Comments and forex-analytics from FBS

[ryuroden]

Commerzbank: comments on EUR/USD

Technical analysts at Commerzbank keep regarding the outlook for the single currency versus the greenback as negative.

In their view, EUR/USD is likely to decline to $1.3380/60 (78.6% Fibonacci retracement of the October advance and September minimums) and then to $1.3145 (October 4 minimum). According to the bank, in the longer term the pair is poised down to $1.2000.

The specialists say that bearish pressure on euro will ease if it manages to rise above $1.3870/80. If euro succeeds, it will be able to return up to the 55- and 200-day MA at $1.4013/1.4104. The major resistance is set at $1.4250/55.

[ryuroden]

Euro area: political situation

Italy

New Italian Prime Minister-designate Mario struggles to get political parties to agree to take part in his technocratic Cabinet as it would be hard for the government without political representation to pass unpopular laws through the government.

Monti has to convince investors that the nation is able to reduce its 1.9 trillion debt ($2.6 trillion) and stimulate economic growth which was below euro area average during the last decade.

Greece

New Greek Prime Minister Lucas Papademos underlined that the country’s future is in the euro area. According to Papademos, the membership in the currency union guarantees Greece “monetary stability and creates the right conditions for sustainable growth”, reports Bloomberg.

The new government formed on November 11 has to implement budget measures necessary to obtain the second bailout package of 130 billion euro ($177 billion) adopted on October 26 and conduct a voluntary debt swap by the end of February.

For now the main goal is to secure the payment of an 8 billion-euro tranche of the first bailout program. In order to avoid default Greece needs this money before the middle of December.

The EU waits for all Greek parties to give written commitment to structural reforms and austerity measures. So far opposition leader Samaras has been declining to do that.

Germany

German Finance Minister Wolfgang Schaeuble said that Merkel’s government wants Greece to remain a member of the European Monetary Union. At the same time, Christian Democratic Union party led by the Chancellor voted to allow euro states to quit the currency area.

[ryuroden]

Euro area: sovereign bond yields are surging

The single currency got today under negative pressure. The pair EUR/USD dropped from the levels in the $1.3800 area where it started the week to the $1.3500 zone. The pair EUR/JPY hit 1-month minimum at 100.93 yen.

European bond yields surged increasing concerns about the region’s debt crisis. Italy’s 10-year yield approached the critical level of 7%. The yield spreads between 10-year debt of Spain, France, Austria and Belgium and similar German bunds all widened to the maximal level since the euro was adopted in 1999.

The economic data were also discouraging: German ZEW Economic Sentiment index declined this month to the lowest since October 2008 of minus 55.2.

Strategists at Nordea warn that if euro falls below last week's minimum at $1.3480, the number of bears will sharply increase. Analysts at Bank of Tokyo Mitsubishi UFJ believe that the fate of the currency union is still vague as the European nations may move closer to fiscal integration or break apart. In their view, EUR/USD will drop to $1.25 during the next 6 months.

[ryuroden]

On RBA rates and Aussie’s prospects

News about new technocratic governments in Italy and Greece brought only short-term relief to the market. Yesterday’s surge of euro zone bond yields threw investors into the risk-averse mode that affected such risk-sensitive pair as AUD/USD.

Analysts at RBC Capital Markets believe that Australian dollar’s dynamics versus the greenback will remain extremely volatile as Aussie is closely correlated with the equity markets which are seized by uncertainty. In their view, the risks for AUD/USD are to the downside.

Dow Jones reports that the interest rate swaps market is currently pricing in a 100% chance of a rate cut by the RBA in December, though the surveyed economists expect the RBA to keep the rates unchanged.

This month RBA lowered its benchmark rate by 25 basis points to 4.5% citing the projected slowing inflation and the risks posed by the euro zone debt crisis. The central bank gave no hints on further rate cuts in its meeting minutes released yesterday. According to the document, the policymakers have also discussed the possibility of staying on hold. The RBA underlined that the mining industry could become the driver of the nation’s economic growth that would require more tight monetary policy in the medium term.

Analysts at Westpac, however, claim that the mentioning of the risks connected with Europe means that the RBA left the door open for further easing, and look forward to 75 basis points of rate cuts starting in February.

