Comments and forex-analytics from FBS Brokerage Company

[fallenDC]

USD/CHF: fundamental & technical comments

 

On Friday USD/CHF trades above 0.9700 on the back of the economic data released in Switzerland and the US labor market data.

 

According to today’s report, Swiss CPI declined in line with forecasts by 0.3% in June after remaining flat in May, showing deflation. Specialists at Sarasin Bank say that the negative inflation supports the SNB's policy of maintaining a currency floor for EUR/CHF. Foreign currency reserves increased to a record high of 364.9B, serving as proof of the SNB’s interventions aimed at the depreciation of the national currency. USD is supported by the yesterday’s ADP non-farm employment data, raising hopes that the US labor market is rebounding (number of employed people increased by 176K in June compared with a 136K growth in May and a 103K forecast). Watch out for NFP release today at 12:30 GMT.

 

On H1 chart USD/CHF consolidated in narrow range between 0.9685 and 0.9715 after climbing by more than 100 pips yesterday. The pair has broken strong resistance in the 0.9600 zone (January maximums). The next resistance levels are at 0.9771 (June 1 maximum) and 0.9800. Support is found at 0.9660/75 – the pair may retreat here before going higher. If the greenback deeps below 0.9600, we’ll get a selling signal.

 

http://static1.fbs.com/sites/default/files/image/analysis/July2012/05_07_12/h1_usdchf_14-57.gif

 

Chart. H1 USD/CHF

 

 

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Commerzbank: bearish on GBP/USD

 

Commerzbank analysts recommend selling GBP/USD on rallies to $1.5550 and adding at $1.5580.

 

The pair is expected to continue a bearish movement as long as it's trading below $1.5611 and slide to $1.5407 (June 8 minimum). If the pair breaks this level, a further decline to 1.5268 (June 1 minimum) and 1.5233 (2012 minimum) will become possible.

 

http://static1.fbs.com/sites/default/files/image/analysis/July2012/06_07_12/daily_gbpusd_06.07._16-28.gif

 

Chart. Daily GBP/USD

 

 

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Monday, July 9: events to watch

 

http://static2.fbs.com/sites/default/files/image/analysis/July2012/09_07_12/utro_eng.jpg

 

Japan: Current account is to increase to 0.42T in May from 0.29T in April. Core machinery orders, a leading indicator of private capital spending, is forecasted to decline by 2.4% in May compared with a 5.7% growth in April. Economists, however, see a forecasted drop as an exception, and expect machinery orders to remain in a moderate increasing trend, supported by reconstruction-related demand.

 

China: China's annual consumer price inflation in June likely eased to a 29-month low with producer prices falling for the fourth month in a row, giving the monetary authorities more room to stimulate the economy. CPI may increase by 2.4% in June compared with a 3.0% growth in May, while PPI - to fall by 2.0% compared with a 1.4% decline.

 

Europe: there’s a scheduled Eurogroup meeting. Troika officials will conduct the first discussion on the mission’s ongoing inspection to Greece and try to develop an approach for the negotiation of the updated bailout agreement. Another item on the agenda will be Spanish and Cyprus requests for entry into the ESM. 

 

Great Britain: The BoE’s Deputy Governor Paul Tucker will hold a speech where he will no doubt be defending himself from accusations by Bob Diamond that a call to the bank caused the "confusion" that led to the interbank lending rate to be fixed. Tucker hopes to become the next governor at the BoE when Mervyn King quits.

 

Canada: The BoC is to release its quarterly business outlook survey.

 

 

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July 9, Asian session: news, currencies

 

EUR/USD opened with a gap down renewing 2-year minimum at $1.2250 and then edged higher versus its US counterpart.

 

Euro zone’s finance ministers meet today to discuss the measures adopted by the European leaders at the latest summit. In addition, the ECB President Mario Draghi will speak to the European parliament (12:30 GMT) after the central bank cut its benchmark rate to the record minimum of 0.75% last week. Earlier Draghi claimed that the decision to lower borrowing costs may have only a “muted” economic impact and growth in the euro area “continues to remain weak with heightened uncertainty.”

 

USD/JPY slid at the week’s opening, but then managed to come to the upside. Japan’s trade surplus declined from 0.29 trillion yen in April to 0.28 trillion in May, while the economists were looking forward for an increase to 0.42 trillion yen. Japanese core machinery orders fell by 14.8% m/m in May vs. expected decline of 2.4%.

 

The MSCI Asia Pacific Index fell from 119 to 117.90 before recovering to 118.50. Higher-yielding commodity currencies also opened with bearish gap. AUD/USD was affected by the comments of Chinese Premier Wen Jiabao who said that downward pressure on the economy remains “relatively large” and the nation’s government plans to intensify stimulus. Last week China reduced interest rates for the second time in a month. Data released today show that Chinese consumer inflation slowed from 3% in May to 2.2% in June.

