Comments and forex-analytics from FBS

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ECB announced the measures to support euro area banks

The European Central Bank announced new liquidity measures yesterday – 12- and 13-month loans in October and December, giving banks access to unlimited cash through January 2013, and the resumption of 40-billion euro covered bonds purchases aimed to encourage lending.

Strategists at UBS say that the measures should bolster the prospects of renewed net inflows to the euro zone. The specialists also point out that the ECB President Jean-Claude Trichet didn't hint at a rate cut, so both the single currency and stocks will get support.

In addition, the European Commission is pushing for a coordinated capital injection into banks, while German chancellor Angela Merkel claimed that Germany would not hesitate to recapitalize banks. On Sunday, October 9, Merkel is meeting French President Nicolas Sarkozy. The process of EFSF bill ratification is continuing: there are only 2 member nations left – Slovakia and Malta – who still haven't made the decision.

The pair EUR/USD rose from the 8-month minimum at $1.3145 hit on October 4 to the levels above $1.3400. Analysts at Brown Brothers Harriman believe that euro will be able to climb to $1.36/1.37, but then the demand for it weakens again and it will start falling again to end 2011 at $1.29.

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The market’s looking forward to NFP release

The main piece of data for today is the US September Non-Farm Payrolls figure released at 12:30 GMT.

Economists surveyed by Bloomberg News believe that the number of jobs increased last month by 55,000. The unemployment rate is expected to stay at 9.1% for the third month in a row. In August the number of employed remained unchanged versus the forecast of 68,000 increase.

The current situation of uncertainly about the global economic prospects and the concerns about European and US debt ruins American consumer and business confidence that, in its turn, affects spending and hiring. Analysts at Goldman Sachs estimate the chance of recession in the United States during the next year by 40%.

Specialists at TD Securities say that for the jobless rate to decline by 1 percentage point over a year payrolls should rise by 200,000 a month. During the 18-month recession that ended in June 2009 the nation’s economy lost 8.75 million jobs – only 1.9 million of them was recovered through August. US President Barack Obama proposed a $447-billion plan in September aimed to maintain growth and pushing down the unemployment rate next year.

As the market thinks that the number of jobs added last month in the US won’t be enough to curb unemployment, the mood is far from optimistic that supports demand for the greenback as the safe haven.

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Reuters’ poll: GBP/JPY prospects

British pound declined versus Japanese yen from 2011 maximums in the 140.00 area to the levels below 117.00.

The survey conducted by Reuters among more than 60 banks and currency analysts shows that the specialists expect GBP/JPY to bottom out at the current levels and then start rising.

According to their median estimate, the pair will be gradually moving up during the next 12 months to trade 118.60 in a month and then reach 123.20 in 6 months and 128.6 in September 2012.

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RBS: Aussie may return to the parity versus the greenback

Currency strategists at RBS note that though commodity currencies have been weakening so far (Australian, New Zealand’s and Canadian dollars all lost 8-10% in the third quarter) the situation is likely to change.

The specialists who have developed “economic surprise index” believe that the markets’ sentiment in the fourth quarter is going to improve as the flood of the negative news will abate, even though the Europe will keep facing serious debt issues.

In their view, the worst for AUD, NZD and CAD might be over, though they don’t completely rule out the risk that these currencies retest their Q3 minimums.

Aussie seems to be especially attractive as Australia has the biggest interest rates that lure investors with yield and if the Reserve Bank of Australia doesn’t cut the borrowing costs, the nation’s currency would get additional driver.

According to RBS, the pair AUD/USD will return to the parity versus the greenback by the end of 2011. As for the single currency, the strategists see further depreciation, but don’t expect the currency union to collapse.

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EUR/USD: fundamental factors

The single currency approached the 3-week maximum versus the greenback as it’s testing the levels in the $1.3700 area.

It happened as the risk sentiment improved after Chinese state-run fund announced that it had started buying the shares of the nation’s biggest banks (Industrial & Commercial Bank of China (1398), China Construction Bank, Agricultural Bank of China and Bank of China). The fund intends to continue such practices without unveiling any details about the amount of investments.

