Comments and forex-analytics from FBS

[ryuroden]

Euro’s on the downside ahead of EU summit

The single currency declined versus the greenback ahead of EU summit later today. The European leaders meet in Brussels to make the final amendments to the deficit-control treaty and endorse the statutes of a 500 billion-euro ($659 billion) rescue fund to be set up this year.

According to Financial Times, Greece’s finance minister Evangelos Venizelos rejected a German plan for the euro zone to impose to create a European Union “budget commissioner” with the power to veto Greek tax and spending decisions, saying it would improperly force his country to choose between “financial assistance” and “national dignity”.

At the same time, euro found some support on the speculation Greece and its private-sector creditors will reach an agreement on a debt-swap plan this week.

AUD/USD fell as Fitch Ratings placed Australia's four biggest banks on credit watch with negative outlook, though it’s necessary to note that the move only brought Fitch in-line with other major ratings agencies.

In addition, many experts expected the People’s Bank of China to reduce reserve requirement ratio this weekend at the end of the New Year holiday but Chinese monetary authorities didn’t loosen monetary policy. If the PBOC cut RRR, this would encourage spending and boost demand for commodities.

Important events today:

• EU Economic Summit;

• Italian will sell debt maturing in 2016, 2017, 2021 and 2022. On January 27 Fitch ratings lowered the ratings of Italy, Spain, Belgium, Slovenia and Cyprus, saying they lack financing flexibility in the face of the regional debt crisis.

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BMO: buy US dollar versus Japanese yen

Currency strategists at BMO Capital think that though Japanese yen reached maximums in 2011, the things will be different this year.

The specialists underline that last year Japan had positive balance of payments amid low global interest rates. This month, however, the nation announced that it ran a trade deficit in 2011 due to the increased energy import. According to BMO, this will likely become a trend. Moreover, Japan's debt exceeds 200% of GDP and the Bank of Japan has signaled that it wants to invest overseas which means buying foreign currencies.

The bank recommends buying USD/JPY stopping at 74.90 and targeting 81.45. The specialists claim that this way one may both play the range and take advantage of the changing dynamics for 2012..

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Canadian dollar: prospects and forecasts

Loonie and other commodity currencies

Many experts think that Canadian dollar will outperform Australian and New Zealand’s dollars against their American counterpart. The explanation of this assumption seems to be simple enough: economic growth of the United States, Canada’s main trading partner (about 75% of Canadian exports go to the US) is gaining pace, while the growth of Chinese economy, Australia’s main trading partner (about 25% of Canadian exports go to China) is slowing down.

According to Bloomberg’s purchasing power parity analysis, Australian currency is overvalued by 28.6% against USD, while Canada’s dollar is undervalued by 6.2%.

The correlation between the currencies which tend to trade in tandem with stocks and commodity prices is declining: CAD weakened by 2.3% in 2011, while Australian and New Zealand’s currencies finished the year almost unchanged.

Canada’s positive economic outlook

Canadian growth data seems optimistic enough: leading economic indicators gained in December for the sixth month in a row, while the nation’s GDP added 2.7% in October from a year earlier (US economy increased in the fourth quarter by 2.8% y/y). The odds that the Bank of Canada will loosen its monetary policy declined. In addition, Canada’s trade balance switched to surplus of C$1.07 billion in November due to the increased exports of energy and automobiles.

Data from Canadian Imperial Bank of Commerce shows that the demand for Canadian securities more than doubled last year from 2008’s record C$11 billion. Strategists at Nomura Securities have found out that for every C$10 billion of net investment into Canada’s bond market, loonie strengthens by 0.7% versus the greenback.

USD/CAD prospects

At the end of last week loonie reached the parity versus the greenback for the first time in almost 3 months. On January 26 the pair USD/CAD declined to 0.9980.

Analysts at RBS claim that US economic outlook looks reasonably good and that has not yet been reflected in Canadian dollar’s rate. In their view, the currency is attractive because it hasn’t run up as much as some of the other commodity currencies.

Economists at UBS are positive on loonie in the longer term. At the same time, the specialists warn that the problems in the euro area and Iran may worsen risk sentiment and make USD/CAD return to 1.04 before starting to decline.

However, not everyone believes in loonie’s appreciation. Canadian banks, for example, aren’t bullish on the national currency. Toronto-Dominion Bank, the most bearish, expects loonie to weaken to C$1.09 per US dollar, while Bank of Nova Scotia, the least bearish, thinks that Canadian currency will decline to C$1.02 per dollar.