 

 

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Weekly Ichimoku: USD/JPY

 

Weekly

 

On the weekly USD/JPY chart we see consolidation inside the Ichimoku Cloud. The prices recoiled up from the bottom line of Kumo and then turned down from its upper border.

 

Last week the pair opened below Kijun-sen (1) which is now playing the role of resistance. As for support, it’s provided by shorter-term Tenkan-sen (2). This line, also referred to as the Turning line, seems more vulnerable than the Standard line, especially if we take into account the fact that Tenkan has recently crossed Kijun upside-down forming a “dead cross”, bearish signal. Though the signal isn’t very strong, the odds are that the greenback will slide at least to the levels around Senkou Span A (3) seem rather high. The Cloud itself made a small bullish twist (4), but the bulls were unable to hold their grounds and Kumo once again became bearish.

 

At the same time, note that the bears haven’t regained their power yet. In addition, Tenkan and Kijun are horizontal pointing at sideways trade within the recent range. One more thing worth mentioning – Tenkan’s support is strengthened by the support line from June minimums.

 

Note that there’s also a support line connecting January and May minimums at 78.40 yen. On the other hand, resistance line can be drawn through March and June highs. The 2 lines are forming a triangle – the possibility of a breakthrough to each side seems somewhat equal.

 

As a result, as long as the pair remains trapped inside the Cloud and more narrow range between Kijun and Tenkan, we have to wait for the breach of support or resistance to enter the trade.

 

http://static1.fbs.com/sites/default/files/image/analysis/July2012/09_07_12/usdjpy_weekly_ich.gif

 

Chart. Weekly USD/JPY

 

 

Daily

 

On the daily chart the prices have entered the Cloud which turned out to be on their way. The pair has been consolidating around daily Tenkan-sen (1) since the end of June. This pattern is likely to continue.

 

There is support in the 79.50 area (last week’s minimum, trend line support). Below this level the greenback will be supported by the horizontal Kijun-sen (2) at 79.15 and Senkou Span A (3) at 78.90.

 

However, to see some major improvement, USD/JPY has overcome firstly 80 yen (psychological level) and then break above 80.50 (Ichimoku Cloud top, June and May maximums).

 

http://static1.fbs.com/sites/default/files/image/analysis/July2012/09_07_12/usdjpy_daily_ich.gif

 

Chart. Daily USD/JPY

 

 

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Aspen Trading: recommendations for USD/CAD

 

Analysts at Aspen Trading Group recommend buying USD/CAD at C$1.0200, targeting at C$1.0600 and with a stop at C$0.9900.

 

According to specialists, the pair is expected to rally on a falling stock market and falling crude oil. Lately Canada has demonstrated weak manufacturing and labor market data. Most analysts don’t expect the BoC to raise interest rates in the nearest future on the back of recent disappointing data.

 

http://static1.fbs.com/sites/default/files/image/analysis/July2012/09_07_12/daily_usdcad_09.07._11-19.gif

 

Chart. Daily USD/CAD

 

 

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Analysts: bullish on AUD/NZD

 

Strategists at RBC Capital Markets recommend going long on AUD/NZD at current levels, targeting at 1.33/1.35 in the next 1-3 month. On Monday AUD/NZD trades on the upside, remaining flat around 1.28. The pair trades above a 100-day MA and close to a 38.2% Fibonacci retracement from a May-June decline.

 

ANZ Research: The pair is to re-test the 1.30 level in coming months. A paring of Australian interest rate expectations against steady New Zealand rates should see support from the differential. Key NZ commodity prices such as those for dairy products appear set to weigh on the NZ dollar.

 

Resistance for AUD/NZD lies at 1.2815 (July 2 and June 20 maximums), 1.2832 (50-day MA) and 1.2855 (June 13 maximum and 50% Fibonacci retracement), while support - at 1.2760 (July 5 minimum) and at 1.2737 (July 2 minimum).

 

http://static1.fbs.com/sites/default/files/image/analysis/July2012/09_07_12/daily_audnzd_09.07._12-12.gif

 

Chart. Daily AUD/NZD

 

 

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Key options expiring today

 

Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).

 

Here are the key options expiring today:

 

• EUR/USD: $1.2250, $1.2300, $1.2350, $1.2400, $1.2450, $1.2500

• GBP/USD: $1.5400, $1.5450, $1.5500

• USD/JPY: 80.00

• EUR/GBP: 0.8045

• AUD/USD: $1.0150, $1.0200, $1.0250, $1.0265

 

http://static2.fbs.com/sites/default/files/image/analysis/July2012/09_07_12/flatline.jpg

 

 

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[fallenDC]

EUR/USD down ahead of ECOFIN

 

EUR/USD touched its lowest level in two years ($1.2255) early Monday ahead of the EU finance ministers meeting, but then bounced to $1.2290.