[ryuroden]

Wells Fargo: negative forecast for EUR/USD

Analysts at Wells Fargo are bearish on the prospects of the single currency versus the greenback during the next 12 months. The specialists believe that euro will be affected by the increasing borrowing costs for the peripheral euro area nations and the risk of recession in the region.

According to the bank, EUR/USD will fall to $1.3000 in 3 months, to $1.2800 in 6 months and to $1.2600 in 9 months and hit $1.2400 in November 2012.

[ryuroden]

Japan: monetary policy, economy, yen’s rate

The Bank of Japan left its benchmark rate unchanged at the minimal levels of 0-0.1% and the asset-buying fund at 20 trillion yen ($260 billion) after increasing it by 5 trillion yen in October.

As Japan’s economy strongly depends on the external demand for Japanese goods, deepening European debt crisis, the flood in Thailand and the risk of global economic slowdown will have a serious negative impact on the nation’s growth prospects.

Analysts at Nomura claim that the central bank may augment monetary stimulus if the national currency which is regarded as a refuge keeps strengthening and once again approaches record maximums against its US counterpart.

According to Japan Automobile Manufacturers Association, in the first half of 2011yen’s appreciation slashed Japanese carmakers’ profit by 330 billion yen. Japanese GDP rose by 6% in the third quarter on the year-to-year basis as the nation’s economy recovered from the March earthquake. However, during the first 20 days of October exports slashed by 1.6%. Credit Suisse believe Japan’s economy is losing upside momentum since August and that the readings of its indicators will soon start to deteriorate.

As for Japan’s intervention policy, analysts at UBS don’t expect any changes. In their view, the nation’s monetary authorities will keep intervening only in case yen’s sharp bounces. As the European debt crisis escalates, Japanese investors trim their overseas assets – primarily euro zone sovereign debt holdings – and repatriate their money making demand for yen increase. That means that yen’s appreciation is caused not only by the speculative inflows, but also by the Japanese real money accounts. In such circumstances Japan will be forced to act, so USD/JPY’s decline will be likely limited.

[ryuroden]

Feldstein: Greece will have to leave the euro zone

Martin Feldstein, professor at Harvard University, who has foreseen in 1998 that the euro zone will end up with the necessity of bailing out its members, claims now that the currency union will survive, even though Greece will leave the bloc within a year.

According to Feldstein, if Greece doesn’t default and devalue its currency, it will face constant economic slump. The specialists underline that even if the nation’s debt was wiped out Greece would have an unbearable a current-account imbalance which could be eliminated only by abandoning euro and devaluation.

According to the European Commission, Greece’s debt will reach 163% of GDP this year.

Feldstein claims that Italy is in better situation than Greece due to the stronger economy and budget and smaller current-account deficit.

It’s also necessary to note that the economist advises the European Central Bank to resist pressure and avoid increasing purchases of Italian bonds as this would distort financial markets and reduce the urgency for the government to restore fiscal order.

[ryuroden]

Societe Generale: comments on EUR/JPY

Analysts at Societe Generale warn that the single currency may keep declining versus Japanese yen and fall to October 4 minimum at 100.75 yen. The specialists underline that EUR/JPY has eroded support in the 104.90/104.75 zone.

According to the bank, bearish pressure will ease only if the pair returns above 104.75. In such case euro will get chance to rise to October 31 maximum at 111.60 yen.

[ryuroden]

HSBC, Rabobank on the factors influencing EUR/USD

Analysts at HSBC claim that the fair value of the European currency is in the $1.20/$1.30 area. However, even despite the escalating crisis euro keeps trading above these levels. The specialists see 2 reasons for that.

Firstly, euro is supported by monetary inflows even though some of them are the result of European banks bringing capital home in an effort to defend themselves against possible losses on their holdings of euro-zone bonds. The current account of the euro area as a whole is almost balanced and there are positive portfolio and merger and acquisition inflows.

Secondly, as the consequences of the currency union’s break up are expected to be terrible, investors are betting that the policy makers will find a way to save the bloc. In addition, there is also a chance that the member nations will move to closer fiscal coordination.

Analysts at Rabobank add that much may be explained by the weakness of US dollar which showed the worst performance among the other major this year but has regained some safe haven status because of the European turmoil. At the same time, there are pairs with much stronger downtrend for the common currency: EUR/JPY fell from April maximum at 123.32 yen to the levels in the 103 yen area.

