Comments and forex-analytics from FBS Brokerage Company

[FBS.com Official]

HSBC: ECB and BoE may repeat Japan’s mistake

 

European inflation broke above the ECB’s 2% threshold in December rising to 2.4% in February, while the British CPI growth accelerated last month to 4.4%, twice higher the 2% BoE target level. As a result, the European Central Bank announced about its readiness to raise interest rates and more and more members of the Bank of England’s MPC call for monetary tightening. Analysts at HSBC, however, claim that the central banks should take into account Japan’s unsuccessful experience in this field.

 

In their view, the inflation threat may misguide the European monetary authorities and, as a result, the region’s economy may suffer like Japan did in the past quarter century. At the beginning of 1990s, the Bank of Japan increased its key rate in more than 2 times to 6% as the Gulf War pushed oil prices and inflation to 4.%. However, when inflation was soon eliminated the central bank has to cut back the rate to less than 2% by the end of 1993.

 

According to HSBC, oil-price surge can create sometimes more deflationary than inflationary risks as it is squeezing spending power. The specialists warn that that’s what may be currently happening in Europe as crude oil approached maximum in more than 2 years above $100 a barrel.

 

HSBC notes that among the longer term costs of the monetary policy mistake there are stagnation, deflation and economic underperformance. To receive evidence one must just look at Japan: the country has to keep rates at the record low, while its debt is twice the size of the nation’s economy.

[FBS.com Official]

Wells Fargo: the outlook for major currencies

 

Analysts at Wells Fargo claim that there are 2 opposing forces influencing the pair USD/JPY. On the one hand, there is the speculative upward pressure on yen due to the anticipation of the repatriation flows. On the other hand, Japanese officials have drawn the line in the sand to prevent further appreciation of the national currency. The specialists believe that this kind of mixed environment for yen is going to prevail for at least several months. The specialists, however, don’t think that Japanese currency will once more test the postwar maximums as it did on March 16 when it reached 76.31 yen.

 

Wells Fargo says that 80 yen mark is certainly a psychological level below which the intervention risk is high. The economists are speaking not so much about the actions of other central banks, but about the efforts of both the Bank of Japan and the country’s Ministry of Finance. Judging from the degree of momentum at the market the pairs USD/JPY and EUR/JPY will be the primary crosses affected by potential intervention, though the Bank of England and the Bank of Canada have also sold yen.

 

The strategists note that though the amount of the international participation probably isn’t very strong, it will send a strong message to investors indicating the high degree of the authorities’ commitment.

 

The market has priced in about a 100 basis points interest rates hike over 12 month – quite significant pricing in – so it can be argued that there’s still some place for Euro to reflect the expectations. The problem is still in the European debt concerns. Wells Fargo believes that some of the euro zone’s indebted nations, especially Portugal, may soon need a bailout.

 

As for Portugal, April is a very important month in terms of the debt’s refinancing. This could be the point where the forex market will come more in line with the fixed income market. It’s necessary to note that Portuguese bond market is still showing a significant amount of investors’ stress. It’s just the forex market that hasn’t paid much attention to the euro area’s debt problems so far.

 

The specialists say that the greenback will be on the defensive due to the hawkish signals from the ECB and the Bank of England until the second round of the QE ends in June. Wells Fargo expects June to be an important threshold for the currency market. The transition from easing to neutral policy is going to be significant itself, even if the Fed doesn’t start hiking rates quickly.

 

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[FBS.com Official]

Commerzbank: EUR/GBP eroded long term resistance

 

The single currency bounced yesterday versus British pound breaking above the key resistance in the 0.8758 area. Technical analysts at Commerzbank note that euro has severed the long-term downtrend, introducing scope to 0.8935/45.

 

The specialists say that as long as the pair EUR/GBP is trading above the mentioned trend it has potential to advance to the 0.8935/45 area representing the 50% retracement of the decline from 2009 and the October 2010 maximum.

 

According to the bank, bullish pressure on euro will ease only below the short term uptrend at 0.8672 and the pair will be poised lower to 0.8605 then 0.8560.

 

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[FBS.com Official]

Barclays Capital: Australian dollar may rise to 1.09

 

Analysts at Barclays Capital note that Australian dollar is under bullish pressure versus its US counterpart as long as it holds above 1.01. In the near term the pair AUD/USD is likely to fluctuate near the post-float maximums in the 1.0260 area. If Aussie decisively breaks up through these levels, it will get chance to climb to 1.0650 and 1.09 in the medium term.

