Comments and forex-analytics from FBS

[ryuroden]

Citigroup: ECB won’t cut rates until February

Analysts at Citigroup believe that the European Central Bank will definitely cut interest rates, but this won’t happen until February as the euro zone’s monetary authorities need to wait for the confirmations of declining inflation and weaker economic growth.

According to Citigroup, on Thursday the ECB will take a pause in the borrowing costs reduction and reaffirm their support for the region’s economy.

As a result, the single currency will stay under pressure. The bank expects EUR/USD to drop to $1.25 in the next 3 months and then to $1.20 by the end of 2012.

[ryuroden]

Nordea: be bearish on euro

Analysts at Nordea Bank advise investors to go short on EUR /USD at $1.2779 placing stops at $1.3820.

In their view, euro will be affected by the difficulties the European governments will surely face trying to raise funds and implement new budget rules.

According to the bank, “the question is not if you are bearish on the single currency, but rather, are you bearish enough?”

The specialists claim that one should buy back the single currency when it hits $1.20.

[ryuroden]

EUR/USD: main events and data releases

On Monday the European currency tested the weakest level since September 2010 at $1.2665. Today the moves of EUR/USD seem limited on both sides.

On the upside, euro is under pressure ahead of Spanish and Italian securities auctions this week as investors are worrying that the nations won’t be able to raise enough funds to meet their funding needs.

Spain will offer 5 billion euro ($6.4 billion) of bonds due 2015 and 2016 tomorrow, while Italy plans to sell 12 billion euro of bills. Yesterday Fitch Ratings warned that Italy faces a “significant chance” of a downgrade. The agency is going to make decision on Italy’s and Spain’s ratings by the end of January.

In addition, Reuters reported that hedge funds may resist a 100 billion-euro plan to restructure Greece’s debt which will be outlined next week by Lucas Papademos.

On the downside, there’s some support as US dollar is constrained before China’s inflation report. According to the forecasts, the pace of consumer prices growth might have slowed down in December. As a result, Chinese monetary authorities may get more liberty in spurring growth easing their monetary policy.

In addition, demand for US currency as a safe haven may decline as America’s economic performance seems to be improving.

The longer-term forecast for euro is bearish with plenty of experts seeing the pair drift down to $1.20 during the next few months.

Today:

- German 5-year notes auction aimed to raise 4 billion euro. Euro will likely be vulnerable even to the slightest signs of weak demand for the debt of the euro zone’s leading economy.

- US Beige Book (7:00 p.m. GMT) – Summary of Commentary on Current Economic Conditions.

Tomorrow:

- Chinese CPI (1:30 a.m. GMT) – Prev. 4.2% y/y; Forecast 4.0% y/y;

- Euro zone’s Industrial Production (10:00 a.m. GMT) – Prev. -0.1% m/m; Forecast -0.2% m/m;

- US unemployment claims (1:30 p.m. GMT) – Prev. 372K; Forecast 370K;

- Also watch the ECB meeting, but that’s a separate story.

[ryuroden]

RBC on trading EUR/CHF and EUR/USD

Swiss National Bank Chairman Philip Hildebrand resigned on Monday due to the scandal over his wife’s currency trading.

Franc strengthened after Hildebrand’s announcement as the investors began questioning the SNB’s resolve to keep EUR/CHF floor at 1.20.

Analysts at RBC Capital Markets think that the market has overreacted. The specialists advise buying euro at 1.2000 stopping at 1.1975 and expecting the pair to rise to 1.2400.

It’s necessary to note that the bank isn’t exactly bullish on the single currency versus other peers. According to RBS, euro is likely to make a corrective bounce next week as the EUR/USD shorts are currently too large, but eventually euro will drop to the levels in the $1.25. As a result, the recommendation is to sell euro on the rallies.

[ryuroden]

ANZ: USD/JPY will face strong resistance

Analysts at ANZ underline that the greenback is trading versus Japanese yen within a very narrow range between 76.50 and 78.50.

The specialists note that even though an eventual break of the downtrend seems almost inevitable, the bulls will have to overcome strong resistance at 79.35/50 and 80.55/81.00. In their view, major moves of the pair will likely be only “elusive” as it turned out to be before.