Analysts at Nomura note that Chinese government regards the equities of the domestic banks as cheap and its demand will encourage the entire Asian stock market. The specialists claim that the market in the risk-on mode, so one should stay away from the refuges such as US dollar and Japanese yen and move to the higher-yielding ones. The MSCI Asia Pacific index of shares added 2.1%.

Yesterday the leaders of Germany and France pledged to come up with a plan to recapitalize the region’s banks by the G20 Meeting on November 3. At the same time, strategists at RBS doubt that European authorities manage to resolve all key issues by the end of the month.

The negative factor is that Slovakia’s coalition hasn’t managed yet to come to agreement on the nation’s participation in EFSF. Slovakia is the only member of the currency union that hasn’t ratified the measure (Malta did so yesterday). Today the nation’s lawmakers vote again. Analysts at National Australia Bank warn that euro may slump in case Slovakia’s parliament votes against ratification.

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Analysts about EUR/USD future

Many leading currency experts believe that the Federal Reserve will launch the third round of quantitative easing in order to encourage the national economy and that the greenback will stop strengthening.

Analysts at JPMorgan Chase reduced their average forecasts for the greenback in the fourth quarter from $1.3387 to $1.34 per euro and from 77.06 to 76.6 yen. In their view, the Fed may begin discussing QE3 by the end of 2011 and begin asset purchases at the beginning of the next year. The specialists expect EUR/USD to end the year at $1.38 and the USD/JPY – at 75 yen.

Strategists at Westpac think that the bears won’t be able to push EUR/USD below $1.30. In their view, the pair will trade at $1.31 at the year-end.

All in all forecasters surveyed by Bloomberg project euro to appreciate to $1.40 by the end of 2012. Never the less, there still are those who prefer US currency.

Economists at Credit Agricole think that the risk of recession is exaggerated. In their view, in the medium term the greenback would benefit from the fact that US economy is in the better condition than the other major economies. According to the bank, EUR/USD will end the year at $1.33 and then drop to $1.26 by the end of 2012.

Analysts at Wells Fargo say dollar will end the year at $1.32 per euro pointing out that they are more optimistic on dollar’s future than on euro’s prospects.

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Trichet warns of systemic crisis

European Central Bank President Jean-Claude Trichet claimed that the euro zone financial crisis has become systemic and called for decisive political action.

«The high interconnectedness in the EU financial system has led to a rapidly rising risk of significant contagion. It threatens financial stability in the EU as a whole and adversely impacts the real economy in Europe and beyond,» claimed Trichet cited by Reuters.

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Mizuho: pound’s under pressure due to the weak data

UK economic data surprised to the downside: manufacturing contracted in August for the third month in a row declining by 0.3% versus the expected contraction of 0.1% confirming that Britain’s economic recovery’s under threat. In the second quarter the nation’s GDP expended only by 0.1% (q/q).

Last week the Bank of England raised the ceiling for bond purchases from 200 to 275 billion pounds billion pounds. According to the British Chambers of Commerce, additional monetary easing may not be enough to prevent recession, so there’s the need for more radical measures.

The pair GBP/USD dropped from 1-week minimum at $1.5688 to the levels in the $1.5630 area. If pound closes below 1.5500, it will slide to the key support at $1.5330.

Analysts at Mizuho Corporate Bank believe that by the end of 2011 sterling will fall below $1.50 versus the greenback and lower than 0.85 per euro.

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Troika authorized sixth bailout tranche for Greece

The so-called Troika – the European Union, the International Monetary Fund and the European Central Bank – sanctioned providing Greece with the sixth tranche of the bailout package at the beginning of November. Now it depends on the approval of the Eurogroup and the IMF.

According to Troika’s statement, the indebted nation keeps making progress in such areas as fiscal consolidation, privatization, the banking system and structural reforms.

Never the less, Greek economic outlook is considered to be pessimistic: the recession will be deeper than it was seen in June and Greek economy will start recovering only in 2013.

