Comments and forex-analytics from FBS Brokerage Company

[fallenDC]

BBH: where to get trading hints from?

 

Analysts at Brown Brothers Harriman underline that one can no longer rely on the changes in risk appetite while trying to forecast currency moves. For instance, USD/JPY had a 0.42 correlation with the S&P 500 in January, while now this index switched to -0.11. The greenback used to fall on rising stocks, but so far it has been rising with equities and Treasury yields.

 

As a result, the analysis of market’s sentiment has lost its relevance for trading. The specialists say that they are “shifting toward the more fundamental outlook for growth.”

 

So, BBH recommends forex traders to watch:

- Bond markets (the steepness of Treasury yield curve). The specialists claim that a “sharp rise in the 10-year yield is indicative of improvement in the U.S. economy and perhaps the outlook for Fed policy” that means lower odds of more QE and stronger US dollar.

- 2-year yield spreads between U.S. and Germany and U.S. and Japan for hints about the dynamics of EUR/USD and USD/JPY.

[fallenDC]

Crude Oil prices: outlook

 

On Thursday crude prices dipped after a report that Barack Obama sounded commitment to release oil from the Strategic Petroleum Reserve, the nation's emergency oil stockpile. U.S. reminded traders that governments stand ready to cope with any supply disruptions. The White House later denied the information and said no deal was in place for a release from the reserve.

 

Straight after the data WTI for April delivery decreased to $105.11 a barrel on the Nymex; in the meanwhile Brent crude dropped to $123.55 a barrel on the ICE.

 

Before the report oil prices had been demonstrating a consecutive upward trend since February. Light Sweet reached a six-month high ($109.5 a barrel) at the end of February. Brent crude peaked in mid-March ($126.7 a barrel).

 

However, a wide range of factors will be pushing crude prices up in the longer term. Firstly, tensions in the Middle East increased due to the fears of an escalation of the Iranian nuclear issue. As OPEC's second largest exporter of crude oil, Iran controls the Strait of Hormuz, the world's most important sea transport line of crude oil. Israeli-American military invasion could cause a shutdown of transportation links.

 

Secondly, the rise of the euro due to progress made in resolving Greece's debt crisis coupled with the falling dollar promoted investment in crude oil futures, thus lifting prices.

 

Moreover, oil prices were boosted by positive economic figures from the U.S.

 

Nomura: Oil may have overtaken the euro zone as financial markets’ primary source of concern. Iran’s nuclear program is increasing chances of an Israeli military strike. However, an early Israeli election as well as the US presidential outcome could postpone the attack for another year.

 

UBS: The Arab awakening and non-Opec shortfalls in 2011 support the supply-side case, and coupled with threats in the Strait of Hormuz, we see continued strength in oil prices next year.

 

Bayerische Landesbank: Brent crude could rise to $127 a barrel; oil investment certainly looks like a good investment these days.

 

Goldman Sachs: Brent crude could rise as high as $127.50 in 2012 and $135 in 2013.

 

Vitol: It’s unlikely but possible that oil may rocket to $150 in 2012 due to growing geopolitical tensions in the Middle East.

 

Mirae Asset Management: A period of warmer weather in Europe would reduce demand and pull the prices below $120 if Iran doesn't flare up.

[fallenDC]

J.P. Morgan: trading recommendations

 

Strategists at J.P. Morgan Asset Management claim that the drive to lower interest rates will bring the currencies down. It is therefore beneficial to trade on this tendency.

 

According to analysts, USD/JPY is going to hit 86 yen in the coming months. Japan’s current account surplus disappeared, and the Japanese investors recommenced putting up money overseas.

 

Canadian economy will strengthen along with improving situation in U.S., so J.P. Morgan specialists recommend going long on the loonie against the yen. Their advice is to enter the trade at 84.00, setting a stop at 82.00 and a target at 88.00.

[fallenDC]

March 19-23: main events of the week

 

US dollar has significantly strengthened during the last week on the FOMC meeting which gave no hints of QE3, though by the end it has given up some of the rally. American economy kept showing positive figures, but will this trend continue?

 

The European and the IMF policymakers have finally approved second bailout for Greece and the tensions in the region eased, though the market’s attention started shifting to another problem nations such as Spain and Portugal.