According to the bank, the downtrend will reverse only if USD/JPY rises above 81.00 and holds above this level on a sustainable basis. If dollar slips below 76.50, it will risk falling to 74.50 or even 71.50.

[ryuroden]

Morgan Stanley: comments on EUR/USD

Analysts at Morgan Stanley believe that the European Central Bank will lower its benchmark rate to 0.5% and keep it at this level through 2012 in order to support the weak European economy. As a result, money market rates will decline; euro will become more attractive as a funding currency and depreciate.

The market will be pessimistic on the euro zone’s outlook, so the greenback will enjoy safe haven support this year. While the markets may worry about potential QE3, its impact is expected to be limited. According to Morgan Stanley, when the rest of the world is not outperforming, “bad news” in the United States will be more supportive for the American currency in the flight to safety.

The bank says that EUR/USD will end the year at $1.2000.

[ryuroden]

Analysts on the ECB monetary policy

Analysts at BofA Merrill Lynch, Citigroup, JPMorgan Chase and Barclays Capital believe that by the middle of the year the European Central Bank will reduce borrowing costs to the record minimum of 0.5%.

“The ECB is being more preemptive and aggressive now,” points out JPMorgan.

Citigroup expects euro zone’s economy to contract by 1.2% this year and 0.2% in 2013 after 1.5% growth in 2011. As a result, inflation rate will fall from 2.8% in December to 1.1% in the second quarter of 2013, while the ECB’s target lies just below 2%. JPMorgan Chase thinks that fiscal squeeze of almost 2 percentage points of GDP this year will push unemployment above the record 11% level.

Specialists at UniCredit, however, seem more optimistic. In their view, European economy will add 0.6% in 2012 as cheaper euro encourages trade. Consequently, the ECB will be able to keep its rate at 1%.

Economists at Societe Generale claim that the central bank will be unwilling to pare its benchmark too close to 0 to maintain a corridor between it and the smaller deposit rate as the much lower benchmark would make it unattractive for money-market funds and banks to lend. The bank says that the ECB will stop cutting rates at 0.75%.

Analysts at Jefferies note that if European economy keeps deteriorating even after the rate cuts, the ECB may decide to follow the Federal Reserve and the bank of England conducting direct quantitative easing. In their view, such an initiative may come as soon as March and initially involve promising to buy as much as 500 billion euro of bonds across the region over 3 months.

At the same time, it’s necessary to remember that Bundesbank strongly opposes purchases of Spanish and Italian bonds. Taking into account the strong influence of German central bank at the ECB, one may assume that quantitative easing will be an option for the European monetary authorities only if their price-stability mandate is at risk.

Some experts think that the ECB is already conducting indirect QE lending to banks, which in their turn use these funds to buy government debt. Others don’t agree with such opinion saying that the central bank is currently trying to save banks and keep open the channel through which lower interest rates are transmitted rather than actively aid growth and governments.

[ryuroden]

BoA: pound's slipping into downtrend

Analysts at Bank of America Merrill Lynch believe that British pound will trade within downtrend versus the greenback all year.

The specialists claim that if GBP/USD breaks below support at $1.5272 (October minimum), the pair will complete 15-month “head & shoulders” breaking through the neck line. As a result, the long-term trend will become bearish and sterling will be condemned to failure to $1.3908 and $1.3825.

Analysts at Commerzbank are also bearish on pound, though not as strongly yet. In their view, the pair will fall to $1.5272 and then to $1.5135, where it should hold first time around before resuming decline.

[ryuroden]

BoA: Canadian dollar will fall in Q1

Analysts at Bank of America Merrill Lynch believe that by the end of the first quarter the greenback may reach peak at 1.09 versus its Canadian counterpart and then return to the lower levels.

The specialists underline that loonie keeps depending on the market’s risk sentiment. Canada’s currency is highly sensitive to the market volatility stemming from Europe and the situation in the euro area, in their view, will get worse before it gets better.

Moreover, the bank points out that Canada's housing market is overvalued. Although Merrill Lynch doesn’t expect a crash, this situation may кeinforce any large external shock if prices fall rapidly.

In addition, China remains the object of investors’ concerns.