Greece won’t be able to meet its deficit target this year, partly because its GDP keeps contracting. Inspectors claim that the nation will probably have to conduct additional measures.

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Slovakia didn’t ratify the EFSF

Slovakia didn’t ratify the EFSF bill yesterday. The ruling coalition didn’t manage to gather enough votes from the Slovak parliament in favor of the measure: there were only 55 votes in favor, while the necessary majority is 76.

The other 16 member nations have already approved the bill, while the EFSF expansion has to be ratified unanimously.

Prime Minister Iveta Radicova was trying to persuade the lawmakers that the whole euro area is now in danger, so it’s necessary to unify efforts. As Radikova associated the EFSF vote with the vote of confidence to the government, the coalition collapsed. Still the Prime Minister who is leaving her post proposed a compromise that may allow the parties to reach agreement at the second vote that will take place in a few days.

Richard Sulik, leader of the dissident Freedom and Solidarity party, said that it would be better to allow Greece default rather than waste enormous amounts of money for loans that may never pay back. Sulik said that Slovakia’s participation in the bailout deal isn’t in proportion with its small economy and showed his intention to fight for changing that.

Never the less, some experts say that as the debt crisis is continuously deepening the plan might not offer enough support for indebted nations, especially taking into account the fact that the fate of such big economies as Spain and Italy may soon come at stake.

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Societe General: comments on EUR/USD

Technical analysts at Societe General claim that despite the negative event background the single currency keeps gaining versus the greenback.

In their view, the pair EUR/USD may rise to $1.3795 and even to $1.3850. The outlook for euro is positive as long as it’s trading above support at $1.3435.

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Senate rejected Obama’s job plan

More news from the policymakers: US Senate blocked Barack Obama’s $447-billion plan aimed to promote jobs creation. 2 Democrats joined the Republican minority criticizing stimulus measures for being costly and inefficient and voted against the bill.

The legislation includes the reduction of the payroll taxes for workers and employers and provides new funding for roads, bridges and other infrastructure. Parts of the plan may still be pushed through if Obama finds enough support for specific provisions.

US political parties can’t agree on the measures that could have to decrease the unemployment that stays at 9.1%. Republicans are in favor of permanent tax cuts and deregulation, while the President and congressional Democrats propose more federal spending and short-term tax reductions.

The inability of American lawmakers to reach agreement on the key economic and financial issues increased the uncertainty on the global financial markets making investors worry about the recovery prospects of the world’s biggest economy.

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Deutsche Bank about yen as a refuge

Currency strategists at Deutsche Bank note that Japanese currency has depreciated during the last few weeks.

The pair USD/JPY kept trading sideways, but it seems that investors are no longer tempted to leave everything for yen assets: there have been foreign equity outflows, and foreign bond buying by the Japanese which weren’t of much help to yen so far.

The more important thing is that the declining current account surplus and low interest rates bring the situation in Japan closer to what’s seen in other developed nations.

The bank points out that the number of short positions on yen has increased. In their view, that presents an opportunity to resume buying yen and selling US dollar

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BNY Mellon: euro's prospects have improved

The single currency rose to the 3-week maximums versus its US counterpart in the $1.3820 area.

The markets are waiting for the European Commission President Jose Barroso to make proposals about the recapitalization of the regional banks, on Greece and the participation of private sector in the bailout and the EFSF. Barroso is expected to announce its plan speaking to the European Parliament at 3 p.m., as Bloomberg cites the information from the unnamed official.

There was also some positive data released in the euro area: industrial production unexpectedly rose in August adding 1.2% from July level and showing the biggest increase since November 2010.

In addition, the inspectors of Troika indicated yesterday that Greece will get an 8 billion-euro ($11 billion) loan at the beginning of November. More details here http://www.fbs.com/analytics/news_markets/view/8908.

Analysts at Bank of New York Mellon note that the level of uncertainty has subsided. Even despite the internal political tensions – Slovakia failed to ratify the EFSF extension (see http://www.fbs.com/analytics/news_markets/view/8911) – the prospects of euro area have improved in comparison with what was seen a week ago.