 

The Bank of Japan disappointed many investors by not increasing monetary stimulus. Despite some correction, yen’s still trading within the downtrend versus the greenback. Many experts think that it will have to do more easing in the coming months. Barclays and J.P. Morgan increased forecasts for USD/JPY by the end of the year.

 

The Swiss National Bank left EUR/CHF floor unchanged at 1.20 and increased Switzerland’s 2012 economic forecast from 0.5% to 1%. Franc rose on the news.

 

This week one has to pay attention to the following data releases:

 

Tuesday, March 20

 

- RBA March Monetary Policy Meeting Minutes (0:30 GMT).

- UK Inflation (9:30 GMT): British CPI growth pace declined from 4.2% in December to 3.6% in January (y/y). Inflation is decreasing in line with predictions, though is still above the Bank of England’s 2.0% target. Now the analysts expect a further drop to 3.4%.

- US Building Permits (12:30 GMT): there’s a growth trend in US housing sector. The number of building consents may have increased to 0.69 million in February.

 

Wednesday, March 21

 

- MPC Macrh Meeting Minutes (9:30 GMT).

- US Existing Home Sales (14:00 GMT): in January the index rose by 4.3% to a 4.570 million annual rate. Last month the existing home sales may have climbed to 4.61 million.

- New Zealand’s Q4 GDP (21:45 GMT): the nation’s economy has been rising since 2009. The analysts expect 0.6% advance after 0.8% growth in the previous quarter.

 

Thursday, March 22

 

- US Unemployment Claims (12:30 GMT): last week the index dropped to the 4-year minimum of 351,000 claims. Now a small rise to 355,000 is expected.

 

Friday, March 23

 

- Canadian inflation data (11:00 GMT): Canada’s CPI growth pace unexpectedly rose in the first month of the year (by 0.4%, probably due to high energy prices) after 0.6% decline in December. In February consumer priced may have increased by 0.5%.

- US New Home Sales (14:00 GMT): another piece of US housing market data. The number is seen rising to 326,000.

 

Also note that the Fed’s Chairman Ben Bernanke is speaking on Tuesday evening, while the ECB President Mario Draghi’s speech is scheduled on Thursday.

[fallenDC]

Commerzbank: USD/JPY technical analysis

 

Technical analysts at Commerzbank note that the greenback keeps consolidating/correcting within uptrend versus Japanese yen.

 

The specialists think that USD/JPY may decline to 82.23 (May 2011 maximum) from the current levels slightly above 83 yen.

 

According to the bank, support for the pair lies at the base of Ichimoku Cloud on the h4 chart, which lies in the 81.98/61 area. If the support holds, US currency may rebound to 85.53 and 86.80 yen.

[fallenDC]

BCA: positive outlook for euro and riskier assets

 

BCA Research, leading provider of global investment research, recommends maintaining a “pro-cyclical currency” (currency that has a strong positive correlation with economic growth: AUD, CAD, NZD) strategy despite the recent unpopularity of such currencies.

 

The specialists underline that risky currencies made a significant advance at the beginning of the year, but then retreated since the end of February. One of the causes for such a pullback was the outcome of the Greek debt swap. However, these currencies were overbought and due for correction.

 

BCA has modeled EUR/USD against the behavior of other key currencies from 1999 to 2009 (before the beginning of the euro zone debt crisis). The analysis showed that the currency pair stands more than 20% below the model’s estimated value. Stated differently, the market has priced in a lot of bad news and the dip in risky currencies is just a healthy technical correction.

 

As can be seen from the above, BCA is convinced that in the future the commodity and riskier currencies will become much stronger and less vulnerable to the euro zone’s debt crisis.

[fallenDC]

Ichimoku. Weekly forecast. GBP/USD

 

Weekly GBP/USD

 

British pound tested levels below the Standard line (1) on the weekly chart, but managed to return last week above it paring the decline it made the week earlier.

 

The lines Tenkan-sen and Kijun-sen, as expected, formed the “golden cross” (3), though the signal isn’t very strong as it happened below the Cloud. ***o itself began narrowing (4) as Senkou Span A turned upwards.

 

With both the Standard (1) and the Turning (2) lines as support the only resistance ahead for the pair GBP/USD is the Cloud which is thin in the place where the prices are projected to approach it (5). All in all, the chances of the bulls have improved. We may see the beginning of a move up or a broad sideways trading.

