Comments and forex-analytics from FBS

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RBS: GBP/USD may break higher

British pound keeps rebounding versus the greenback from 4-1/2 month-minimum at $1.5268 hit on June 1. Today sterling opened with a gap higher following euro and other riskier currencies on relief that Spain will get external funding for its troubled banks.

Analysts at RBS note that the reliable support at $1.5300, which had been tested for several times since 2010, has managed to hold the bears. As a result, the specialists see the chance of sterling’s return to the $1.6000/50 area. In their view, the outlook for the British currency for the rest of the months has improved and GBP/USD has more chances to break higher than EUR/USD.

Resistance: $1.5602 (March 12 minimum, June 7 maximum), $1.5664 (38.2% retracement of the decline in May), $1.5786 (50% retracement).

Support: $1.5514 (23.6% retracement of the decline in May), $1.5300, $1.5233 (2012 minimum).

Chart. Daily GBP/USD

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June 12: economy and currencies

EUR/USD began today’s trading day edging higher. However, the pair’s staying below the strong psychological resistance of $1.2500. On Monday the common currency has sharply declined when the initial optimism caused by the Spain’s bailout request began dissolving as investors realized that the region’s crisis is far from over. Italy’s 10-year bond yields reached 6.03% on yesterday’s auction, while Spain’s borrowing costs have already overcome the 6.50% threshold. Riskier currencies such as Australian and New Zealand’s dollar recovered from yesterday minimums, but the trade promised to be quite choppy this week, so be careful.

The Japanese yen declines against its major peers after the International Monetary fund said that the currency is overvalued and the Bank of Japan should ease the monetary policy further. In other words, the IMF justifies the potential BoJ intervention at forex market. The next BoJ policy meeting is scheduled on Friday, June 15. Note that Japanese tertiary industry activity went down by 0.3% in April (consensus-forecast was +0.4%). USD/JPY consolidated above Kijun-sen at the daily Ichimoku chart in the 79.10/80 area.

Events to watch today:

Euro zone: Greek T-bill auction.

Great Britain: A bunch of important figures is to be released: manufacturing and industrial production data and NIESR GDP estimate. According to economists, manufacturing production increased by 0.1% in April compared with a 0.9% growth in March.

U.S.: Federal budget balance is expected to show $107.2 billion deficit in May after $59.1 billion surplus in April.

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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: $1.2450, $1.2540, $1.2625;

USD/JPY: 78.00, 79.00, 79.05, 79.25, 79.30, 80.00;

EUR/JPY: 99.80;

AUD/USD: $0.9700, $0.9770, $0.9950, $1.0000;

EUR/GBP 0.8050.

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Commerzbank: euro’s recovery may be over

Technical analysts at Commerzbank claim that euro’s correction versus the greenback may be over as EUR/USD didn’t manage to overcome resistance at $1.2672 (38.2% Fibonacci retracement of May decline). In addition, the specialists spotted divergence on the H4 RSI chart. As a result, the bank recommends selling the single currency. As the same time, the analysts don’t completely rule out the possibility of euro’s advance to $1.2786 (50% retracement) and even $1.2825 (May 21 maximum) if EUR/USD overcomes resistance and rises above June maximums. On the downside, below $1.2435 (June 8 minimum) euro will be vulnerable for a decline to $1.2288 (2012 minimum) and then to $1.2058 and $1.2000.

Chart. H4 EUR/USD

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Wednesday, June 13: economy and currencies

Risk sentiment is affected by lack of details in a loan agreement to help Spain recapitalize its banking sector and concerns that the bailout will aggravate the country’s huge public debts. Italian yields went up to 6.3% yesterday, the highest level since end of January. Spanish borrowing costs rose to 15-year maximum of 6.83%. EUR/USD is trading below 23.6% Fibonacci retracement of its decline in May.

