, however, that as long as EUR/USD is trading below the short-term resistance line at $1.3486, the outlook for the pair will remain negative. The specialists claim that if euro breaches support in the $1.3145/1.3063 area it will fall to 2011 minimum at $1.2860. According to the bank, the technical indicators on the daily chart remain negative. At the same time, the strategists say that there may be some consolidation after the abrupt slump seen so far.

BMO: recommendations ahead of BoE and ECB meetings There are 2 important central bank meetings on Thursday: the one of the Bank of England (with the rate and the amount of asset purchase facility released at 3:00 pm GMT+4) and the one of the European Central Bank (with the rate and the rate released at 3:45 pm GMT+4 and press conference at 4:30 GMT+4). Analysts at BMO Capital Market note that there may be 4 possible combinations of the central banks’ decisions. Here they are: - BoE does nothing, ECB does nothing; - BoE increases quantitative easing, ECB does nothing; - BoE does nothing, ECB cuts rates; - BoE increases quantitative easing, ECB cuts rates. According to the specialists, the last scenario represents the best trading opportunity. In such case the market may firstly react to the reduction of the interest rate differentials in favor of the UK and the single currency will decline versus British pound. However, investors will likely soon realize that the ECB’s action is meant to improve the situation in the euro area. As a result, the European bank equities and euro will advance. So, BMO recommends buying EUR/GBP on the dips, at 0.8550 stopping below 0.8500 and targeting 0.8700.

Mizuho: forecasts for EUR/USD Analysts at Mizuho believe that the single currency will fall versus the greenback to $1.3100 in a month, then rebound to $1.3400 by the end of 2011 and reach maximum at $1.3600 in 6 months before resuming its decline. The specialists say that the pair EUR/USD will trade at $1.3000 in a year from now.

Roubini: euro zone needs 2 trillion euro Nouriel Roubini, professor of economics at New York University famous for predicting 2008 global crisis, says that the European bailout fund have to be increased to 2 trillion-euro ($2.7 trillion) before it’s too late. According to the specialist, this is the matter of not months, but weeks. Roubini underlines that the main risks come from Italy and Spain as these nations are “too big to fail but also too big to save” – these nations have already lost the market’s confidence. The economist says that the ECB has to ease its policy and cut rates depreciating euro. In his view, it’s also necessary to recapitalize European banks and set an orderly process to allow Greece quit the euro area. Fiscal stimulus at the core members of the currency union is also needed to avoid a recession for all European countries. Roubini notes that the chance that all these measures will be conducted in a coherent way is low as there are serious political tensions. The specialist warns that the consequences of the European debt crisis will likely be worse than those of the Lehman Brothers collapse.

Mizuho, Nomura: euro remains under pressure Analysts at Mizuho Securities note that there isn’t much progress in containing the sovereign crisis. In their view, the euro area risks falling into recession. The specialists believe that in these circumstances the single currency will stay under pressure. According to the bank, euro seems oversold and may recover a bit, but this upward correction will be short-lived. Currency strategists at Nomura Securities think that the single currency may fall to the lowest levels since the beginning of the debt crisis in the $1.1800 area. European finance ministers considered “technical revisions” to the second bailout package adopted in July during their 2-day meeting. The deal foresaw investors contributing 50 billion euro ($66 billion) to a 159 billion-euro rescue. That “private sector involvement” includes debt swaps and rollovers. According to Luxembourg Prime Minister Jean-Claude Juncker, the revisions may be necessary as the situation has changed since July. The decision about granting Greece the next tranche of financial aid was postponed to the middle of October. Greek Finance Minister Evangelos Venizelos said that the nation will be able to repay its debts until the middle of November.

UBS: bullish forecast for USD/CAD The greenback rose versus its Canadian counterpart from July minimums in the 0.9400 zone to the levels above 1.0500. Currency strategists at UBS are bullish on USD/CAD as the Canadian trade flows worsen and the interest rate support is fading. In their view, the treat for CAD is in the growing reliance on foreign buying of debt denominated in loonie and rising domestic leverage levels. According to the bank, the pair will reach 1.1000 by the end of the year.

Goldman Sachs cut forecasts for euro Analysts at Goldman Sachs reduced their 2012 global economic growth forecast from 4.3% to 3.5%. Japan’s growth outlook for the fiscal year beginning in April 2012 was decreased from 2.5% to 2.1%, while the estimate of the nation’s GDP growth this fiscal year was lowered from 0.2% to 0.1%. According to Goldman, the United States will come close to recession at the beginning of 2012 – its economy will add in the first quarter only 0.5%. The nation’s economic forecast for the next year was cut from 2.0% to 1.4%. The specialists think that during the next several quarters the euro zone’s core nations such as Germany and France will go through mild recession beginning in the fourth quarter, while the peripheral nations of the currency union will suffer much more. European GDP will add in 2012 only 0.1%. The bank also revised down 3-month forecast for EUR/USD from $1.40 to $1.38 and for EUR/JPY from 108 to 106 yen.

UBS: ECB will cut rates on Thursday Currency strategists at UBS believe that the European Central Bank will reduce its benchmark rate by 50 basis points to 1.0% on October 6. According to the specialists, the downside risks for EUR/USD in the near-term come from the potential ECB easing rather than from the possibility of Greece’s default. The bank underlines that the rates markets have priced in 25-basis-point cut, but the forex markets haven’t. If the ECB loosens its policy, long-term investors – central banks and sovereign wealth funds – will sell the single currency. As a result, UBS thinks that EUR/USD will move down to $1.20/1.30.