 

A two-day Eurogroup/ECOFIN Finance Ministers meeting (July 9-10) attracts the market attention. The policymakers are to discuss the details around the decisions from the EU Summit: on the top of the agenda is the Spain's and Cyprus' rescue. According to the EU diplomats, EU ministers will grant Spain one additional year, until 2014, to meet the 3% deficit target. Moreover, the new Greek Finance Minister will report on efforts to put the country's reform program back on track.

 

The post EU-summit optimism has been rather short lived as yields on Spain’s and Italy’s 10-year bonds exceeded the pre-summit levels (above 7%) on Monday. The Sentix Investor Confidence index dropped to a 3-year low, coming out below the expectations and adding to investors’ concerns.

 

http://static2.fbs.com/sites/default/files/image/analysis/July2012/09_07_12/shue-photo.jpg

 

Image: Michael Shue

 

 

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European irony: French yields decline

 

There are always plenty of interesting things happening in the euro area these days. For example, the yields on 2-year French debt fell from the levels around 0.6% where they had been in the recent weeks to only 0.17% today.

 

As borrowing costs in troubled Spain and Italy went up again, France has become the main destination point of safe-haven flows. One may think that being a safe haven in Europe is Germany’s prerogative. However, German yields are already negative and if the situation continues this way, French ones will soon turn negative as well.

 

http://static3.fbs.com/sites/default/files/image/analysis/July2012/09_07_12/franc_2_g.png

 

Source: Bloomberg

 

 

This means that despite the fact that France’s new president Francois Hollande is a socialist who favor spending, the nation is regarded as too big to fail. Spain and Italy, on the contrary, aren’t enjoying investors’ confidence no matter how much effort they show to reign in their fiscal problems.

 

 

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[fallenDC]

Danske Bank: bullish on AUD/CAD

 

Analysts at Danske Bank are bullish on AUD/CAD in the medium term. The specialists think that the pair has bottomed out around 0.9955. In their view, if Aussie overcomes resistance in the $1.0455 zone (June 29 maximum), it will be able to rise to 1.0520 (19 March maximum), 1.0665 (28 October 2011 maximum) and then to 1.0785 – the bank recommends taking profits here. In the longer term, the bulls may push the pair to 1996 maximum at 1.1090.

 

http://static1.fbs.com/sites/default/files/image/analysis/July2012/09_07_12/daily_audcad__15-49.gif

 

Chart. Daily AUD/CAD

 

 

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Banks' forecasts for FX majors

 

Here are banks' forecasts for FX majors. Data were submitted on July 6.

 

http://static3.fbs.com/sites/default/files/image/analysis/July2012/09_07_12/prognozy_6.07.png

 

Source: FX Week

 

 

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EUR's role as a funding currency grows

 

The single currency becomes more attractive as a funding currency for carry trade operations in the wake of the ECB rate cut on Thursday. The regulator lowered the borrowing rate to 0.75%, while the deposit rate – to zero, so in the nearest future investors are likely to use the euro as a “whipping boy” on the FX market.

 

Traditionally, investors chose the Australian and the New Zealand dollar to benefit from higher interest rates offered there. However, these days some speculators switch attention to the Hungarian forint, the Polish zloty and the South African rand. Hungary's 10-year bonds, for example, bring nearly 8% compared to just 3.1% in Australia. AUD and NZD, however, remain the most reliable currencies for carry-trade operations: emerging European currencies are less liquid and much riskier.

 

No matter which currency investors choose for their assets, euro will be the loser anyway as the market players will borrow in euro to invest elsewhere. This is a significant bearish factor for EUR.

 

http://static1.fbs.com/sites/default/files/image/analysis/July2012/09_07_12/b8ac6f9374f6109d68ff1c.gif

 

 

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[fallenDC]

July 10: economy and currencies

 

http://static2.fbs.com/sites/default/files/image/analysis/July2012/10_07_12/angl.jpg

 

Risk aversion dominates the FX market on Tuesday: commodity currencies weaken amid concerns that the European financial authorities may fail to answer the important questions at today’s meeting.

 

The single currency is trading on the downside today remaining close to the minimal level since July 2010 at $1.2255 hit yesterday.

 

In Europe French and Italian May industrial production figures draw the most of attention today as the economists are looking for contraction by 0.9% and 0.3% m/m respectively. The data for the whole euro area will be released on Thursday, July 12.