Demand for safe havens strengthened after Fitch Ratings predicted Spain will miss budget-deficit targets. Moreover, the agency downgraded 18 Spanish banks yesterday. US dollar strengthened versus its major peers. USD/JPY remains seated in the 79.10/80 area, above Kijun-sen at the daily Ichimoku chart.

Aussie should have gained on comments of the RBA Governor Glenn Stevens who said that the strength of the nation’s currency benefits consumers and though “a number of sectors are really struggling with the exchange rate where it is, we shouldn’t wish too quickly for a low exchange rate.” However, AUD followed euro stalling its progress against the greenback, unable to overcome the parity level.

Events to watch today:

Euro zone: Industrial production in the region is forecasted to drop by 0.9% in April after a 0.3% decline in March. Germany holds a 10-year bond auction. Italy holds a T-bill auction.

U.S.: Retail sales are expected to decrease by 0.1% while core retail sales (excluding automobiles) – to increase by the same percent. Producer price index may go down by 0.6% in May. The April disappointing results, when a 0.2% decline was recorded, reinforce the worries about the further monetary policy easing. Business inventories may increase by 0.4% April. Later in the day a 10-year bond auction will be held.

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EUR/USD: negative pressure’s again here

The single currency is consolidating versus the greenback above $1.2500, but below 23.6% Fibonacci retracement of its decline in May. Euro’s chances for rebound are limited ahead of Italian debt auctions (especially the sale of Italian debt maturing in 2015, 2019 and 2020 which will take place tomorrow) and Greek elections on Sunday.

Spain’s 10-year bond yields surged to 6.83% (the highest since 1997), after the nation became the fourth euro zone member to ask for an international bailout. On Tuesday Fitch ratings downgraded 18 Spanish banks and added that the country is likely to remain in recession until late 2013. Italian yields went up to 6.3% yesterday, the highest level since end of January.

The ECB and the European Commission propose to create a tight banking union that will supervise the biggest banks and provide a deposit guarantee scheme. German officials, however, oppose the quick establishment of the union. In their view, the current level of economic and financial integration isn’t high enough. Meanwhile, the IMF chief Cristine Lagarde underlined yesterday that the euro block has only 3 months left to solve its problems, otherwise it will become difficult to avoid a breakup. The market’s speculating that the issue with the banking union may be adressed at the G20 meeting on June 18-19.

Bank of Tokyo-Mitsubishi UFJ: “Euro is going to drift around $1.25 before the weekend. It’s also possible that even on Monday we may still know very little about who’ll be in government in Greece. That's why we have to brace ourselves for more uncertainty ahead.”

Commerzbank: bearish pressure on EUR/USD will decline only above $1.2672.

Chart. Daily EUR/USD

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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: $1.2400, $1.2440, $1.2445, $1.2455, $1.2465, $1.2500, $1.2550, $1.2570, $1.2650.

USD/JPY: 79.55;

USD/CHF: 0.9850;

AUD/USD: $0.9800, $0.9870, $0.9950;

EUR/GBP: 0.8030, 0.8050;

GBP/USD: $1.5500, $1.5600, $1.5685.

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RBNZ is unlikely to cut rates

The Reserve Bank of New Zealand is likely to leave the official cash rate at 2.5% when it meets on Thursday, June 14. Despite the increased uncertainty in the euro zone and the slowdown of the global economic rebound, further rate cuts, according to the RBNZ Governor Alan Bollard, could cause a new credit boom.

The rate cut expectations declined sharply in recent weeks: after about 80% of probability a few weeks ago, these days only 20% of economists believe in the chance of a cut.

Specialists at JPMorgan expect a rate cut to happen in the next few months, because the CB needs more information on the global economy prospects to take the right decision.

Photo: FX service

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Westpac: trading AUD/NZD

Analysts at Westpac claim that one should wait until the pair AUD/NZD rises on the RBNZ rate-cut talk, and then sell the Australian dollar versus its New Zealand’s counterpart around 1.2870, targeting 1.2600 and stopping at 1.2960.