 

 

Daily GBP/USD

 

On the daily chart pound keeps moving sideways – the bullish ***o continues narrowing.

 

The pair didn’t fall to the lower border of the Cloud, as we feared, managing so hold around Senkou Span A and finally make a significant breakthrough on Friday overcoming both Tenkan-sen (2) and Kijun-sen (1), which formed the weak “dead cross”.

 

If sterling manages to stay today above the Standard line, it will be able to get higher, though any advance will be constrained by late February/early March maximums. However, resistance in the $1.5860/5900 band seems high, so the slide back to Senkou Span A also seems quite possible.

[fallenDC]

UBS: Treasury yields will increase

 

Analysts at UBS believe that that government bond yields will start trading within the long-term uptrend.

 

The specialists give the following reasons for such shift:

 

- the Fed won’t undertake another round of QE;

- US economy shifts to a sustainable recovery;

- private sector credit in the US expands;

- China and other major emerging economies rebound after dipping in the first half of the year;

- euro zone’s recession doesn't shock the global economy.

 

The bank revised up 10-year Treasury yields forecasts from 2.4% to 2.7% by the end of 2012 and from 3.0% to 3.3% by the end of 2013.

 

According to UBS, higher US yields will push up USD/JPY and USD/CHF. As the ECB and the BoE conduct more loose monetary policy than the Fed, the greenback will be also supported versus euro and pound.

 

The analysts claim that commodity currencies “will be less affected”. Canadian dollar will benefit from US economic growth. Australian dollar, on the other hand, may be vulnerable because of China’s economic slowdown.

[fallenDC]

Euro zone’s leaders may combine EFSF and ESM

 

European officials consider combining two bailout funds to increase the region’s financial firewall from 500 to nearly 700 bln euros, said German Chancellor Angela Merkel on March 16.

 

Finance ministers and CB governors will discuss the capacity augmentation of the permanent (European Financial Stability Facility, EFSF) and temporary (European Stability Mechanism, ESM) funds on a March 30-31 meeting in Copenhagen.

 

By the existing rules the joint lending volumes of the 500 bln-euro EFSF and the 400 bln-euro ESM cannot exceed 500 bln euros. However, investors insist on the expansion of the fund in order to make sure that the region has enough facilities to cope with the debt crisis, but Germany opposes such outcome.

 

According to one of the euro zone’s officials, the policymakers discuss several variants, one of which is to consider that Greek bailout (192 bln euros) was financed by EFSF, while the ESM will start with new 500 bln. In this case the overall crisis fund will rise to 692 bln euros. The final decision on the issue, however, isn’t made yet.

[fallenDC]

Investors may sell yen on its advance

 

Japanese yen rose versus euro, the greenback and growth-linked currencies. Never the less, the majority of experts see yen’s recovery as a chance to open new shorts on yen.

 

Analysts at CIBC World Markets claim that the market has gone too short on yen, so now we are seeing a correction in USD/JPY and EUR/JPY. The specialists expect the greenback to rise to 85-85.50 yen and think that euro will consolidate after reaching 5-month maximum above 110 yen. Strategists at Credit Suisse think that US dollar’s ability to resume rebound against Japanese currency will depend on further actions of the Bank of Japan.

 

The BOJ may continue monetary stimulus after it surprised the markets with unexpected easing last month, but didn’t expand its asset purchase program in March. Investors will likely keep using yen as a funding currency in carry trades (borrowing in low-yielding yen in order to buy higher-yielding assets). US dollar has become less attractive for this purpose because of rising Treasury yields.

 

However, Japanese companies tend to buy yen in March ahead of the end of the nation’s fiscal year on March 31 – this may encourage demand for yen.

 

One should also watch New York Fed President William Dudley’s comments later today as he’s known as a dove and may emphasize that the chance of further stimulus could not be ruled out unless the U.S. unemployment rate declines more.

[fallenDC]

CFTC: yen net shorts at maximum since 2007

 

According to Commodity Futures Trading Commission, net shorts positions on Japanese yen reached the maximal level since May 2007 of 42,380 contracts. Sterling short positions also rose to the highest level since the beginning of December of 41,848 contracts. The value of net long position on US dollar declined from $19.27 billion (March 6) to $19.0 billion (March 13).