All these factors contribute to increasing the possibility of an interest rate cut by the Bank of Canada, negative for CAD.

[ryuroden]

MIG Bank: negative outlook for Aussie

Technical analysts at MIG Bank are bearish on the prospects of Australian dollar versus its American counterpart.

In their view, the pair AUD/USD will go down to the parity level and then drop to $0.9862 (December 15 minimum) and $0.9664/20 (November 23 minimum).

According to the bank, the pair won’t be able to overcome 200-day MA which has been has been holding steady around $1.0413 during 3 months.

[ryuroden]

Citigroup: USD/JPY is facing resistance

Analysts at Citigroup think that US dollar will be imprisoned in range between 75 and 80 yen in 2012.

The specialists claim that USD/JPY will face resistance of the weekly Ichimoku Cloud which is situated in the 78/80 yen area.

In their view, the greenback will trade with a slight downside bias unless and until the Federal Reserve shifts to tighter monetary policy.

Strategists at ANZ are bearish on USD/JPY in the long-term as Japan switches away from direct currency intervention tools. In addition, they say that the private sector is likely to have a continued bias to repatriate offshore assets because of the global deleveraging cycle. As yen is strengthening in most of its crosses, it would be very difficult for Japanese policymakers to encourage large outflows of private sector capital.

[ryuroden]

ECB: rates unchanged, analysts’ comments

As it was expected, yesterday the European Central Bank left its benchmark rate unchanged at 1%.

Here are the main points of the euro zone’s monetary authorities:

- There are “tentative signs of stabilization” in the European economy, yields at Spanish and Italian bond auctions decline.

- Still euro zone’s economic outlook in 2012 seems alarming, the region’s financial market is in the state of “high uncertainty and substantial downside risks”.

- During the next few months euro area inflation will remain at 2% before declining.

- European leaders have to encourage job creation without slippage in austerity measures and reforms.

- The new European fiscal compact, which is currently under negotiation, must be characterized by “unambiguous and effective wording”.

- The central bank’s decision to provide 489.2 billion euro in low-cost 3-year loans to the European banks has prevented a credit contraction.

- The ECB was pleased that euro zone leaders had confirmed that the involvement of private creditors in the second Greek bailout was “unique and exceptional.” The ECB has persistently argued against private sector involvement warning thatt it would increase contagion risks.

Analysts’ comments

Nomura underlines that the central bank wants to assess the latest data in order to judge the magnitude and depth of the recession in the region.

Societe Generale claims that further rate cuts will only be forthcoming in case of the signs of an outright credit crunch.

The single currency picked up versus the greenback returning above $1.28.

Never the less, UBS thinks that the overall negative outlook for euro didn’t improve after the ECB meeting. The specialists lowered forecasts for the pair EUR/USD from $1.25 to $1.15 by the end of this year and from $1.20 to $1.10 by the end of 2013.

[ryuroden]

Morgan Stanley: sell EUR/CAD and EUR/AUD

Analysts at Morgan Stanley recommend selling the single currency versus Australian and Canadian dollars.

In their view, traders will be using euro as funding currency investing money in higher-yielding currencies such as Aussie and loonie. Such move of the market may be explained by high risk aversion in the euro area, low yield especially in key European economies and the risk of ECB’s easing policy, says the bank.

According to Morgan Stanley, one should open shorts on EUR/CAD at 1.3150 stopping at 1.3260 and targeting 1.2740 and on EUR/AUD at1.2660 targeting 1.1925 and stopping in the 1.2860/2905 area.

[ryuroden]

Commerzbank on trading EUR/USD

Technical analysts at Commerzbank claim that resistance for the pair EUR/USD lies at $1.2860 and $1.2933. While the single currency holds below the latter, the outlook for it will be negative.

The specialists recommend going short on euro at $1.2760 stopping at $1.2935 targeting $1.2588.

[ryuroden]

ING, Lloyds: EUR bearish trend will stay intact

The single currency has been trading within downtrend since November, when the possibility of Greece exiting the euro zone was mentioned officially for the first time.

Analysts at ING claim that no matter whether the European policymakers including the ECB reach agreement to stabilize the government debt crisis or not, the single currency will fall. In their view, the Europe’s credit crunch is a reality, and the euro zone requires softer monetary conditions, including a weaker euro.