 

The officials’ comments also weighed on euro. The ECB Mario President Draghi signaled yesterday that the central bank consider another interest-rate cut if necessary. The EU Economic and Monetary Affairs Commissioner Olli Rehn claimed that Spain will have to take additional measures soon to meet budget targets – that’s doesn’t help to ease the market’s worries about the nation’s future. Spanish 10-year yields reached 7.06% on Monday. Yesterday there was a meeting of the Eurogroup (euro zone’s finance ministers). Luxembourg

 

Prime Minister Jean-Claude Juncker said that Spain will get 30 billion euro for its banks by the end of July. Today there’s the gathering of EU27 financial chiefs (ECOFIN).

 

High Spain’s and Italy’s bond yields raise demand for safe havens, especially JPY. AUD/USD is near to a one-week low after a report showed China’s import rose less than expected. Chinese growth slowdown will surely affect Australia’s economy. Australian business confidence index fell to a 10-month low in June amid uncertainty about the euro zone and China. NZD/USD is also moving down: New Zealand business confidence dropped to a lowest since Q2 2011.

 

 

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Key options expiring today

 

Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).

 

Here are the key options expiring today:

 

EUR/USD: $1.2300, $1.2400, $1.2475;

 

USD/JPY: 80.75, 80.85;

 

GBP/USD: $1.5300, $1.5700;

 

AUD/USD: $1.0000, $1.0175, $1.0200;

 

EUR/GBP: 0.7900, 0.8125;

 

USDS/CHF: 0.9560, 0.9600.

 

http://static2.fbs.com/sites/default/files/image/analysis/July2012/09_07_12/flatline.jpg

 

 

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RBS: bears on EUR/GBP

 

Analysts at RBS remain bearish on EUR/GBP in a medium term. In their view, a bear flag pattern is targeting 0.7695 (2008 minimum).

 

http://static1.fbs.com/sites/default/files/image/analysis/July2012/10_07_12/daily_eurgbp_10.07._12-05.gif

 

Chart. Weekly EUR/GBP

 

 

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Analysts: comments on AUD/USD

 

Specialists at Shelter Harbor Capital, an investment advisor, are bearish on Aussie and recommend going short on AUD/USD at $1.0200 with a stop at $1.0330 and a target of $0.9100.

 

In their view, Australian economy becomes highly dependent on mining sector. Meanwhile, China, Australia’s largest trading partner, aims to help its economy move to a more developed, postindustrial stage. As a result, China’s demand for resources is likely to decline. Moreover, Australia’s economic growth is slowing and the RBA is expected to keep cutting rates.

 

This week China is to release a bunch of important economic data (GDP, consumer price inflation, industrial production and retail sales). Where the nation’s economy is heading? BMO Capital analysts point out that China’s GDP growth below expectations (consensus forecast: 7.9%) would raise investors’ concerns and weigh on AUD. Westpac specialists expect China to cut rates further.

 

Analysts at Aspen Trading Group think that the technical picture for AUD/USD will remain positive as long as it stays above parity.

 

http://static1.fbs.com/sites/default/files/image/analysis/July2012/10_07_12/daily_audusd_10.07._13-25.gif

 

Chart. Daily AUD/USD

 

 

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The United States: a ‘timid’ rebound

 

Here's the article by FBS published in the latest issue of FX Trader Magazine http://www.fxtradermagazine.com/Index_en.php.

 

Almost every day we see US indicators in trader’s economic calendar. Sometimes the reports are good, sometimes they disappoint the markets. The abundance of data can be quite misleading when you want to design a longer-term strategy. What we really need is seeing the whole picture – the real economic trends behind all the fuss.

 

It’s almost 4 years since the global financial crisis broke out in September 2008. American authorities tried to rehabilitate the national economy and put it back on the sustainable growth track. However, the United States hadn’t managed to overcome its economic problems when new global challenges emerged.

 

The global economic prospects are now extremely uncertain. This makes us pose questions about US future. How vulnerable is the US to the European debt crisis? Are US debt problems gone for good? Is American economy able to move forward on its own or more rounds of monetary stimulus are needed? These are the issues which we would like to address in this article.

 

US economic recovery: overview

 

The period from the Lehman Brothers collapse and up to the second half of 2009 is sometimes referred to as the “Great Recession”. The historical parallel with the Great Depression is not without reason as we have witnessed the biggest shock for US economy in decades which resonated both in advanced and emerging market economies.

 

According to the data, provided by the Bureau of Economic Analysis, US GDP contracted in Q1 and Q4 2008 quarter-to-quarter by 1.8% and 3.7% respectively and in Q1 and Q2 2009 by 6.7% and 0.7% respectively. The annual growth rates may be seen on the chart below. American economy survived the sharpest contraction since 1960.