The Reserve Bank of New Zealand will be meeting Wednesday night. Westpac believes that the central bank won’t lower the borrowing costs, so trade on the market’s expectations seems like a good opportunity.

According to Westpac, the RBA will cut rates a couple more times, but the RBNZ will remain on hold for the rest of 2012.

Chart. Daily AUD/NZD

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Sumitomo: EUR/JPY may slide to record low

Analysts at Sumitomo Mitsui claim that euro versus has completed a “head-and-shoulders” pattern Japanese yen at the end of May. According to the specialists, the first shoulder was formed on January 26 (102.20 yen), the head – on March 21 (111.43 yen) and the second shoulder – on May 22. The bank says EUR/JPY may drop to the new record minimum of 88.51 yen – this target is calculating by subtracting the distance between the neckline and the head from the neckline.

If we look at the daily Ichimoku Chart, we’ll see that the pair’s testing Kijun-sen (blue line) as well as the psychological resistance at 100 yen. Downward pressure on euro will strengthen if it fails at this point and slides below support of Tenkan-sen (red line) in the 98.30 zone.

Chart. Daily EUR/JPY

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Commerzbank: comments on USD/CAD

Technical analysts at Commerzbank note that the greenback has eased down from June maximum in the 1.0450 area versus its Canadian counterpart consolidating above 1.0200.

The specialists claim that if USD/CAD breached the support mentioned above, it will slide to 1.0124 (50% retracement of the May advance) and then to at 1.0105 (200-day MA).

However, the bank’s baseline scenario is positive for US currency: US dollar may recoil up from 1.0200 and travel upwards during the next few weeks. The targets on the upside above 1.0450 are 1.0523 (November maximum) and 1.0583 (200-week MA).

Chart. Daily USD/CAD

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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: $1.2400, $1.2415, $1.2575, $1.2585, $1.2600, $1.2645, 1.2650;

USD/JPY: 79.75, 80.00, 81.20;

GBP/USD: $1.5600, $1.5700;

EUR/GBP: 0.8025, 0.8040;

AUD/USD: $1.0000, $1.0120, $1.0150, $1.0200 (large), $1.0250.

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GBP/USD: fundamental and technical comments

GBP/USD keeps consolidating on the hourly chart between $1.5650 and $1.5720.

On the positive side we have positive risk sentiment after Asian session. In addition, the Bank of England is expected to increase its asset purchase program on Thursday to restart the engines of the lackluster UK economy.

On the downside there’s weak British construction PMI data (the index fell to 48.2 in June from 54.4 in May and below consensus of 53.0 indicating contraction of the industry). Net lending to individuals came at 1.3B in May (above 1.1B expected, but below 1.4B in April).

Analysts at Commerzbank think that the pair will retest resistance in the $1.5752/1.5786 area (200-day MA and 50% Fibonacci retracement). In this region one may also find $1.5806 (55-day MA) and $1.5771 (200-week MA). The resistance seems strong and it will likely stop the first bullish attack. If the bulls manage to overcome resistance , GBP/USD will be able to rise above $1.6000 where the specialists also see high odds of failure.

Support is at $1.5600 and $1.5485. Below these levels there’s a risk of a slide to $1.5407 and $1.5269/35 (recent minimum and 2012 minimum).

Chart. Daily GBP/USD

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Where will the AUD move?

On Tuesday Australian dollar has been strengthening against its major counterparts on the back of the positive data. There is no surprise that the RBA left the interest rate unchanged on today’s meeting: Australia is evidently stronger these days than many euro zone’s economies.

The news provided a temporary bounce for the AUD/USD, raising the pair to $1.0283, before it stabilized near $1.0260 (near to the strong resistance level – 78.6% Fibonacci retracement from a May drop and an intersection of the100- and 200-day MAs).