At the same time, the specialists underline that euro’s shorts are too large now, so if the currency is to fall further from here, a “different community of sellers” – corporations, institutional investors and FX reserve managers – must emerge.

According to ING, US dollar, demand for which will be supported by the euro zone’s debt problems, will keep strengthening versus commodity and emerging market currencies. The recovery of American currency will go on for 3-6 months, says the bank.

Strategists at Lloyds Bank claim that though excessive euro shorts may allow the European currency to experience short-term runs, euro's reaction to the improved global data will be limited as the markets realize that European economy is severely weakened by the austerity measures and it would take a long time for the region’s growth to become strong enough so that the ECB would be able to tighten its monetary policy.

[ryuroden]

Italy: mixed results of the debt auction

Italy managed to raise 4.75 billion euro meeting the target level. The nation sold 3-year notes at an average yield of 4.83% down from 5.62% at a prior auction in December.

The single currency declined versus US dollar and Japanese yen as the demand wasn’t as high as the market’s expected: investors bid for 1.2 times the amount allotted, down from 1.36 last month.

Italy will soon face a more serious challenge – 10-year bond auction which is set to take place in 2 weeks. In the first quarter the country will have to pay off more than 100 billion euro.

Analysts at Morgan Stanley claim that any rebound of EUR/USD is going to remain limited and the medium-term outlook for the pair is limited.

[ryuroden]

Rabobank: comments on EUR/GBP

Analysts at Rabobank believe that the single currency will decline to 0.82 versus British pound in 3 months.

The specialists say that though UK monetary authorities will likely do more quantitative easing in February, in the coming months the pair EUR/GBP will be driven by the euro zone’s fundamentals which seem to be in poor condition.

[ryuroden]

France will offer bills amid the downgrade

The weekend was marked by the dim news for the euro area: Standard & Poor’s downgraded France and Austria by one level from top AAA rating to AA+ with “negative” outlooks. The agency also reduced credit ratings of Italy, Portugal, Spain and Cyprus by 2 steps and cut Malta, Slovakia and Slovenia by one notch. The ratings of Germany, Belgium and the Netherlands were affirmed.

In this light one has to watch French debt auction the result of which will be due around 13:55 GMT. The nation plans to sell 8.7 billion euro ($11 billion) in bills.

The yield on France’s 10-year bonds rose by 3 basis points to 3.055%. The yield spread between French and German 10-year bonds increased from less than 50 points a year ago to about 130 basis points.

France’s finance minister Francois Baroin claimed that “it’s not a catastrophe” and “it’s still an excellent grade.” Never the less, the downgrade will likely have a dreadful impact on the image of French president Nicolas Sarkozy. According to the polls conducted last week, Sarkozy, the leader of the ruling UMP party, has the backing of 23.5% of voters versus 21.5% who support anti-euro candidate Marine Le Pen, the leader of the nationalist National Front, while Socialist Party candidate François Hollande leads with 27%.

Coming auctions

Tuesday, January 17: EFSF, Greece, Spain

Wednesday, January 18: Portugal

Thursday, January 19: Spain

Debt payments in 2012

Debt to refinance, billion euro Interest payments, billion euro

Italy 341 54

France 266 39

Germany 193 22

[ryuroden]

J.P.Morgan: sell GBP/USD

Analysts at J.P. Morgan recommend selling British pound versus the greenback at $1.5295 stopping at $1.5530 and targeting $1.4800.

The specialists remind that the European crisis has strong negative impact on British economy as about 40% of UK exports go to the euro area and a large percentage of the nation’s banks have claims on the euro zone.

[ryuroden]

Barclays Capital: comments on British pound

Analysts at Barclays Capital claim that as British pound may be able to hold at current levels for a while as so far it has managed to close above $1.5270 – the neckline of a multi-week pattern.

If GBP/USD closes below this level, it will fall to $1.5150 and $1.4950 later in January. The fact that sterling spiked below this mark on Friday means that the bears will ultimately pull the rate lower.

According to the bank, the outlook for pound will remain negative as long as it’s trading below $1.5410.Barclays Capital: comments on British pound.