 

http://static3.fbs.com/sites/default/files/image/analysis/July2012/10_07_12/gdp_change.png

 

In order to support domestic economic growth through lower borrowing costs the Federal Reserve bought $2.3 trillion of bonds in 2 rounds of so-called quantitative easing, or QE, from 2008 through 2011. Then in September 2011 the Fed launched Operation Twist program which had the same purpose. There were intense debates on whether these measures have really helped. As the central bank set no distinct targets set in advance, it is quite difficult to judge about the efficiency of the steps taken by the US central bank. Analysts at Barclays Capital argue that American monetary authorities succeeded in eliminating deflation risk, but failed to generate strong economic recovery.

 

US real GDP has finally returned above the pre-recession levels in Q3 2011. Never the less, the growth may still not be fast enough to spur a robust recovery and ensure new jobs creation.

High unemployment remains America’s greatest pain. On the back of recession the jobless rate soared from 4.6% in 2007 to the record highs of 9.6% in 2010. It happened as people who lost their jobs in such depressed sectors as finance, housing and construction sectors were forced to change their qualification. According to the Federal Reserve Bank of San Francisco, the natural unemployment rate during the crisis grew from 5% to 7%.

 

In late 2011 and then in the first half of 2012 the situation at US labor market has also improved. This spring jobless rate subsided to 8.1-8.2% returning to the same levels as when Barack Obama took office in early 2009. Winter gave investors the optimism they have almost forgotten – US economy generated 200K a month encouraging hopes that the recovery will be gaining pace.

 

However, it turned out that the upturn in non-farm payrolls was caused mainly by unusually warm weather and a decrease in the size of the workforce. As you may see on the chart below, the pace of new jobs creation has slowed down. This may be a sign that American economy still needs monetary stimulus. Remember that one of the main pledges of the Fed’s mandate is “to promote effectively the goals of maximum employment”. If things keep deteriorating or just stagnate at this point, the Federal Reserve may decide that it has no choice but to add more easing – the policymakers are still keeping this door wide open.

 

http://static3.fbs.com/sites/default/files/image/analysis/July2012/10_07_12/nfp.png

 

Other important US economic indicators aren’t much convincing either. The Conference Board consumer confidence index, one of the main indicators of US consumer optimism, decreased from 112.6 in 2007 to 25.0 in 2009. Since that time the situation has improved, but the full recovery of the consumer confidence still remains a distant prospect: in May 2012 the reading was only 64.9 after one more leg down to 39.8 at the end of 2011.

 

The Federal Reserve reports that the housing market’s collapse made the median net worth of American families fell by almost 40% between 2007 and 2010, down to levels last seen in 1992. The median family income dropped by 7.7% during the mentioned period.

 

The ISM manufacturing PMI, the main indicator of the manufacturing sector’s economic health, shows that the industry is expanding for the 34th consecutive month since August 2009. With the help of the QE the index has reached its 7-year maximum in April 2011 at 61.4. However, since the second half of 2011 manufacturing growth has slowed down and the PMI posted 53.5 in May 2012. Such rollback may be another sign that the industry’s rebound is not strong enough to drive the US economy out of the standstill without the central bank’s help.

 

As for the retail sales, an important gauge of the consumer spending, a remarkable slowdown was recorded after a surge in January and February: the indicator dropped by 0.2% in both April and March. The data clearly demonstrates that the US economic recovery remains sluggish. Many economists have lowered their Q2 GDP growth estimates by almost a half of percentage point to 1.9-2%.

 

The Organization for Economic Co-operation and Development sees a slow rebound of growth in the United States, driven mostly by private demand. According to the organization, American economy, in contrast, would grow by 2.4% this year and 2.6% in 2013, while the 17-member euro zone economy is expected to shrink by 0.1% this year before posting growth of 0.9% in 2013.

 

Just from here we are able to make first conclusions. US economy remains fragile: high unemployment and anemic growth are the issues at sight. During the past months the market’s sentiment had its positive moments. These surges of optimism were caused by occasional favorable data. For now US improvement still hasn’t become a trend. In addition, the prospects of the Unites States looked brighter as they were considered against dismal European background. The separate analysis of US economic performance demonstrates that the past post-crisis years haven’t brought an economic breakthrough.

 

American economy is very open and, consequently, dependant on the global economy, so the lack of the robust recovery may be also explained by the external factors, primarily the ones associated with the faltering Europe. Let’s have a look on the extent to which the euro zone’s debt problem affect the world’s largest economy and then try to outline the main prospects and challenges which lie ahead of America in these uncertain times.

 

America and the European debt crisis

 

It goes without saying that nowadays the major risks for the US come from Europe, so we can’t analyze US economic prospects without paying enough attention to this issue. There are 2 principle areas of American economic exposure to the euro zone’s problems: trade and financial effects.

 

Trade exposure

 

Have a look at US trade balance. The nation’s exports to the EU account for 19% of total exports and to the euro area – for 13% of the total. That is only 1.3% of US GDP – not much. Nobel Prize winner Paul Krugman points out that even a sharp fall in exports to the EU would be only a small direct hit for the US.