Where will the pair move next? Most analysts expect the Aussie to keep gaining, especially if the other regulators take new easing measures. In our view, it makes sense to buy AUD/USD at current levels targeting $1.0300 and stopping at $1.0085. If the AUD/USD manages to overcome the current level, an intraday rise to $1.0285 and $1.0310 will become possible. Support for the pair lies at $1.0225 (June 20 maximum), $1.0211 (July 2 minimum), $1.0128 (61.8% Fibonacci retracement), $1.0085(June 15 maximum), and $0.9965 (June 25 minimum).

Chart. Daily AUD/USD

AUD/JPY also demonstrates growth and has already overcome the yesterday’s maximum. The cross trades in an upward channel since early June. According to analysts, AUD/JPY has good prospects for growth: AUD is second strongest currency of last 5 days behind the NZD and ahead of the JPY.

Chart. Daily AUD/JPY

EUR/AUD keeps moving on a downside for a fifth consecutive week. The pair managed to touch a 5-month low today. However, the RBA announcement didn’t influence the pair significantly. The support for EUR/AUD lies at $1.2225 (January 17 minimum) and $1.2145/30 (twice acted as a support in February), while resistance – at $1.2359 (July 2 maximum), $1.2436 (June 29 maximum), $1.2525 (June 22).

Chart. Daily EUR/AUD

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Outlook for USD/JPY

USD/JPY is consolidating between 79.20 and 80 yen staying within larger downtrend. The pair is trading on the upside helped by yen’s broad weakness during the Asian session.

Analysts at Bank of Tokyo-Mitsubishi UFJ note that although everyone is used to yen’s strengthening on weak US economic data, this pattern doesn’t work anymore. In their view, yen depreciated since the beginning of the year due to trade and merger and acquisitions by Japanese firms. The specialists think that yen’s purchases haven’t revived and the greenback may recover to 80 yen in the near term.

Experts warn that thin trading volumes may exaggerate price movements ahead of the US Independence Day holiday on Wednesday, the ECB meeting on Thursday and Friday’s US NFP report.

The technical picture

On the daily USD/JPY chart US dollar enjoys support of Kijun-sen, but remains under pressure of large looming bearish Ichimoku Cloud. However, the Kumo has so far significantly narrowed that means that the bulls are really fighting to regain the market.

If USD/JPY overcomes psychological resistance at 80 yen, enters the daily Cloud and gets above 38.2% Fibonacci retracement of the decline from March maximums to May minimums around 80.13, it will be able to rise to 80.92 (50% Fibonacci retracement) and probably to 81.59/78 (current Ichimoku cloud top, 61.8% Fibonacci retracement), though unlikely higher.

If USD/JPY falls below 79.13 (Kijun-sen), support will be at 78.90 and 78.61 (June 15 minimum).

Chart. Daily USD/JPY

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EUR/NZD: will the trend persist?

EUR/NZD is declining for the eighth week in a row: the pair is close to setting a new historical low (the current minimum was reached on February 15). Since its peak on May 18 the pair has already declined more than by 7%.

However, some analysts believe the recent events such as a temporary Greek relief and a positive outcome of the EU summit could reverse the sustainable trend. Is it possible? Not really. New Zealand dollar is actually the best-performing currency in recent months, while the euro zone’s euphoria comes to an end – root of the problem grows ineludibly despite all the summits and negotiations.

Specialists at RBS also don’t forecast the trend reversal: in their view, it doesn’t matter whether the overall risk sentiment is positive or negative; the EUR/NZD is expected to go down. If the pair breaks support 1.5590/50, a decline to the 1.5250 area becomes possible.

Support:

1.5632 (July 2 minimum);

1.5618 (today’s minimum);

1.5590 (Feb. 15 minimum).

Resistance:

1.5820 (April13 minimum);

1.5888 (June 29 maximum);

1.5999 (June 20 maximum);

1.6181 (23.6% Fibonacci retracement from Nov. 2011 – Feb. 2012 fall).

Chart. Daily EUR/NZD

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July 4: economy and currencies

US markets are closed for the Independence Day holiday, so trading volumes will be rather thin.