[ryuroden]

Commerzbank: comments on GBP/USD

Technical analysts at Commerzbank believe that after British pound has broken support of the 55-day MA and 38.2% Fibonacci retracement at $1.5825 it’s poised versus the greenback down to $1.5632 (October 18 minimum) and then to $1.5271 (October 6 minimum).

In the longer term the specialists expect sterling to slide to the support line of the uptrend from 2009 to 2011 at $1.5050.

According to the bank, resistance for GBP/USD is found at $1.6060 (downtrend line) and $1.6136 (200-day MA). The outlook for the pair will remain negative as long as it’s trading below $1.6185, the 61.8% Fibonacci retracement of pound’s decline from August maximums.

[ryuroden]

RBC: euro managed to recover a bit versus dollar

The single currency has managed to recover a bit versus the greenback after it slumped earlier this week to the minimal level since October 10 in the $1.3420 area.

Analysts at RBC claim that euro got lift from short-covering and the advance of US stock futures. The specialists say that the further dynamics of EUR/USD today will depend on the results of Spanish and French bond auctions.

In addition, the pair’s rebound may be explained by the speculation that the Fed will do additional quantitative easing. It’s recommended to pay attention to the speech of New York FRB President William Dudley at 5:50 p.m. GMT.

The market is also looking to see the increase in US Jobless claims (1:30 p.m. GMT).

At the same time one should remember that the situation in the euro area remains very tense. Strategists at Brown Brothers Harriman warn traders that if euro breaks below $1.3400, it will slide to October minimum at $1.3145.

[ryuroden]

Danske Bank: yen will keep strengthening

Analysts at Danske Bank expect Japanese yen to keep strengthening versus the greenback due to its safe haven status and Japan’s current account surplus.

The specialists expect USD/JPY to renew the record minimum sliding to 75 yen in 3 months and to 74 yen in 6 months.

In their view, loose monetary policy of the Federal Reserve is going to be more aggressive than the one of the Bank of Japan. As a result, yen’s appreciation will be interrupted only by the occasional interventions, but their effect will be short-lived.

[ryuroden]

BoA Merrill Lynch: sell GBP/USD

Currency strategists at Bank of America Merrill Lynch note that the euro zone’s debt turmoil that threatens recession has a negative impact on the situation in UK as about 30% of the nation’s exports go to Europe and only 10% to the United States.

As a result, the specialists expect sterling to stay under pressure versus the greenback. The bank advises traders to sell GBP/USD in the $1.5800 area stopping above $1.6100. According to Merrill Lynch, in the near term the pair will slide to $1.54, while in the medium term it will be poised to hit $1.50.

The analysts note that the chances that British pound will be a safe haven from the European crisis are low.

[ryuroden]

UBS about Spain-related risks

Economists at UBS give 3 reasons to be concerned about Spain’s economic prospects: firstly, the high possibility that the country misses its deficit-reduction target, secondly, the risk of Spain’s falling into recession the next year and, thirdly, the precarious position of Spanish banks which will likely need more state money.

Spanish Finance Ministry announced that the nation’s GDP will add 0.8% in 2011 failing to meet the 1.3% growth target. Spain’s economy stagnated in the third quarter. The country’s jobless rate is close to 23%.

It’s too early to make predictions whether the deficit goal of 6% of GDP will be attained this year as the regions’ third-quarter budget data aren’t available yet. In 2010 Spain’s shortfall was equal to 9.3% of GDP.

Spain faces general elections on Sunday, November 20. The ruling Socialist Party is likely to lose to the opposition People’s Party which pledges to meet the deficit goal of 4.4% of GDP in 2012.

The 10-year Spanish bond yield rose to 6.4% for the first time since August. The specialists warn that the market’s rather optimistic attitude to Spain in comparison with Italy may change in the coming months or even weeks.

[ryuroden]

Capital Economics: the BoE will increase QE

The Bank of England reduced its forecast for UK economic growth in 2012 from 2% to 1% claiming that British economy will suffer from the euro zone’s debt crisis. The central bank also slashed outlook for CPI growth rate claiming that by the end of the next year inflation will fall from the current 5% level below the 2% target.

Economists say that although the BoE didn’t signal further easing the market now expects it to expand its QE program in 2011 by at least 50 billion from the current 275 billion pounds.