 

One should not forget, however, about the indirect effects. In 2010 Europe accounted for 25% of world trade. Loss of this market would slow global growth and weight on investors’ risk sentiment and, consequently, financial markets.

 

Financial exposure

 

Financial effects of the euro zone debt crisis deserve a more profound analysis. Once again we start with direct impact.

 

Banks are commonly in the first row to take the blow. European problems did not begin yesterday. Certainly more that 2 years is enough time to hedge preparing for the doomsday. In comparison with 2008, the amount of leverage in the financial system has gone down. Global policy makers were not seating still and tried to encourage this process. Of course a new crisis could reveal that American banks are still undercapitalized, but they are certainly in better shape than they used to be 4 years ago. However, we have to make an important remark here.

 

In January US Securities and Exchange Commission (SEC) requested American banks to provide reports containing specific descriptions of loans and trading positions relating to Europe. It turned out that the exposure of 5 big American banks’ to Portugal, Ireland, Italy, Greece, and Spain accounts for more than $80 billion. Cumulatively, the banks have hedged their positions by $30 billion, mostly through investing in credit default swaps. The banks analyzed include Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, and J.P. Morgan Chase.

 

It is necessary to note, however, that the SEC has managed to collect only partial information on the banking sector’s exposure to the European debt as many banks tried to present things in better light than they actually are by concealing some vital details.

 

For example, American banks revealed the net figures of exposure. That means that US financial institutions diminished the actual size of their European assets by taking into account offsetting items or, in other words, some undisclosed hedges and short positions. The problem is that a bank might not be able to collect all the offsets if the crisis strikes really hard, because many of the US hedges are made in Europe – for instance, through French banks.

 

http://static3.fbs.com/sites/default/files/image/analysis/July2012/10_07_12/3._banks.png

 

This is the main problem of the modern financial sector: no one may be allowed to fail as one failure provokes a chain reaction – the domino effect. Firstly, if European banks get into trouble, they may not be able to honor any payments which they owe on trades American banks have made as a hedge. Secondly, collateral often comes in the form of cash euro or European government bonds and many of the banks’ hedges are credit default swaps which presume prospective payouts to be made in euro . If euro collapses as a currency, that will surely be a disaster.

 

We admit that the European Central Bank’s decision to inject about 1 trillion euro into European banking sector will help to save the banks from running out of liquidity and, consequently, reduce the risk of the credit crunch. Never the less, the Fed’s Chairman Ben Bernanke has pointed out that although US banks are now less exposed to the sovereign debt issues in Europe, there will be a great number of different channels through which euro zone’s crisis may affect US financial system.

 

Apart from the banking sector, the US is also vulnerable because households and governments are still in the midst of deleveraging from the last financial crisis and policy makers are running out of ammunition to stimulate economic activity. In addition, US and European markets are closely correlated. Of course, American equities outperformed the European ones during the last few years which were marked by severe tensions in the euro area. At the same time, though the Euro Stoxx 500 and the S&P 500 move in different magnitudes, they are quite rarely entirely out of step with each other.

 

Let’s look back to the notorious 2008. The fault in the global financial system made economies all over the world suffer in unison, no matter how intense was their trade with America. There are no doubts that if Greece or another struggling European nation defaults on its debts and quits the euro zone, the future of monetary union will be in question. That will certainly trigger turmoil in markets. Business investment would stall, while banks would pull back on credit, equity prices fall and consumer spending contract. Commodity prices would plunge, helping importers but hurting growth in export economies. The extent of the damage would depend upon how quickly global policymakers could calm the markets.

 

Economists propose different scenarios of further developments in the euro zone. Hence, the impact on US will differ from weakening growth to severe recession. Even if all goes relatively well – political situation in Greece stabilizes and the nation stays in the monetary union, Spain recapitalizes its banks and EU integration gradually advances – the ongoing volatility in financial markets and slow-to-mildly negative euro zone growth would continue weighting on US growth prospects. All in all, we come to the conclusion that the risks associated with Europe can be contained, but not isolated.

 

US economy: challenges and prospects

 

As we have uncovered above, American economy will suffer from the negative influence of the European debt crisis and euro zone’s poor economic performance. However, the hurdles for US economic rebound do not end here.

 

Debt crisis is not a unique European issue. Analysts at Deloitte claim that US debt problems are “bigger than you think”. Last summer after fierce debates between Democrats and Republicans the nation’s policymakers have increased the debt ceiling by $2.1 trillion to $16.4 trillion. Note that at the end of Q1 2012 the nation’s GDP was equal to $15.5 trillion. Anyway, this was only a temporary solution and the critical debt level may be reached already around the end of the year.