 

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[FBS.com Official]

SNB quarter report released

 

The Swiss National Bank has released today its quarterly report. The central bank announced that the tensions in the Middle East led to the new strengthening of Swiss franc versus the European currency and US dollar.

 

According to the central bank, franc’s appreciation has so far had only a moderate effect on the import price index. The Swiss franc prices of some import goods react with a time lag to the exchange rate’s moves, as the companies adjust them at irregular intervals.

 

Switzerland’s monetary authorities also said strong national currency made the country’s exports lose considerable momentum. The SNB expects that Swiss GDP will gain about 2% in 2011.

 

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[FBS.com Official]

Outlook for Japan’s trade balance and current account

 

In February Japan's trade balance returned to surplus after imports exceeded exports for the first time in 22 months in January.

 

Japan's current account balance decreased by 47.6% compared with 2010 level in January 2011 to 461.90 billion yen (US$5.62 billion) as a higher import bill and seasonal declines in merchandise exports eroded Japan's surplus and contributed to its first trade deficit in two years. In December 2010, Japan's current account surplus rose by 30.5% to 1.1195 trillion yen.

 

The extent to which Japan's current account will continue to widen will largely depend on external demand from its Asian trading partners, especially China, as well as the United States and Europe, but will be weighed down if commodity prices (especially oil) continue to show strength.

 

Japanese Ministry of Finance claimed on March 8 that Japan's current account is expected to improve over the next month as seasonal factors which drove the decline in the trade balance diminish.

 

Economists at UBS believe that Japan's export figures in March will be weakened due to the declines in production resulting from the March 11 earthquake. The specialists believe that the first quarter GDP growth will be very insignificant.

 

Analysts at Mizuho claim that Japan's exports in March and April are likely to slow down, though Japan will continue with a trade surplus and exports are likely to return to a recovery path around May along with the nation's reconstruction, but they may slow down again around summer when power supplies are expected to be restricted.

[FBS.com Official]

TD Securities: Aussie gains versus dollar and yen

 

Australian dollar climbed today to 1.0332, the maximal level versus its US counterpart since 1983 when it began floating freely. The currency climbed to 85.68, the highest since May 5, 2010.

 

Analysts at TD Securities believe that Aussie will rise to 88 yen by the end of June helped by Chinese growth and surging commodity prices. The pair AUD/JPY gained 6.8% since March 18.

 

Related data releases (based on Bloomberg surveys):

 

March 31: Australia’s retail sales (forecast +0.4%);

 

March 31: Australia’s building permits (forecast +4%);

 

March 31: US factory orders (forecast +0.5%);

 

April 1: China’s PMI (forecast: 54 from 52.2 in February).

 

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Chart. H4 AUD/USD

 

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Chart. Daily AUD/JPY

[FBS.com Official]

Standard Life Investments are bearish on EUR/USD

 

Analysts at Standard Life Investments believe that the single currency is currently overvalued. In their view, the pair EUR/USD may drop to the undervalued levels before the sovereign debt crisis is resolved.

 

The specialists note that although the marker is pricing in 100 basis points of the interest rates hike for euro in 12 months, they expect no more than 75 points increase in the ECB rates.

 

According to Standard Life Investments, EUR/USD fair long term value for indebted countries like Greece, Portugal, and Ireland is found somewhere between $1.00 to $1.10 range and for the euro area as a whole – between $1.20 and $1.25.

 

The strategists underline that the European authorities need weak euro to cope with the debt crisis, slow trend growth and the necessity of fiscal consolidation.

 

As for the United States, the economic fundamentals, on the contrary, will be gradually improving, says Standard Life Investments. The analysts think that dollar’s decline won’t last long.

 

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[FBS.com Official]

Sumitomo: comments on USD/JPY and EUR/USD

 

Analysts at Sumitomo Trust & Banking claim that US dollar is likely to trade at the upside of the range between 82 and 83 yen. In their view, American currency will be supported by the speculation that the Fed soon quit its $600-billion quantitative easing program fueled by the comments of president of the Federal Reserve Bank of St. Louis James Bullard about the need to normilize the country’s monetary policy. The specialists note that the market’s sentiment has become more optimistic.

 

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Chart. Daily USD/JPY

 

As for the pair EUR/USD, Sumitomo expects it to fluctuate today between 1.4050 and 1.4150. The strategists underlined that euro finds itself under the influence of 2 contradictory factors: the expectations of the ECB rate hike and the concerns about indebted peripheral euro zone nations.