 

JAPANESE YEN (Contracts of 12,500,000 yen)

6,393,314,023.65

3/13/12 week 3/06/12 week

Long 22,249 33,281

Short 64,629 52,639

Net -42,380 -19,358

 

EURO (Contracts of 125,000 euros) 16,243,919,400.00

3/13/12 week 3/06/12 week

Long 40,325 39,943

Short 139,661 156,416

Net -99,336 -116,473

 

POUND STERLING (Contracts of 62,500 pounds sterling)

4,108,165,850.00

3/13/12 week 3/06/12 week

Long 21,924 22,308

Short 63,772 59,407

Net -41,848 -37,099

 

SWISS FRANC (Contracts of 125,000 Swiss francs)

2,003,845,737.19

3/13/12 week 3/06/12 week

Long 9,351 8,114

Short 24,149 27,592

Net -14,798 -19,478

 

Data from CFTC, Reuters

 

It’s necessary to note that the figures cited above are always a week old at the time of their release. Never the less, CFTC data gives a good oversight into how the market is positioned and if/how these positions are being unwound.

[fallenDC]

BMO Capital: trading GBP/USD

 

Currency strategists at BMO Capital are bearish on British pound versus the greenback.

 

The specialists think that MPC March meeting minutes which are released tomorrow will show weak economic growth. In addition, BMO cites the recent Financial Times article proposing to conduct long-term refinancing operation in the UK. At the same time, US Federal Reserve may allow itself to refrain from easing taking into account its improved economic prospects.

 

BMO wants to “take advantage of the selloff in the dollar to sell the British pound on a rally”. The analysts think one should wait for a lift in the pound noting that “the market got itself way too long U.S. dollar and everybody pulled back at the end of the week.”

 

According to the bank, it’s necessary to sell GBP/USD at $1.5925 targeting $1.5650 and stopping at $1.6025.

[fallenDC]

NZD/JPY: Elliott Wave forecast

 

According to Forecast Pte, NZD/JPY may reach 69.63, its highest level in almost 2 1/2 years. Specialists believe the kiwi is rising in line with the Elliott Wave Theory and now is on its 5th wave.

 

The Elliott Wave Principle, proposed by accountant Ralph Elliott in the 1930’s, is a form of technical analysis based on the theory that investor psychology moves between optimism and pessimism in natural sequences. It seeks to predict prices by dividing trends into 8 waves.

 

First wave: Nov. 24 - Dec. 2 (rally from 57.03 to 61.12);

Second wave: Dec. 3-15 (decline from 61.12 to 58.26);

Third wave: Dec. 15 - Feb. 27 (rebound from 58.26 to 68.35);

Fourth wave: Feb. 28 - March 6 (drop from 68.35 to 65.31);

Fifth wave: began on March 7 (increase from 65.31).

 

Analysts at Forecast Pte are convinced there is a strong resistance line at 69.63. NZD has already approached this level in Oct. 2009 and in May 2010.

 

Today New Zealand’s dollar is trading in the 68.67 area. Yesterday it rose to 69.14, the highest since May 2010.

[fallenDC]

BBH: bullish on AUD/USD

 

In the middle of the last week the Australian dollar held support near $1.0420, but then closed the week rebounding to the $1.0600 level.

 

BBH analysts remain bullish on the Aussie because the possible rate lowering from the RBA in May is already priced in.

 

Specialists believe the Aussie to pass the $1.0640 resistance line, which corresponds to the 20-day moving average, and to test the $1.07 area before the end of the week. In a longer outlook AUD/USD may reach the $1.08-$1.0850 level.

[fallenDC]

RBC, Commerzbank: resistance for EUR/JPY

 

Technical analysts at RBC Capital Markets note that “bullish engulfing” pattern seen at EUR/JPY daily chart (February 15, 16) made the pair break through the key resistance at 107.45 yen.

 

The specialists underline that euro finds itself inside a “declining wedge” seen on the monthly chart. If the single currency closes March above 107.45 yen, it will be able to test resistance levels at 111.67, 114.05 and 120.95 yen. The bank expects bulls to become more active at 107.45 and 102.20 opening new longs on the dips.

 

Analysts at Commerzbank also think that EUR/JPY may strengthen to 113.29 yen if it overcomes resistance at 111.57.