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Greece: budget deficit in figures

During the period from January to September Greece’s central government budget deficit (without local authorities and social security spending) increased by 15% in comparison with the first 9 months of last year rising from 16.65 to 19.16 billion euro.

Greece’s debt load is expected to reach 173% of GDP in 2012 as its economy will shrink for the fifths year in a row.

Greece’s Cabinet approved a 2012 draft budget on Sunday which sees the next a deficit of 6.8% of GDP (versus the previous estimate of 6.5% of GDO) and 8.5% shortfall this year (versus earlier projection of 7.6% of GDP).

There are significant chances that the second bailout for Greece agreed on July 21 will be renegotiated. Greece is missing its budget deficit targets and the bigger the budget gap requires more financing, so the amount of loan (109 billion euro) has to be increased.

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Bank of Montreal: USD/CAD may fall to parity

Canadian dollar strengthened versus the greenback making the biggest advance in 2 months as the markets seem to be optimistic on the plan of the European authorities to recapitalize banks.

The pair USD/CAD declined from 1-year maximum at 1.0657 set on October 4 to the levels below 1.0200.

Analysts at Bank of Montreal claim that loonie may reach parity versus its US counterpart.

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Wells Fargo: comments on EUR/USD

Technical analysts at Wells Fargo are neutral/positive on the single currency in the short-term. In their view, among the positive factors there are significant short positions on euro and favorable readings of the technical indicators, such as the momentum ones.

In the longer perspective, however, EUR/USD remains within downtrend due to the euro zone’s economic growth slowdown and potential ECB’s easing.

According to the bank, resistance for the pair is situated at $1.3936 (September 15 maximum), $1.4061 (200-day MA) and $1.4247. Support levels are found at $1.3566, $1.3145 (October minimum) and $1.2874 (January minimum).

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BoA Merrill Lynch: forecast for euro

The single currency has made a significant advance versus the greenback during the last several days. The pair EUR/USD climbed from the 8-month minimum at $1.3145 hit on October 4 to the levels in the $1.3800 area.

Analysts at Bank of America Merrill Lynch explain euro’s gains by squaring of excessive short positions. In their view, the up move is a correction and the European currency won’t be able to grow on the sustainable basis.

The specialists claim that EUR/USD may rise to $1.4000 in the next 1-2 weeks and then the bears will once again take the situation in their hands. So, investors are to look for the chance to resume selling the pair.

The bank also points out that the dynamics of euro is strongly correlated with the oil prices: when the latter increases, oil exporters tend to convert their dollar earnings in euro to keep their assets balanced. As a result, it’s necessary to take into account that as long as China’s economy stays in a good shape and the demand for commodities is high, the single currency will be supported against its US counterpart.

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Minutes of FOMC September meeting

Last month, the Federal Reserve decided to perform Operation Twist or, in other words, replace $400 billion of Treasuries in the central bank’s portfolio with longer-term debt to reduce borrowing costs.

According to the minutes of the US Federal Open Market Committee’s last meeting that took place on September 20-21, the majority of FOMC members are in favor of unveiling more information about the Fed’s goals and how they influence the central bank’s decisions. In addition, many policymakers think that it’s necessary to establish specific levels of inflation and unemployment as conditions for keeping interest rates near zero.

Some FOMC officials including Fed’s Chairman Ben Bernanke believe that asset purchases would be a more efficient tool than the Operation Twist and that QE should be retained as an option, while others warned that further expansion of the Fed’s balance sheet would more likely raise inflation and inflation expectations than stimulate economic activity. The Fed has also Fed bought $2.3 trillion in housing and government debt in two rounds of QE from December 2008 to June 2011. However, US economy still remains weak.

The FOMC was also discussing the possibility of communicating its decisions through other way than the post-meeting statements.

Analysts at Daiwa Capital Markets America believe that most FOMC members would like to save QE as the last measure in case the economy starts contracting and there is the risk of deflation.