 

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Chart. H4 EUR/USD

[FBS.com Official]

Yen’s under pressure due to the rate differentials

 

It’s very likely that the Bank of Japan will fall behind when the world’s major central banks begin normalizing monetary policy.

 

Japanese yen fell today to 11-month minimum versus the European currency at 117 yen per euro. Analysts ANZ National Bank note that euro keeps getting support from the interest rates differentials. The ECB council member Jozef Makuch claimed yesterday that the possibility of the ECB rate hike next week seems to be high.

 

Euro strengthened versus yen even despite Standard & Poor’s cut Portugal’s sovereign credit ratings from BBB to BBB- and Greece’s – from BB+ to BB- with negative outlooks. Strategists at UBS claim there can be 2 reasons for such dynamics: either investors were pricing in a lot of the bad news or this pushes Portugal closer to asking for aid that’s regarded as positive.

 

US dollar managed to get above 83 yen level for the first time since Japan’s earthquake on March 11. Yen got under pressure due to the rising Treasury yields and the recent hawkish comments of the Fed’s members.

 

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[FBS.com Official]

Commerzbank: EUR/JPY will rise to 120.00 yen per euro

 

Technical analysts at Commerzbank note that the single currency broke through resistance at 115.69 yen completing the major base. In their view, the pair EUR/JPY will now move up to the 119.65/120.00 zone limited by the February 2010 minimum and the psychological resistance.

 

The specialists believe that in the longer term euro will manage to climb to 126.00. According to the bank, the European currency will be able to make such advance as long as it stays above the key support in the 114.40/113.55 area limited by the 20-day MA and last week’s minimum.

 

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[FBS.com Official]

German Deputy Finance Minister: comments on euro zone

 

German Deputy Finance Minister Joerg Asmussen claimed that euro zone is ready to face any violent moves of the financial market caused by the region’s debt problems.

 

The policymaker underlined that the European authorities strengthened Stability and Growth Pact, approved the Euro-plus pact for competitiveness and worked out the permanent crisis-resolution mechanism – the ESM.

 

Standard & Poor’s cut today Portugal’s sovereign credit rating from BBB to BBB-. According to Asmussen, Portuguese government will decide for itself whether the country needs any financial help. The EU and the IMF will support Portugal if necessary but only if the nation pledges to conduct the required austerity measures.

 

Portuguese 10-year bonds fell, pushing the yield above 8%t for the first time. Economists at Rabobank estimate that Portugal needs to raise 1.35 billion euro to fund itself to the end of April, including the April 15 redemption spike.

 

G20 leaders will ***emble in Nanjing (China) tomorrow for a one-day seminar on the international monetary system.

 

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[FBS.com Official]

Barclays Capital: comments on USD/CHF

 

US dollar reached today 2-week maximum versus Swiss franc at 0.9250 and then eased down to 0.9220.

 

Technical analysts at Barclays Capital claim that that the advance of pair USD/CHF is limited by the Fibonacci retracement resistance and the old range minimums between 0.9200 and 0.9260. In their view, the greenback’s decline will extend to the 0.9105/0.9090 zone.

 

The specialists note, however, that if US currency manages to overcome 0.9260, it will be able to rise to the early March maximums in the 0.9370 area.

 

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[FBS.com Official]

Mizuho: EUR/JPY will rise to 126.00 yen in April

 

Technical analysts at Mizuho Corporate Bank note that the all elements of the daily Ichimoku chart point at the long positions for the pair EUR/JPY. According to the bank, euro rose above the top of the “pennant” formation, while the 9-day MA went up almost vertically. The specialists expect the single currency to appreciate to 126.00 yen in April.

 

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[FBS.com Official]

Analysts on Swiss KOF barometer

 

According to the data released today, Swiss KOF barometer rose from upwardly revised February figure of 2.19 to 2.24 in March increasing for the third consecutive month.

 

Analysts at Credit Suisse note that although the change in the indicator remained rather moderate in absolute terms, it shows that Switzerland’s economic activity remains strong. In their view, exports to the EU and growth of Swiss industry were the main drivers of the KOF index.

 

Strategists at UniCredit sound quite optimistic as well. In their view, such dynamics of the barometer means that Swiss economy remains in full swing this year. The economists still think that Swiss GDP will add 2.5% in 2011 maintaining 2010 growth pace.