 

Mounting debt represents a great burden for US economic growth. According to Deloitte, American government will need to spend at least $4.2 trillion in interest payments during the next 10 years. These are immense amounts of money that could be otherwise invested in increasing US competitiveness. Moreover, spending cuts touch the areas which are most connected to competitiveness, such as education and R&D.

 

Automatic spending reductions of more than $1 trillion are taking effect in January, while bush-era tax cuts expire at the end of 2012. No doubts that this will increase the negative pressure on the economic agents the next year. On the other hand, the Congressional Budget Office said that an extension of these cuts and current Medicare spending without monetary policy change would make the federal debt climb in 25 years to twice the size of US GDP.

 

At some point the Fed will probably have to introduce additional monetary stimulus whether extending Operation Twist or purchasing more government debt. There is scope for such action: US consumer prices increased by 1.7% in the 12 months ended in May showing the smallest 12-month gain since January 2011. The Fed’s mandate is to target 2% inflation. Inflationary pressure decreased due to the decline in gasoline prices.

 

At the same time, the more the Federal Reserve loosens its policy, the less room for maneuver it has: the interest rates are already extremely low, so their further decline probably won’t be efficient enough. As you may see on the chart below, the central bank’s balance sheet has more than doubled since 2008.

 

http://static3.fbs.com/sites/default/files/image/analysis/July2012/10_07_12/4._fed_balance_sheet.png

 

It’s also necessary to note that opinions in the Fed are divided. Although the FOMC has turned more dovish this year, there are those who think injecting more money into the economy is risky. Some officials claim that US economic outlook hasn’t significantly darkened yet. The annual Federal Reserve’s August meeting in Jackson Hole will be likely marked by the key monetary decisions as it was in the last couple of years.

 

In conclusion we would like to underline that without the European threat American economy would continue recovering with the press of huge debt looming over the US in the longer-term. However, the United States isn’t isolated from the uncertainty and risks of contagion which have been constantly emanating from Europe during the recent years.

 

US Treasuries still represent the largest and the most liquid sovereign debt market: the yields went down even after the nation has been downgraded by the Standard & Poor’s as US debt securities and the greenback remain the market’s final refuge in the absence of worthy alternative elsewhere. Yields on US 10-year government debt touched the record minimum of 1.44% in June. The Dollar Index added 10% since last summer.

 

Risk aversion will keep supporting US currency against its counterparts. However, the door for more monetary easing in America is still open. Both QE1 and QE2 led to the decline of the DXY by approximately 16% in 2009 and 7% in 2010-2011.

 

In the near future US policymakers are not as limited in their choices of further actions as the European ones – it’s even harder for more numerous and more divergent euro zone’s governments to reach consensus than for US parties. America’s manufacturing industry is in better shape and US markets seem more stable. Rating agencies confirmed American credit ratings for now, though with negative outlook. The tensions between Republicans and Democrats will keep on: the first will continue insisting that any increase in the nation’s debt limit should be matched by spending cuts of the same magnitude, while the latter will keep supporting the idea of economic stimulus. For now we do not see a way out of this stalemate. With the presidential elections at the end of 2012 there is a political battle coming, so the words “recovery”, “debt” and “Europe” will stay in the center of the polemics.

 

Elizaveta Belugina

 

Kira Iuchtenko

 

 

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Commerzbank: comments on USD/JPY

 

Analysts at Commerzbank expect USD/JPY to slide to 78.99 (200-day MA) as in an uncertain environment yen gains momentum as a safe haven. The pair is likely to remain above 78.61 (June 15 minimum) in a short term.

 

However, if USD/JPY manages to break below 78.61, a decline towards 77.65 (June minimum) will become possible. Strong resistance for the pair lies at 80.07/10 (July 5 maximum and 38.2% Fibonacci retracement) and 80.61 (June high and a 100-day MA).

 

http://static1.fbs.com/sites/default/files/image/analysis/July2012/10_07_12/daily_usdjpy_10.07._16-37.gif

 

Chart. Daily USD/JPY

 

 

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July 11: economy and currencies

 

http://www.fbs.com/sites/default/files/image/analysis/July2012/11_07_12/utro_eng.jpg

 

On Wednesday EUR/USD remains choppy ahead of FOMC meeting minutes: will the release reveal some discussions on QE3 or Fed funds rate? FOMC minutes (18:00 GMT) are probably most important risk event of the day. US will also publish a May trade balance (forecast: 48.5B trade deficit) and hold a 10-year bond auction today.

 

EUR remains weak today even as European finance ministers at a meeting in Brussels worked out a way for euro bailout funds to intervene in bond markets and said the first 30 billion euros of 100 billion euros in rescue loans will start flowing to Spanish banks this month. Spain was given an additional year (until 2014) to meet a 3% budget deficit target. On Wednesday Germany sells 10-year bunds. Yesterday Spanish and Italian 10-year bond yields were below the critical 7% level, giving some relief to the markets.