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Commerzbank: technical comments on EUR/USD

Technical analysts at Commerzbank expect the single currency to stay today below resistance in the $1.3838/48 area (July minimum/50% Fibonacci retracement of the decline from the August maximum) trading versus US dollar.

If EUR/USD managed to overcome the mentioned levels, it would be able to rise to $1.3936 (September 15 maximum) and $1.4013 (61.8% Fibonacci retracement) before another move down.

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Wells Fargo: comments on AUD/USD

Australia’s dollar finds itself under the impact of both positive and negative factors.

On the one hand, the payrolls in Australia increased in September by 20,400 exceeding the median forecast by more than in 2 times. On the other hand, Chinese exports increased last month at the slowest pace in 7 months, while the trade surplus of Australia’s main trading partner declined from 17.8 billion yuan in August to 14.5 billion in September.

Analysts at Wells Fargo see moderate strength for Aussie. In their view, the currency will be appreciating taking onto account accommodative policy of the Federal Reserve, but will underperform other commodity currencies as the rate hikes of the Reserve bank of Australia are unlikely, while rate cuts are possible.

The pair AUD/USD rose from 1-year minimum in the 0.9390 area hit on October 4 to the levels above the parity.

Resistance levels for Aussie are found at $1.0377 (200-day MA), $1.0398 (September 16 maximum), $1.0664 and $1.0767 (September maximums). Support levels are situated at $0.9866 and $0.9388 (October minimums).

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Commerzbank: technical comments on USD/CHF

The greenback went down from the multi-week maximum versus Swiss franc at 0.9315 reached on October 6 to find support in the 0.8927/18 area (September 12 maximum, September 29 minimum).

Technical analysts at Commerzbank believe that dollar’s decline will likely to limited by the 1-month uptrend support line and USD/CHF may return up to 0.9150.

If the bears manage to breach the mentioned support, the pair will be poised down to 0.8783/0.8778 (the 3-month support line and the 200-day moving average).

Wells Fargo: forecast for USD/CHF

Analysts at Wells Fargo are bullish on the greenback versus Swiss franc in the coming months.

The specialists underline that the Swiss National Bank has managed to weaken its national currency by keeping EUR/CHF above 1.2000. In addition, the bank expects US dollar to strengthen against euro that, in its turn, may give USD bulls more powers to push up the pair USD/CHF.

According to Wells Fargo, USD/CHF will reach 0.9175 in 3 months, 0.9375 in 6 months, 0.9700 in 9 months and reach the parity in a year from now.

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RBA lowered the benchmark interest rate

The Reserve bank of Australia lowered its benchmark interest rate from 4.75% to 4.50%. The majority of the economists now agree that the RBA is unlikely to start the easing cycle.

Analysts at HSBC claim that as long as Aussie remains strong, the central bank will be less concerned about inflation that will prevent it from decreasing the borrowing costs. In addition RBA’s statement doesn’t contain hints at further rate cuts. According to the specialists, RBA’s approach has switched to neutral.

Strategists at ANZ aren’t sure about the central bank’s neutral position but say that they don’t expect another easing move in December naming February as the potential time when the next cut arrives. Analysts at St. George Bank look forward to only one more rate reduction in March.

Australian dollar fell versus its US counterpart from today’s maximum at $1.0566 to the levels below $1.0450.

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UBS increased forecasts for EUR, GBP, AUD and NZD

Currency strategists at UBS increased their 1-month forecast for the single currency versus the greenback from $1.30 to $1.40 and 3-month one from $1.20 to $1.35. In their view, the pair EUR/USD will be trading between $1.35 and $1.45 during the next few weeks.

The predictions for GBP/USD were also lifted up from $1.51 and $1.40 to $1.60 and $1.55.

In addition, the specialists raised their 1- and 3-month estimates of future AUD/USD rate from 0.95 and 0.90 to 1.04 and 0.97 and of NZD/USD from 0.76 and 0.72 to 0.80 and 0.74 respectively.

As the reason for the revisions the analysts cited the improvement of the market’s sentiment after the European authorities took actions to safe Greece from default.