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UBS: US dollar won’t decline much

Analysts at UBS note that last week we saw an improvement of the market’s risk sentiment due to stronger-than-expected readings of some key euro zone’s indicators promises of the deal between Greece and the private creditors, successful bonds and T-bill auctions in peripheral euro zone debt markets (except worried about Portugal). In addition, the Fed decided to leave the interest rates at “exceptionally low” levels until late 2014 and indicated that further quantitative easing is possible if US economic fundamentals worsen.

All that had negative impact on the greenback. Analysts at UBS, however, claim that as US GBP gained 2.8% in the fourth quarter on the annual basis after adding 1.8% in the previous 3 months (revised down), QE3 seems unlikely. As a result, the specialists think that the dovish stance of the Fed may be already priced in the greenback’s rate, so one shouldn’t become bearish on American currency.

The specialists advise investors to pay attention to Ben Bernanke’s testimony to Congress on February 2.

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EU summit: Europe’s stuck in tensions

European leaders met in Brussels on Monday to discuss the region’s debt crisis and other issues.

Analysts at UBS claim that the lack of positive surprises at yesterday’s EU summit may lead to further disappointment of the market. In their view, “the positive news flow markets have enjoyed since the beginning of the year is proving hard to sustain and there will be far bigger challenges up ahead”.

Euro zone’s future actually seems quite challenging: Britain’s Prime Minister David Cameron and French President Nicolas Sarkozy disagree on everything from the new treaty on tighter fiscal rules – which only Britain and the Czech Republic of the EU's 27 countries won't join – to a financial transactions tax, a single EU patent and industrial policy, reports Reuters.

Among other sources of tension – the dissatisfaction of Poland and other several east European countries which aren’t fully included in euro zone summits (Poland. Hungary, the Czech Republic and Slovakia aren’t the members of the currency union, but they don't want to see Europe divided and want to attend the meetings) and concerns of Spain and other peripherals on the negative effects of severe austerity measures they have to conduct (Spain is tasked with reducing its budget deficit from 8% of GDP to 4.4% – the target almost impossible to reach for the stumbling economy).

European finance ministers are meeting on February 12-13.

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BNP Paribas: comments on EUR/USD

The single currency is trading today on the upside versus the greenback on the hopes for a Greek debt restructuring deal as the nation’s Prime Minister Lucas Papademos said that “significant progress” in talks had been made.

Resistance for EUR/USD lies at $1.3244 (38.2% Fibonacci retracement of the euro's decline from October to January). Analysts at BNP Paribas claim that if the pair manages to overcome this level, it will rise towards $1.3500 on the short-covering. The specialists note, however, that such outcome will be possible only if Greece reaches the ultimate agreement with its private creditors.

In addition, it’s the end of the month, so the managers may sell UD dollars to adjust their portfolios.

At the same time, bear in mind that the Greek debt talks have yet to be resolved and the market seems really worried about Portugal’s future.

[ryuroden]

USD/CAD: upwards or downwards?

At the end of last week the greenback hit the parity level versus its Canadian counterpart for the first time in 3 months.

Bearish view

Analysts at Morgan Stanley believe that USD/CAD will breach the 200-day MA in the 0.9955 area and become vulnerable for a decline to 0.9835.

Bullish view

Strategists at Brown Brothers Harriman, however, note that the pair has been declining for 3 consecutive weeks and say that technical indicators show that the downside momentum for the pair has started weakening. In their view, the pair will be able to bounce by 1% to 1.0135 and then probably to 1.0250/80.

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J.P.Morgan: sell CAD/JPY

Amid all talks about the euro area, don’t forget that a piece of traditionally watched US data is due on Friday: Non-Farm Payrolls figures are released on February 3 at 1:30 p.m. GMT.

The consensus forecast is a 156K increase. Payrolls rose by 200K in December.

Economists at Deutsche Bank think that American economy has added 210K jobs in January. Analysts at J.P. Morgan are less optimistic. In their view, the reading will be equal to 150K.

However, J.P. Morgan thinks that even such number will be risk-on. In these circumstances the specialists recommend investors buying Canadian dollar versus Japanese yen at 75.00 stopping at 73.50 and targeting 79.50.

As the reasons for such trade the bank names interest rates differential and rising commodity prices supporting loonie, while Japan posted first annual trade deficit in 31 years.

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Danske Bank: EUR/USD forecast revised upwards

Analysts at Danske Bank revised upwards their forecasts for the single currency versus the greenback.

The specialists think that the downside risks for EUR/USD have decreased due to the dovish Fed’s statement, the positive impact of ECB’s 3-tear LTRO and extensive short positions on euro.

According to the bank, the pair will trade at $1.30 in 3 months, $1.32 in 6 months and $1.36 in a year. At the same time, Danske urges investors to be cautious and hedge their long euro positions as downside risks to the global business cycle continue to translate into downside risks for euro.

