Comments and forex-analytics from FBS Brokerage Company

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RBC on the policy of major central banks

 

ECB: the central bank surprisingly cut interest rates by 25 basis points in November. The analysts expect to see the same reduction in December.

 

Bank of England: the MPC will likely announce another 50 billion pounds of asset purchases at its meeting on Thursday, November 10. The minutes from October Meeting showed that all members of the Committee agreed that further monetary stimulus is necessary.

 

Bank of Canada: the next time the interest rates will be changed to the upside, but this won’t happen until the second half of 2012.

 

Reserve bank of Australia: there will be another 25-basis-point rate cut in the first quarter of 2011.

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Mizuho: US dollar may strengthen versus yen

 

Technical analysts at Mizuho Corporate Bank believe that the greenback may rise to the 4-month maximum versus Japanese yen.

 

The specialists point out that USD/JPY has managed to break above the top of the Ichimoku Cloud. In their view, after Japan’s intervention on October 31 dollar’s baseline has lifted up to 77.44 yen. If the greenback keeps closing above this level until the end of November, bullish pressure on US currency will increase.

 

According to the bank, the pair may rise above August 4 maximum at 80.23 yen.

 

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Commerzbank: negative outlook for EUR/USD

 

Technical analysts at Commerzbank note that the single currency declined yesterday versus the greenback testing levels below $1.3565, the level representing 61.8% Fibonacci retracement of its advance in October.

 

The specialists think that if EUR/USD remains trading below $1.3565, it will be poised down to $1.3380/60 (78.6% retracement and September minimum). After that, the next downside target will be $1.3145 (October 4 minimum).

 

According to the bank, resistance levels are situated at $1.3685/90 and $1.3870.

 

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SocGen: sell Aussie versus yen

 

Currency strategists at Societe Generale advise traders to stay out of EUR/USD as there is severe event risk and the pair’s dynamics is extremely volatile.

 

The specialists propose investors to trade on the consequences of the euro area’s debt crisis or, in other words, on the economic growth slowdown and worsening risk sentiment.

 

So, according to the bank, a good trading strategy is selling Australian dollar versus Japanese yen. The analysts advise to open shorts on AUD/JPY in the 79.50 area stopping above 81.50 aiming at 74.00 yen.

 

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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.

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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.

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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.

 

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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.

 

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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.

 

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Goldman Sachs lifted forecast for NZD

 

Analysts at Goldman Sachs increased forecasts for New Zealand’s dollar versus its US counterpart 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.

 

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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.

 

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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.

 

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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.

 

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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.

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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.

 

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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.

 

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Ichimoku. Weekly forecast. GBP/USD

 

Weekly GBP/USD

 

British currency, as expected, consolidated in the upper part of the Ichimoku Cloud. The lines Kijun-sen (1) and Tenkan-sen (2) act as support as well as the lower border of Kumo – Senkou Span B, while resistance is provided by Senkou Span A (3).

 

The Standard line (1) and the Turning line (2) are horizontal that means that sideways trend is likely to continue on the weekly chart. The bearish Cloud indicates that bears are stronger than bulls.

 

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Daily GBP/USD

 

Last week pound was trading around the Turning line (1) sometimes getting lower, sometimes rising above it. Now Tenkan-sen (1) together with Senkou Span B (3) supports British currency.

 

The Ichimoku Cloud, which has so far turned upwards, widened (4) – bulls have become more confident. The Standard line (2) turned sharply higher that gives the bulls hope for breakthrough in the longer-term.

 

One shouldn’t forget, however, about resistance in the $1.6100 area – at the line connecting September and November maximums. At the same time, if GBP/USD overcomes this zone, the pair will be likely poised for growth.

 

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Ichimoku. Weekly forecast. USD/JPY

 

Weekly USD/JPY

 

As it was expected, Japan’s currency intervention at the last day of October, failed to improve the situation at USD/JPY market: yen continues slowly but surely appreciating as investors crave the refuge.

 

The pair USD/JPY lost support of the Turning line (1) which is now providing resistance for the prices as well as the Standard line (2). Tenkan-sen (1) and Kijun-sen (2) are directed horizontally, holding the strong “bearish cross” (5), while the descending Ichimoku Cloud keeps US currency under negative pressure.

 

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Daily USD/JPY

 

On the daily chart the prices entered the bearish Ichimoku Cloud and reached during the past week its lower border – Senkou Span A – breaching on their way support of the Standard line (1). The Turning line (2) separated from the Standard line trying to get higher but soon it reversed and went sharply down.

 

The market is still in the state of uncertainty: Kijun-sen, which characterizes the longer-term trend, remains horizontal, while the thin Cloud (3) shows that neither bulls, nor bears control the situation.

 

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Ichimoku. Weekly forecast. USD/CHF

 

Weekly USD/CHF

 

As it was expected, the bulls are very persistent in trying to move higher and overcome resistance of Kumo.

 

USD/CHF once again approached the Ichimoku Cloud. The Turning line supporting the prices goes sharply up (2), Tenkan-sen (2) and Kijun-sen (1) hold though weak, but still “golden cross” (3).

 

In addition, the descending Kumo (4) has become extremely narrow – the bulls have all chances to make it change direction and reverse the trend upwards.

 

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Daily USD/CHF

 

On the daily chart everything also goes quite well for the bulls.

 

The prices managed to overcome the Standard line (blue line on the chart). Tenkan-sen and Kijun-sen formed the “golden cross” (1) – strong signal as the lines intersected above Kumo. In addition, the rising Ichimoku Cloud once again began widening (2, 3).

 

It would be worth paying attention to the lagging Chinkou Span: if it manages to break above the price chart while the prices remain above the Cloud, this will be a good signal to buy US dollar.

 

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Morgan Stanley, UBS: sell EUR/USD

 

The political situation in the euro area has stabilized a bit: Greece and Italy got new governments. Never the less, there are still severe doubts that these nations will be able to resolve the debt issues.

 

Analysts at Morgan Stanley are bearish on the single currency versus the greenback. In their view, the pair EUR/USD will drop to $1.30 by the end of the year.

 

Currency strategists at ING and UBS advise to sell euro on its attempts to rise to $1.40.

 

UBS expects US economy add 2.3% in 2012, while the euro zone’s one is seen growing only by 0.2%. As a result, the bank thinks that the Federal Reserve is unlikely to engage in QE3, while the ECB will keep cutting interest rates.

 

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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.

 

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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).

 

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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.

 

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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.

 

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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.

 

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