[fallenDC]

RBC: spring NFP figures may bring negative surprises

 

Analysts at RBC claim that while US economic fundamentals (particularly, the labor market ones) have likely improved so far, some of the recent favorable indicators’ glow may be attributed to the better weather – the winter of 2011-2012 in the US was the forth warmest since 1920.

 

The specialists conducted an interesting research: they analyzed Non-Farm Payrolls data for the last 15 years and came to conclusion that data surprises tend to be positive during warm winters and the actual figures are much higher than on average (this winter NFP beat expectations 3 times increasing by 250K per month on average). Such trend may be explained by rising construction activity and retain spending during mild winters.

 

Spring payroll surprises, on the other hand, tend to be negative and also higher than average. This happens because market’s participants revise up their expectations after winter’s positive figures, so that the next time it’s much more difficult for the actual data to surpass the elevated estimates.

 

What are the implications for trading? According to RBC, after such warm winter of 2011-2012, spring data release may surprise the markets to the downside. How will US dollar react to such data releases?

 

The negative correlation of the greenback and risk sentiment has seemed to wear down (earlier better US data caused American currency decline as risk appetite improved and investors were reducing dollar positions because the greenback was perceived as a safe haven) and for now dollar is acting as a growth-linked currency. So, if RBC’s projections get confirmed, US currency will likely find itself under bearish pressure.

[fallenDC]

JPMorgan Chase: the risk of hard landing in China

 

While many economists worry about China’s economic slowdown, analysts at JPMorgan Chase think that the nation has already started to experience “hard landing”: “Car sales are down, cement production is down, steel production is down, and construction stocks are down. It’s not a debate anymore, it’s a fact.”

 

Earlier in March China’s Premier Wen Jiabao announced that China’s 2012 economic growth target is set at 7.5%, while during the previous 7 years it was always at 8%. China’s factory output in the first two months of the year rose the least since 2009, retail sales increased less than expected and inflation eased to the slowest pace in 20 months, while foreign direct investment in China declined in February.

 

JPMorgan Chase warns investors about the situation at China’s property market. As Wen claimed that home prices are still “far from a reasonable level,” there are concerns that Chinese government will maintain restrictions on the property market for an extended period that will have negative effect on economic growth.

 

“What you can look forward to is to see a pickup in property demand that will clear up the inventory; that doesn’t appear likely. We don’t see any evidence of a policy move that will cause the economy to reaccelerate,” say the specialists.

 

Gary Shilling (A. Gary Shilling & Co.) also thinks that China’s heading towards hard landing and defines this term as a growth rate below 6%.

[fallenDC]

UK economy: there’s some improvement

 

On Wednesday, March 2, Chancellor of the Exchequer George Osborne is expected to present an annual budget and to report there is no threat of recession hanging over Great Britain.

 

Dow Jones analysts believe that Osborne may make some amendments to tax legislation, but basically leave the budget neutral.

 

Specialists say the budget deficit has improved. Public-sector net borrowing will be about 125 billion pounds ($200 billion) in current fiscal year that ends this month rather than the 127 billion pounds forecast by the OBR in November, according to a survey of 27 analysts compiled by the Treasury last month.

 

Morgan Stanley: The deficit is likely to improve next fiscal year to about 120 billion pounds.

 

According to analysts, the U.K. economy definitely returned to growth in the first quarter after a 0.2 percent contraction in the last three months of 2011. Manufacturing and services continued to expand in February (PMI is above 50), while consumer confidence index is forecasted to grow (held at the highest since June).

 

Office for Budget Responsibility is likely to reflect weak improvement in the labor market with jobless claims seen reaching 1.75 million people this year. Data last week showed Claimant Count Change in February turned to be bigger than expected adding 7.2K versus forecasted 6.5K.

 

The data, released today, revealed a decline of CPI to 3.4% in February from 3.6% in January. Inflation, therefore, edged down in February to the lowest level in over a year keeping hopes that easing inflation will allow consumers to increase spending this year and to boost the economy. The main projection for CPI is to fall below the 2% target level by the end of the year.

 

RBS: The U.K. economy is looking marginally better: the euro area crisis has receded and the surveys seem to have got a bit better. Britain could easily get 0.3-0.4% in the first quarter despite some uncertainty around the construction data.

 

Overall in 2011 the UK economy grew just 0.9 percent. The next set of GDP figures for Britain due out in April.