Analysts at Capital Economics think that the central bank’s inflation report suggests that rates will stay on the minimal levels for the foreseeable future and that British economy will likely need even more loose monetary policy.

The specialists think that even the revised forecast of the central bank seems to be too optimistic. In their view, Britain’s economy will stagnate in 2012.

Capital Economics projects the 75 billion pounds of additional asset purchases in February but adds that if the economic data remains weak during the next 2 weeks, the BoE will have to announce extra support already in December.

Analysts at Nomura expect the central bank to expand stimulus by 50 billion pounds in February and 25 billion pounds in May.

[ryuroden]

Analysts are still negative on euro

Spain’s borrowing costs rose to the maximal level since 1997 – the nation’s 10-year bond auction today has fueled concerns about the spreading of the European crisis to France and other core euro zone economies, such as the Netherlands and Finland.

Short-term forecasts

Morgan Stanley: negative outlook for the single currency. The specialists advise to sell euro targeting $1.31 lowering stops to $1.3580.

UBS: if EUR/USD breaks below support at $1.3406, it will begin declining to $1.3346.

Middle-term forecasts

Nomura: euro will slip to $1.30 by the end of the year, so it’s recommended to sell EUR/SUD.

Brown Brothers Harriman: the pair will finish 2011 at $1.29.

Mizuho Corporate Bank: euro will fall to $1.30 by the year-end, trading will be very volatile.

Citigroup: EUR/USD will decline to $1.31 by the end of 2011 and to $1.25 in the first half of 2012.

[ryuroden]

Merkel proposed to change EU’s treaties

German Chancellor Angela Merkel proposed today to change the EU's treaties making the European institutions able to intervene in national budgets in case deficit rules were breached. In her view, complaints should be brought to the European Court. Merkel thinks that the European Union needs greater integration.

Here are some of Merkel’s comments (from Reuters):

“I am convinced that only political solutions can resolve the situation… A breakthrough to a new Europe can only happen if we are ready to change our treaties.”

“This can be limited to euro states, it can be done in the form of a protocol ... it would be a very limited change to the treaty”.

“But national governments must be prepared to tie themselves to the community in a binding way.”

“There are ... many good political and economic reasons to further integrate the 27-member EU, as opposed to the 17-member euro zone”.

[ryuroden]

Westpac: AUD/USD trading recommendations

Technical analysts at Westpac expect AUD/USD to bounce to $1.0200. The specialists recommend selling Aussie on the rallies expecting the pair to drop to $0.9700. In their view, support at $0.9910 won’t be able to hold the bears.

Edited November 18, 2011 by ryuroden

[ryuroden]

Euro area: comments from the policymakers

AAA-rated European nations are beginning to express openly that they are against expanding rescue measures for the most indebted members of the currency union.

Jyrki Katainen, Finnish Prime Minister thinks that the euro area is running out of options to solve the debt crisis. Italy and Greece should act on their own to convince the markets that they are able to reduce the debt burden. Katainen says that the second bailout deal for Greece adopted on October 26 didn’t manage to calm investors: since that time Italian 2-year bond yields surged by 150 basis points. Germany and Finland both oppose the creation of common euro bonds.

France has openly called for the ECB to get more involved by issuing the European Financial Stability Facility (EFSF) a banking license that would allow it to refinance itself with the ECB liquidity operations. German Chancellor Angela Merkel criticized the proposition that the ECB has to become a lender of last resort. Reuters cites European and IMF officials who claim that the authorities discuss the possibility of the ECB lending money to the IMF, rather than any euro zone government that would help to get round the government restrictions.

The IMF refused to release the next portion of its loan to Greece until the nation’s Prime Minister Lucas Papademos wins broad political support for austerity measures.

Mario Monti, Italian Prime Minister pledged additional cuts to those targeted by Silvio Berlusconi.

World Bank President Robert Zoellick claimed that the nations from China to the United Stets may be willing to support Europe through the IMF if the euro zone’s policy makers agree on a plan to stem their debt crisis.

Edited November 18, 2011 by ryuroden

[ryuroden]

Options market expects euro’s slump

Wall Street Journal reports that 1-month risk-reversal indicator, which measures the weight of the bearish options bets on the single currency on the bullish ones, surged to 4 volatility points overcoming the level of 3.5 volatility points where it was seen at the peak of the financial crisis in 2008. That means that investors expect a sharp fall in EUR/USD during the next month.