 

USD/JPY weakens for a fourth consecutive day on expectations the BoJ won’t add stimulus on a next meeting on Thursday. EUR/JPY reached a new one-month low on demand for the yen as a refuge. AUD, NZD and CAD are strong against their US counterpart. Australia consumer sentiment improved by 3.7% in July as households became more optimistic about the economic outlook . Canada releases a trade balance (forecast: 0.5B trade deficit).

 

 

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Westpac: trading AUD/JPY

 

Westpac analysts recommend going short on AUD/JPY at current levels, setting a stop at 82.35 and a target of 78.50.

 

In their view, this week the Aussie will get under pressure because of the negative data releases. Firstly, Australia employment report is to disappoint the investors on Thursday after the unexpectedly strong previous print: economists forecast the number of employed to increase only by 0.3K in June after a 38.9K growth in May. Secondly, China’s GDP is likely to come out below expectations (around 7.3% vs. a 7.9% forecast), what will also influence the Australian currency.

 

http://www.fbs.com/sites/default/files/image/analysis/July2012/11_07_12/daily_audjpy_10.07._11-38.gif

 

Chart. Daily AUD/JPY

 

 

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BoJ expected to leave the policy unchanged

 

On Wednesday the Japanese yen strengthens against the greenback for a fourth consecutive day. The Bank of Japan starts its 2-day meeting today and is widely expected to leave rates unchanged and not announce any new easing measures.

 

It seems that lately the regulator has become slightly more optimistic: the country's economy is headed for a moderate recovery as improvement in domestic demand eases the pain from slowing global growth. According to a Regional Economic Report released July 5 by the BoJ, in Q2 business conditions improved in all nine regions of Japan. Tankan manufacturing and non-manufacturing indices showed improvement in Q2 (-1 and 8 respectively).

 

Some analysts, however, expect the regulator to follow the central banks of Europe, Britain and China with its own monetary measures in a united effort to fight the global slowdown. Moreover, weaker national currency would be beneficial for the Japanese economy. Bank of The BoJ Governor Masaaki Shirakawa said on Tuesday that the bank is ready to undertake all the necessary measures to bring the nation out of its deflationary state. According to him, the BoJ has already accumulated 54 trillion yen of asset purchases, but is aiming for 70 trillion.

 

UBS: We continue to expect the BoJ to add more stimulus on a meeting and by this to weaken the yen. A deterioration of machinery orders and another drop in the current account confirmed the bad sentiment of economy watchers. Moreover, Japan is still struggling to recover after Fukushima.

 

http://www.fbs.com/sites/default/files/image/analysis/July2012/11_07_12/zagruzhennoe.jpg

 

Bank of Japan Governor Masaaki Shirakawa

 

Photo: Reuters

 

 

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Credit Suisse: trading EUR/USD

 

Analysts at Credit Suisse recommend going short on EUR/USD at current levels with a stop at $1.2340 and an initial target of $1.2160.

 

In their view, the fact that yesterday EUR/USD didn’t manage to overcome the $1.2340 resistance creates potential for a further decline. The next support for the pair lies at $1.2150 and $1.1985. Only a break through $1.2401/$1.2408 will let the pair reach $1.2693.

 

http://www.fbs.com/sites/default/files/image/analysis/July2012/11_07_12/daily_eurusd_11.07._14-29.gif

 

Chart. Daily EUR/USD

 

 

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FOMC: easing options remain open

 

The US dollar strengthens against the euro after the minutes of the FOMC June 19-20 meeting, in which Fed officials decided to extend the Operation Twist, revealed some members said additional stimulus may be needed to support the weak labor market. However, the greenback depreciates against the high-yielding currencies.

 

While several policymakers were in favor of the policy easing, the others believed that would only make sense if the economic rebound loses momentum or inflation drops. The Fed underlined that rates are likely to remain at "exceptionally low levels" at least through the end of 2014. Several Fed members said in an intriguing manner that it is necessary to develop "new tools" to ease financial conditions.

 

http://www.fbs.com/sites/default/files/image/analysis/July2012/12_07_12/ben.jpg

 

Photo: Bloomberg

 

 

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BofA: USD to rise regardless of FOMC

 

Specialists at Bank of America expect the greenback to remain strong regardless of the speculation the Fed will ease the monetary policy. They point that the overall trend for the US currency remains bullish.

 

According to their technical forecast, the Dollar index will increase to 85.32 (78.6% Fibonacci retracement from a 2010-2011 decline) if it manages to break above 83.54. A downward movement will become likely if the index falls below 83.00 and 80.73 support levels.

 

http://www.fbs.com/sites/default/files/image/analysis/July2012/12_07_12/usd_index.bmp

 

Chart. US Dollar Index (DXY)

 

Source: marketwatch.com

 

 

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