[fallenDC]

Kiwi may stay unaffected by China in longer term

 

Concerns about China will send kiwi down? Some analysts don’t think so.

 

Commodity currencies, such as New Zealand’s and Australian dollars, dropped yesterday after BHP Billiton, the world’s largest miner, warned that iron ore demand from China was “flattening”. The producer expects demand growth to slide back into single-digit figures.

 

Despite the all the recent worries about the potential slowdown of Chinese economic growth – the second largest economy in the world is the biggest importer of commodities, mainly form Australian and New Zealand – some experts are bullish on NZD in the longer term. For example, analysts at financial adviser Macquarie Private Wealth believe that NZD/USD will keep appreciating during the next 3 years. Their main argument is that New Zealand and Australia will attract investors by safe political climate. They do have a point here as in the current condition political safety actually means much.

 

“If you look at the last 6 months... the New Zealand dollar has risen 8% against the US dollar. Even if the Reserve Bank Governor were to drop interest rates by a full percentage point, it would probably not change the track of our dollar,” claims Macquarie.

 

The specialists think that the interest gap between the New Zealand dollar and Australian dollar will close over time: “Our official cash rate is 2.5%, and we don't see any downside to that - the next move from New Zealand being up...the likely next moves in Australia is down”.

 

Economic data

 

New Zealand’s current account deficit narrowed from NZD4.75 billions in the third quarter of 2011 to NZD2.76B in the final 3 month of last year.

 

Watch the nation’s GDP release at 9:45 p.m. GMT. The consensus forecast is 0.6% growth in Q4 slightly down from 0.8% in the previous quarter. The expected slowdown is explained by the decline in manufacturing, compensated by strong farming output and better retail trade and construction.

[fallenDC]

RBS: how to trade USD/CHF

 

According to Royal Bank of Scotland, the U.S. dollar may strengthen to Swiss franc because of the U.S. economic improvement and the interest rates increase.

 

Strategists at RBS are bullish on American currency. They advise to wait for the lower entry levels and recommend buying the greenback when USD/CHF closes below the 200-day MA for two consecutive days (currently at 0.8824). The target level lies at 0.9950. According to an internal model, fair value for the pair is above the 0.9400 level.

 

Rebounding U.S. economy embraces hope to investors. Inflation is close to a 2% target level and a further quantitative easing is unlikely. The number of Americans claiming new jobless benefits fell to a four-year low (351K in Feb. versus 365K in Jan.). Philly Fed

 

Manufacturing Index picked up this month (12.5 in Feb. versus 10.2 in Jan.). Number of building permits increased to 0.72M in Feb. from 0.68M in Jan. The overnight index swap market is indicating an interest-rate increase from the Federal Reserve in the fourth quarter of 2013, compared with a July 2014 forecast in February.

 

The yield spread from purchasing 10-year Treasuries versus similar-maturity Swiss bonds rose to 142 basis points from 127 basis points at the beginning of the month.

 

Analysts at RBS expect the greenback to trade in the 0.9500 area by the middle of the year before declining to 0.9000 by December.

[fallenDC]

RBS: comments on major currencies

 

- EUR/USD: the pair moved higher in recent days, initially spurred on by mixed US economic data at the end of last week and potentially due to some position readjusting. However, further downside for the pair is likely given increasing rate spreads in favor of the US and recent liquidity expansion in the euro area relative to the US.

 

- JPY: yen is acting more like a funding currency for “risk-on” trades. Strong global equities and narrowing credit spreads in recent weeks appear to be boosting JPY crosses. We still see 85 as a bridge too far at this stage, but base may now be 82.

 

- CAD: Canadian data was softer, with a drop in foreign interest for Canadian assets and disappointing manufacturing and wholesale sales data. But we still think CAD remains attractive versus the USD and EUR, especially if US data keeps improving.

 

- NZD: strong rural growing conditions and improving property market are tending to lift confidence. We see scope for NZD to out-perform AUD near term.

 

- AUD: recent Australian activity indicators below expectations. Political and budget uncertainty increasing as contentious mining and carbon taxes are introduced midyear. Global risk appetite up, but local factors should cap AUD.

 

- This is mixed week - higher US rates pushed the USD higher over the week versus JPY, AUD, NZD and CAD while short-covering has pushed up EUR, CHF and GBP.