Asian session was rather quite with shares rising to 7-week maximum on the hopes for more monetary policy stimulus to support the faltering global economy beginning with the ECB on Thursday. The expectations of more easing predominate over the market warming investor’s sentiment.

Australian retail sales rose by 0.5% in May (vs. +0.3% expected). Aussie and kiwi gained against their American counterpart.

EUR/USD edged down ahead of tomorrow’s Spanish bond auction and the ECB meeting. According to the forecasts, ECB will lower its key interest rate by 25bps to 0.75%. Today’s release of final June services PMI is to confirm that the region’s service sector keeps contracting. Spain is scheduled to sell 3-, 4- and 10-year debt; a 10-year bond yield was at 6.25% yesterday compared with a record maximum of 7.29% reached on June 18.

Elsewhere, don’t miss UK services PMI release: the index is still seen above the critical 50 mark, though economists expect a decline from 53.3 in May to 59.2 in June.

Financial markets keep watching the development of the scandal about Libor manipulation (British bank Barclays has been accused of manipulating worldwide interest rates and other European and US banks will likely follow the suit). Bob Diamond, Barclays’ former CEO faces grilling in Parliament after resigning yesterday. The whole situation raises the risks of confidence to the whole banking system and its ethics.

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Morgan Stanley: bearish on risky currencies

Morgan Stanley lowered their forecasts for the Australian, Canadian and New Zealand dollars, explaining that the current economic conditions are unfavorable for the commodity-exporting countries.

Specialists believe the global economic slowdown is to weigh on the risky currencies: weak manufacturing PMI indices in G10 countries warn that the demand for raw materials will remain low.

According to analysts, AUD/NZD will fall to $0.95 by the end of 2012, compared with a previous forecast of $0.99. NZD/USD is expected to close the year at $0.75, compared with the earlier forecast of $0.80. USD/CAD is to strengthen to C$1.06, compared with the previous forecast of C$1.03.

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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: $1.2450, $1.2500, $1.2800;

USD/JPY: 79.50, 80.00;

EUR/GBP: 0.8060;

AUD/USD: $1.0000, $1.0100.

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BOTMUFJ: AUD/JPY may go up

Analysts at Bank of Tokyo Mitsubishi UFJ think that Australian dollar may rise above 83 yen level for the first time since May.

The specialists point out that AUD/JPY’s 5-day MA crossed 200-day MA bottom-up forming a “golden cross,” a bullish signal. In their view, if the pair closes above its 90-day MA at 82.38 yen (blue line on the chart), it will be able to rise to 83.23 yen (61.8% Fibo retracement of the decline from March 19 maximum to June 1 minimum).

Chart. Daily AUD/JPY

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Citi: data releases disappoint analysts

The Citigroup economic surprise indexes (CESI) entered a negative territory early May and are already approaching to the one-year lows. That means that analysts get systematically disappointed by the data releases in largest economies in the world.

CESI measures the variations in the gap between the expectations and the real economic data. When the CESI is positive it means that the released data have been better than the expectations. When CESI is negative, it means that actual results have been worse than expectations.

On the chart below you may see the dynamics of indices for G10, US, Europe, and China.

Chart. Citigroup economic surprise index (CESI)

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How will EUR react to ECB's decision?

Analysts at Standard Chartered claim that as short positions on euro are extremely large, any ECB rate cut will be initially positive for the currency as the markets will be delighted that the region’s economy gets monetary support. At the same time, the specialists warn that such a surge is possible only in the very short term. The overall medium-term outlook for the single currency is bearish.

At the same time, the markets are hoping for the ECB to act and, if it doesn’t, the disappointment could pull EUR/USD down aiming for June 28 minimum around $1.2407. However, Standard Chartered expect the central bank to “do its bit” i.e., cut rates to support activity and boost confidence, especially as rate cut was discussed at the June meeting.