 

Moody's specialists, however, claim that Swiss economic recovery will slow this year as weaker exports will have negative impact on the nation’s growth. According to them, Switzerland’s GDP growth pace will fall to 2.1% this year. The rating agency believes that situation in the euro zone, Switzerland’s key trading partner, will worsen this year due to severe fiscal tightening and the ongoing sovereign debt crisis. Moody's forecasts that the Swiss National Bank will leave its benchmark interest rate at the current 0.25% level until later this year.

 

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[FBS.com Official]

Commerzbank: AUD/USD on its way up to 1.0500

 

Australian dollar rose from the minimums in the 0.9700 area hit in the middle of March to renew the long-term maximums above 1.0300.

 

Technical analysts at Commerzbank expect the pair AUD/USD to continue its advance reaching 1.0375 (78.6% Fibonacci retracement of the decline from 1981 to 2001) and 1.0500.

 

The specialists note that the strong support for Aussie is found in the 1.0203/1.0175 zone limited by the February and early March maximums and containing internal 3-month support line.

 

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[FBS.com Official]

Bank of America: Fed has little incentive to weaken dollar

 

Analysts at Bank of America Merrill Lynch claim that as the correlation between import prices and US dollar’s rate seems to be low, the Federal Reserve has little incentive to weaken the greenback in order to encourage inflation increasing competitiveness of the national exports or making its debt easier to repay.

 

The trade-weighted dollar index lost 5.8% during the past year. It happened due to the Fed’s loose monetary policy of extremely low interest rates.

 

At the same time, import prices excluding automobiles didn’t change much during this period gaining in February only 1.4% after rising by 1.3% in January.

 

According to Bank of America, 10% decline of US currency is equal to the percentage-point increase in inflation. Consumer prices excluding food and energy showed in February 1.1% annual advance. As a result, it’s possible to say that the link from a weaker currency to higher prices for consumer goods has still been fairly weak.

[FBS.com Official]

Pimco advises not to invest in Treasuries

 

Analysts at Pacific Investment Management Co., the world’s biggest bond fund, believe that US Treasuries have little value due to the rising US debt.

 

According to Pimco, America owes about $75 trillion in bonds and obligations for Social Security, Medicare and Medicaid. The specialists warn that unless the country’s authorities reform entitlement programs, the United States will face inflation, currency devaluation and low or negative real interest rates.

 

As a result, the strategists advise investors to sell US debt. In their view, US may have an off- balance-sheet, unrecorded debt burden of close to 500% of GDP. Pimco claims that the situation in the US is even worse than in Greece and that the nation is “out-Greeking the Greeks”.

 

This quarter US Treasury holders lost 0.1% even after the interest payments, estimates the Bank of America Merrill Lynch. In the final quarter of 2010 the loss was equal to 2.7%. During the presidency of Barack Obama US publicly traded debt rose to the record level of $9.05 trillion.

[FBS.com Official]

Commerzbank: GBP/USD advance is a correction

 

British pound went down from last week’s maximum versus the greenback at 1.6400. The pair GBP/USD found support in the 1.5935/40 area and bounced up returning above 1.6100.

 

Technical analysts at Commerzbank regard sterling’s current advance as correction. In their view, pound’s growth will be limited by 1.6140/70. The specialists expect the pair to fall to the February minimum at 1.5963.

 

According to the bank, if GBP/USD breaks down below support at 1.5963, the top at 1.6400 will confirm in the longer term and British currency will be poised for a decline to 1.5750 and then to 1.5570.

 

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[FBS.com Official]

Ireland: stress tests release

 

Ireland’s economy minister Richard Bruton commented yesterday on the Irish banks’ stress tests that are released today at 1530 GMT.

 

According to the official, investors have to be ready to the fact that the results of the tests will reveal the country’s bank need additional capital. Bruton noted that it was hard to ease Irish banks' dependence on central bank liquidity as long as they didn’t have enough capital. The minister underlined that Ireland was committed to meeting all its fiscal obligations under the EU/IMF rescue package. The policymaker also spoke against raising the corporate tax rate, saying it would affect investor confidence.

 

Analysts at RBC Capital Markets expect that Irish bank need EUR15-EUR25 billion. So far EUR10 billion of the EUR35 billion set aside has been used, says RBC, and an amount within these parameters would be euro neutral, any figure above the EUR35 billion total, although highly unlikely, would be significantly euro negative, while any figure below EUR15 billion would not be credible.