[ryuroden]

Westpac: recommendations for EUR/USD

Analysts at Westpac recommend selling EUR/USD at $1.2650 stopping at $1.2800 and expecting the pair to fall to $1.2350.

The specialists don’t expect much of an upward correction amid sovereign downgrades and a breakdown in talks over the Greek debt restructuring. In their view, it seems that the single currency has shifted into a clear downtrend regardless of more supportive signals from stocks and euro basis swap.

In addition, the specialists underline that euro’s current decline doesn’t seem excessive as during the past 20 years EUR/USD survived at least 8 sustained, multi-week large slumps when it fell by about 20% peak to trough, while euro has lost only 11% dropping from October 2011 maximum at $1.4250.

According to Westpac, from the fundamental point of view, there are only 2 main factors which may reverse euro’s downtrend: another round of QE by the Fed and/or aggressive steps by EU policymakers to bring more definitive coherence to EU finances. Never the less, neither of these outcomes is likely to realize in the short term.

[ryuroden]

UBS: recommendations for EUR/USD

Analysts at UBS recommend selling euro at $1.2755 stopping at $1.3050 and targeting $1.2250. The specialists remind that the European Central Bank is expected to cut 2 more times rates in the next few months from1.00% to 0.50%. In their view, Greece may suffer a disorderly default in March.

According to the bank, downgrades of European economies by S&P will have a greater impact on the euro than just one day's price action would suggest – the strategists think that the downgrades still aren’t fully priced in yet. UBS claims that euro’s fair value is in the $1.15/$1.20.

[ryuroden]

HSBC: Germany is vulnerable to crisis

Analysts at HSBC note that that fact that S&P downgraded European economies on Friday wasn’t unexpected as in December the ratings agency warned the region’s policymakers.

The specialists claim that the euro zone’s officials are guilty of 3 sins: optimism, inaction and omission.

Firstly, too many countries are too optimistic about recovery when all the evidence is now pointing towards recession in both the periphery and the core. Secondly, inaction is inevitable for politicians faced with a difficult trade-off between political expediency and fiscal reality. Thirdly, the idea of a fiscal pact doesn’t deal with the shortfall of income which led to today’s crisis.

According to HSBC, euro zone’s difficulties in the coming months will likely strengthen. The economists think that Germany will get under pressure as its exports to other nations of the currency union will shrink, while its financial institutions are exposed to the region’s debt.

As a result, the leading European economy will be forced into recession. HSBC expects that the ECB will have to step in and start quantitative easing. That would make the crisis easier to solve, though the ultimate way out may be provided only by the political action.

[ryuroden]

January 17: data and comments

Yesterday Standard & Poor’s reduced the rating of the EFSF, the euro area’s 440-billion-euro bailout fund, from AAA to AA+ after earlier downgrades of France and Austria as the fund’s obligations are no longer fully supported either by guarantees from EFSF members rated AAA by S&P, or by AAA rated securities.

The downgrade of the EFSF was no big surprise after Friday's mass downgrade of nine euro-zone countries.

Klaus Regling, chief executive officer of the facility, claimed that “EFSF has sufficient means to fulfill its commitments” until the launch of permanent ESM (European Stability Mechanism) in 2012.

According to the data released today, China’s GDP added 8.9% y/y in the fourth quarter versus 8.7% expected. As a result, EUR/USD managed to rise to $1.2750 on the short squeeze. Even EUR/CHF backed away from the 1.20 danger zone. Asian equity markets added 1.5% on average; gold and oil also rise 1.5% to $1663/oz and $100.30/bbl respectively.

Later today:

• British CPI (9:30 a.m. GMT);

• BOE Gov King Speaks (9:45 a.m. GMT);

• German ZEW Economic Sentiment (10:00 a.m. GMT);

• Bank of Canada’s meeting: overnight rate release (2:00 p.m. GMT);

• EFSF, Greece, Spain: debt auctions.

[ryuroden]

Merrill Lynch: forecasts for euro and pound

Analysts at Bank of America Merrill Lynch think that the single currency may drop to $1.2510 versus the greenback in the near term. In the medium term the specialists see EUR/USD falling to $1.12 and even $1.08 due to both fundamental issues and technical patterns.