Analysts at ING underline that rising yields on European bonds stirs up the market’s concerns. Specialists at Brown Brothers Harriman think that euro will react to the growing concerns about France, Belgium, Austria and other core countries that threaten to take the sovereign debt crisis to a new level.

Edited November 18, 2011 by ryuroden

[ryuroden]

Commerzbank: euro’s recovery will soon be over

The single currency is recovering versus the greenback: EUR/USD has managed to rise from the 5-week minimums in the $1.3420 area to the levels above $1.3500.

Never the less, technical analysts at Commerzbank expect euro’s recovery to be short-lived. In their view, risk aversion will remain strong and the bears will use the opportunity to sell the European currency on its advance against its US counterpart.

As a result, the bank recommends selling the pair in the $1.3650 zone. According to the specialists, resistance in the $1.3870/1.3900 area will cap EUR/USD for a long time from now.

Edited November 18, 2011 by ryuroden

[ryuroden]

Citigroup: scenarios for US dollar after the Supercommittee

Analysts at Citigroup believe that investors’ attention that so far has been focused on the situation in the euro zone will turn next week to the United States where the so-called Supercommittee which consists of Democrats and Republicans is trying to reach a deal on deficit reduction. The specialists note that according to the survey they have conducted among investors, fewer than 20% of the respondents expect the committee to reach agreement on how to proceed with the cuts. It will be recalled that if the parties fail to agree, the nation will face automatic cuts.

Citigroup economists are more optimistic. In their view, approaching election will urge the lawmakers to compromise. If these projections come true, Australian dollar will be able to make significant advance. Talking into account the fact that trading volumes will likely be small ahead of the Thanksgiving holiday on November 24, the bank thinks that AUD/USD could add 2-3% on the positive outcome.

At the same time, the strategists warn that the odds are that the Supercommittee fails to come up with an agreement are rather high. In such case the greenback will get a 1-2% lift as a safe haven. The biggest gains of US currency will be seen versus euro and Canadian dollar. Specialists at RBC Capital Markets, however, don’t agree with the latter, they think that in the latter case US dollar will weaken as it did in July and August.

[ryuroden]

Commerzbank: comments on EUR/USD

Technical analysts at Commerzbank note that euro’s decline versus the greenback paused ahead of support provided by the level of 78.6% Fibonacci retracement in the $1.3380/60 area.

The specialists think that EUR/USD will correct upwards rising to $1.3835/80. Then the bank expects the pair to resume decline moving down to $1.3270 (support line) and $1.3145 (October 4 minimum).

Resistance is seen in the $1.4250/85 zone. The long-term target remains at $1.20.

[ryuroden]

J.P.Morgan: comments on GBP/USD

The Bank of England’s November meeting minutes are released on Wednesday, November 23 at 9:30 a.m. GMT.

Analysts at J.P. Morgan believe that British Monetary Policy Committee will sound extremely dovish. The specialists also think that US Congressional deficit supercommittee won’t come up with the debt reduction steps. As a result, the market’s risk aversion, in their view, will remain very strong. Negative risk sentiment, in its turn, will make sterling decline versus the greenback.

According to the bank, it’s necessary to sell GBP/USD in the $1.5785 zone stopping above $1.6000 and expecting the pair to drop to $1.5385.

[ryuroden]

J.P. Morgan: buy Aussie versus US dollar

Analysts at J.P. Morgan claim that as the situation in the euro area is worsening and the risks of contagion are mounting the possibility that the European Central Bank will have to step in increases.

The specialists underline that if the ECB acts, the easing will most likely be conducted in the form of the rate cuts. In such case the yield for the euro gets less attractive. If the central bank decides to undertake bond buying, this will make investors concerned about inflation and weight on the single currency. At the same time, if ECB succeeded, this would be positive for euro.

So, the economists expect the risk sentiment to keep deteriorating to the critical point where the ECB will be forced to save the currency union and then revive.

The bank thinks that one shouldn’t lose trading opportunity here. According to J.P. Morgan, it’s necessary to open longs on AUD/USD in the $0.9500 area stopping below $0.9100. The economists expect the pair to rebound to $1.0500.