[fallenDC]

UK: public borrowing surges, Posen and Miles want more QE

 

British pound dropped by 70 pips on the news that UK public sector net borrowing rose in February to the maximal level since 1994 of 12.9 billion pounds versus the forecast level of 5.0 billion pounds.

 

In addition, the minutes of the Bank of England’s MPC March 8 meeting showed that 2 members of the Committee (David Miles and Adam Posen) voted to increase Asset Purchase Program by 25 billion pounds in order to avoid damage for the supply capacity of the economy. Posen and Miles said that the central bank’s monetary policy should be loosened further to stimulate demand quickly, “but the stimulus could then be withdrawn were it to become clear that there was a significant risk of inflation rising above target in the medium term.”

 

The agreement to keep the benchmark interest rate unchanged at 0.5% was unanimous. According to the statement, “overall, the Committee judged that the recent data had evolved in line with its expectations and that there had been little change to the balance of risks to UK activity and inflation.”

 

At the same time, MPC acknowledged the sharp increase in crude oil prices: “If oil prices were to rise to a level significantly higher than the Committee currently assumed, then that would tend to slow the global and domestic recovery, reduce supply growth, and put upward pressure on domestic costs and prices.”

 

After the market digested the data GBP/USD found support in the1.5856 area and managed to rise to $1.5870.

 

If the pair manages to rise above March 19 maximum in the $1.1915 zone, it will get chance to strengthen to $1.5966 (Mar. 2 maximum) and $1.5975 (Mar.1 maximum). Support levels for sterling are situated at $1.5831 (Mar. 20 minimum), $1.5823 (Mar. 19 minimum), $1.5798 (21-day MA) and $1.5771 (10-day MA).

[fallenDC]

Commerzbank: euro’s advance may prove short-lived

 

The single currency was trading on the upside versus the greenback today as Greece's lawmakers approved the country's second 130 billion-euro bailout deal.

 

However, the majority of analysts regard euro’s advance as short-lives claiming that EUR/USD will likely be curbed due to rising U.S. Treasury yields which encourage dollar’s growth.

 

In addition, analysts at Commerzbank think that the approval “was not a big step but has been perceived as positive by the market”. In their view, “the broader trend is still a stronger dollar and on that point we see the economy picking up in the U.S.”

 

Brown Brothers Harriman: “If U.S. data remains solid U.S. yields may continue to track higher, while Europe faces some risks from the Italian labor reform talks and continued poor economic news from Spain”.

 

Many experts say that the Parliament vote was nothing but a formality.

 

EUR/USD is down from an almost 2-week high of $1.3283 to the levels around $1.3240. Resistance for the pair is situated in the $1.3300 area (61.8% retracement of the decline from the end of February to the middle of March).

 

Keep an eye on the Fed’s Chairman Ben Bernanke’s testimony to Congress later today and a bunch of European (especially German) PMIs tomorrow.

 

In the longer term analysts at UBS believe that the ECB would need to keep pumping liquidity into the euro zone’s money markets, so investors will be tempted to seek other foreign assets rather than the euro. According to the bank, EUR/USD will fall to $1.25 in 3 months and to $1.15 by the year-end.

[fallenDC]

Citi: USD/JPY ahead of Japan’s fiscal year

 

Usually Japanese companies tend to buy the national currency in March ahead of Japan's fiscal year-end. As a result, yen gets support from elevated demand. This year, however, the traditional pattern seems derailed, says Citi.

 

“One traditional yen specific factor is the year-end yen buying by Japanese corporates and there has been some of that of late. This time around, however, we have also seen some USD/JPY buying from Japanese energy importers. The latter could offset any USD/JPY selling in coming days."

[fallenDC]

Standard Chartered: the greenback and risk appetite

 

Analysts at Standard Chartered underline that many experts that the greenback has lately been switched from being a safe-haven or, in other words, counter-cyclical currency to a more pro-cyclical, risk-positive one.

 

The specialists don’t share this point of view. To their mind, that while US dollar has periodically traded in line with higher-beta assets, as opposed to against them, this has not been the case on a trend basis.

 

According to Standard Chartered, what we see now is not a permanent shift in the relationship between the greenback and risk appetite. The recent dynamics of American currency reflects the cyclical divergence between the US economy on the one hand and those of Europe and Asia on the other, along with diverging portfolio flows.