The ECB finds itself under pressure to ease monetary policy and help the euro area overcome its economic slowdown amid fiscal tightening and austerity. Near-term inflation pressures have declined making the central bank a scope for a rate cut.

Standard Chartered is looking for a 25bps cut of the refi rate (in line with the consensus forecast). In their view, another round of 3-year LTRO (Long-term liquidity operations) is unlikely, though the central bank may offer a shorter liquidity facility due to still-high bank funding stress in some countries.

Chart. H1 EUR/USD

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Citi: threats to risk sentiment

Last week’s EU summit did bring relief to the financial markets: risk currencies strengthened, European credit default swap spreads narrowed, and stocks rallied.

Amid the risk sentiment recovery, analysts at Citi came up with 5 threats which may shoot at any moment making the market slump.

The threats are:

1. Finland and the Netherlands obstruct the bailout.

2. More euro zone’s nations need external financing due to increasing borrowing costs.

3. The IMF says it won’t negotiate or renegotiate with Greece.

4. The ECB will fail to make the region’s economic growth pick up and the situation at debt markets stabilize (“In practice these would amount to little more than showing the flag – were the euro zone’s sovereign debt issues solvable via policy rate cuts, those would have been put in place long ago,” says Citigroup).

5. A gap is growing between bad economic data and more or less optimistic markets.

Indeed, there’s much to be aware of. Citi’s economist Steven Englander cited Calvin Coolidge, the 30th President of the United States: “If you see ten troubles coming down the road, you can be sure that nine will run into the ditch before they reach you.” However, the President didn’t give any advice on what to do about the tenth trouble.

Image from http://ilianaivanova.eu

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EUR/USD: technical and fundamental

On Wednesday EUR/USD has been moving down. The current dynamics of the pair resembles consolidation in the uneven range: euro’s attempt to recover from June 1 minimum of $1.2288 met resistance around 38.2%/50% Fibo retracement of the May decline in the $1.2670/1.2750 range. The pair remains supported at $1.2523 (23.6% Fibonacci retracement of May decline).

Analysts at Commerzbank expect EUR/USD to slip to the $1.2520/1.2460 area. The next support lies at $1.2407 (June 28 minimum) and at $1.2288 (June 1 minimum). However, if the pair trades above this area, it will have chance to test important resistance at $1.2698 (July 3 maximum), $1.2746 (38.2% Fibonacci retracement of this year’s decline and a 55-day MA) and $1.2825 (May 21 maximum).

It’s obvious that the situation in the euro area remains highly unstable these days making the technical analysis less reliable – there are many events ahead which will surely have strong impact on the market. It’s necessary to note that there are no releases from the US because of the bank holiday. Markets stand still ahead of the important news to come out on Thursday (Spain’s 10-year bond auction and the ECB statement – many analysts forecast the regulator to cut rates to 0.75%).

Chart. Daily EUR/USD

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GBP/USD down ahead of the BoE

GBP/USD has been trading on a downside for the third day. On Wednesday a PMI report showed UK services growth fell below the expectations (a decline to 51.3 in June from 53.3 in May), what increases the chances that BoE will add stimulus tomorrow.

According to the median estimate of analysts, surveyed by Bloomberg, the regulator is to raise its target for bond purchases by 50 billion pounds to 375 billion pounds. The sterling, therefore, is likely to weaken further. Specialists at Bank of Tokyo-Mitsubishi UFJ expect GBP/USD to depreciate to $1.50 (a two-year low) over the next three months. Analysts at RBS also expect sterling to weaken in the weeks ahead, as the currency catches up with a continued easing in monetary conditions in the UK.

Support:

1.5616 (50- and 100-day MA’s crossing);

1.5600 (June 7 maximum);

1.5538 (Jun.25 maximum);

1.5510 (23.6% Fibonacci retracement of an April-June decline).

Resistance:

1.5660 (38.2% Fibonacci retracement);

1.5723 (July 2 maximum);

1.5783 (50.0% Fibonacci retracement).

Chart. Daily GBP/USD