 

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[FBS.com Official]

Barclays Capital recommends watching euro closing levels

 

Analysts at Barclays Capital note that the risk sentiment has improves so far.

 

The specialists claim that today is the important day for the market as the month and the quarter ends. In their view, it’s important to watch the closing levels of the single currency versus US dollar and British pound: for the pair EUR/USD the key level is found at 1.4185, while for the pair EUR/GBP it lies at 0.8815. If euro closes above these levels, the bulls will likely remain strong during the rest of the year.

 

The strategists also say that Brazilian real and the Korean won strengthened today versus their US counterpart breaking out of the established ranges. That means, according to Barclays, that dollar may stay weak in the second quarter of the year.

 

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[FBS.com Official]

Commerzbank: comments on USD/CHF

 

Technical analysts at Commerzbank claim that as long as the greenback is trading above the support at 0.9140 it still has chances to advance versus Swiss franc.

 

The specialists note that to confirm its upward potential the greenback has to close above the Fibonacci resistance at 0.9205.

 

According to the bank, if the pair USD/CHF breaks below 0.9140, it will be poised for a decline to 0.9110 and 0.8980/70 on its way down to the minimums in the 0.8852 area.

 

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[FBS.com Official]

Mizuho, BNP Paribas: forecasts for USD/JPY

 

Technical analysts at Mizuho Corporate Bank note that the greenback has returned to the large “triangle formation” in which it was trading versus Japanese yen during 5 months since November.

 

According to Mizuho, the record minimum of the pair USD/JPY at 76.31 hit on March 16 will hold at least during the second quarter of the year. The specialists expect the US currency to continue consolidating between 82.35 and 83.35.

 

Currency strategists at BNP Paribas note that the greenback’s advance has paused due to the month-end rebalancing. The Bank of Japan will undoubtedly keep monetary policy extremely loose and investors increasingly favor yen as a funding currency. According to the bank, American currency will appreciate to 85.00 yen.

 

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[FBS.com Official]

J.P. Morgan: bullish outlook for Aussie

 

Australian dollar reached the maximal levels versus its US counterpart since its free float began in 1983.

 

Analysts at J.P. Morgan are still bullish on Aussie. According to them, Australia’s currency is stimulated by higher commodity prices. As a result, overseas investors willing to benefit from Australia’s commodities and commodity-related firms pour their money to the country both in the form of foreign direct investment or, in other words, M&A, and equity and bond inflows. According to Dealogic, the volume of Australian M&A added 59% in the first quarter of 2011 rising to $18.8 billion.

 

This, in its turn, improves the nation’s economic growth and boosts inflation making the central bank raising the interest rates. The Reserve Bank of Australia (RBA) has been tightening its monetary policy since October 2009. J.P. Morgan believes that the central bank will continue hiking its benchmark rate from the current level of 4.75% to 5.25% by December. Rising yields is another factor luring investors to come to Australia and buy its national currency.

 

However, the bank outlines some risks for Aussie. Firstly, Australia may create the new sovereign wealth fund (SWF) or stabilization fund to collect the natural resource revenues for investment in future needs like it is in Russia and Norway. In addition, the specialists claim as the bullish sentiment on Australia is very strong, so negative news could make it shift very quickly.

 

The specialists say that the support for the pair AUD/USD is found at 1.0200, 1.0155 and on the parity level. Resistance levels are situated at 1.04 and then 1.05/1.0560.

 

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[FBS.com Official]

Ministry of Finance revealed the intervention volumes

 

Japan’s Ministry of Finance announced yesterday that it sold 692.5 billion yen ($8.4 billion) during the period from February 25 to March 29 to weaken the yen that hit on March 16 postwar maximum at 76.31 threatening the country’s economic recovery from the strongest earthquake in its history.

 

Japanese government was helped by the G7 nations which conducted the first joint intervention in more than 10 years. The coordinated actions helped to reverse the pair USD/JPY upwards. The greenback is currently trading above 83 yen level.

 

Analysts at Barclays Bank regard this intervention as very efficient as it managed to stop yen’s appreciation with amounts of money than those used in Japan’s unilateral intervention in September when the country sold 2.12 trillion yen when its national currency strengthened to 79.75 yen per dollar.

 

In addition, it’s necessary to note that Japanese central bank pumped 40 trillion yen into the banking system in successive one-day emergency cash operations from March 14 to March 22 to help financial markets restore after the March 11 disaster.

 

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