[ryuroden]

Dollar may strengthen versus Japanese yen

Many experts began speaking about the reversal of US dollar’s downtrend against Japanese yen claiming that American currency may be supported by rising global equities, investment outflows from Japan, the Asian nation’s first in many years annual trade deficit as well as technical factors. More and more options traders start betting on dollar’s advance.

Analysts at Royal Bank of Scotland think that the greenback will be slowly but surely rising versus Japanese yen. In their view, USD/JPY will reach 80 yen by March.

Strategists at Bank of Tokyo-Mitsubishi UFJ note that as the risk sentiment revives investors will seek for profit going away from low-yielding Japanese currency.

Some experts make bolder judgments and foresee more cardinal changes. For example, currency strategists at Wakabayashi claim that the 40-year cycle of yen’s appreciation from 357.41 yen per dollar in August 1971 to the record maximum of 75.31 yen per dollar on October 31, 2012 has finished. Note that 4 years ago these specialists predicted that dollar bottom around 74 yen in February 2012 and then recover. In their view, USD/JPY will rise to 180 yen by 2025. Analysts at Citigroup say that a move toward 100 yen by the end 2013, to the levels last seen in 2009, “may not be as incredible as it sounds today.”

All in all, 40-year trend is a too strong tendency to analyze now. One may speak about a reversal like that only if USD/JPY gets above 88.70 yen. In the foreseeable future among the things to watch there is US economic momentum, Japanese investment flow trends and the nation’s trade balance.

The greenback’s appreciation will likely be gradual as the Federal Reserve aims to keep interest rates at the record minimum until the end of 2014.

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RBC: good news are already priced in euro

The single currency has been strengthening so far even without the resolution of the Greece’s negotiations with its private creditors.

Analysts at RBC Capital Markets think that when Greek debt deal is reached, we won’t see much of euro’s advance as most of the good news for EUR is already priced in. In their view, austerity measures will cause severe slowdown of the region’s economy putting euro under negative pressure.

The specialists propose going short on EUR/GBP at 0.8450 stopping at 0.8625 and targeting 0.8100. According to RBC, British economic outlook seems better than the euro zone’s one as the economists expect UK GDP to gain 1% this year, while the European economy will likely stagnate.

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Nomura: forecasts for euro, yen and Aussie

Analysts at Nomura claim that as the US and European macroeconomic data has so far improves reviving global market’s sentiment, negative risks for the euro area subsided. As a result, the bank revised up its currency forecasts.

The specialists expect EUR/USD to trade at $1.20 by the end of the second quarter, at $1.23 by the end of the third quarter and finish 2012 at $1.25.

In their view, the pair USD/JPY will end Q2 at 80 yen, Q3 as well at 80 yen and Q4 at 81 yen level.

Nomura thinks that AUD/USD will reach $1.05 by the end of Q2, $1.07 by the end of Q3 and finish 2012 at $1.08

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Westpac: sell AUD/NZD

As Greece is trying to reach agreement with its private creditors, the market became worried about the situation in Portugal.

Analysts at Westpac don’t think that Portugal is an immediate concern, though they admit that one has to be cautious about that. In their view, by the middle of the year the discussion about whether this nation will need the second bailout like Greece will be heating up.

For now, the specialists say that it Greek deal is made and EUR/USD rises to $1.3400, one has to sell the single currency. At the same time, the bank underlines that the uncertainty surrounding the Greek negotiations and the prospect of the Fed’s Chairman Ben Bernanke’s testimony on Thursday makes it hard to trade EUR/USD, so one may better sell Australian dollar versus New Zealand’s dollar at 1.2930 stopping at 1.3115 and a targeting 1.2650.

Westpac expects the Reserve bank of Australia to cut interest rates new week. In addition, “there has been renewed interest over the weekend of sovereign wealth funds buying kiwi assets”, say the analysts.

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AUD surges, Gillard’s comments

Australia's Prime Minister Julia Gillard claimed today that the rate of the national currency versus the greenback will likely remain relatively high during the next several years. In her view, European debt turmoil made investors regard Australian dollar as a global safe haven for the first time in its history. As the euro zone’s issues are far from over, one should expect Aussie to remain strong. The nation still has the best triple-A credit rating. Last year offshore holdings of Australian government bonds increased to 80%. The pair AUD/USD rose by around 80% since 2008.

The Prime Minister claimed that Australia’s economic outlook is positive and that the government is able to fulfill its pledge and deliver budget surplus in 2012-2013. Returning a budget surplus will ensure that the central bank has room to ease monetary policy if needed.

AUD/USD bounced today to $1.0700. Analysts at Westpac think that Aussie is overvalued above $1.6000. The specialists underline that AUD/USD traded above $1.05 only for 1.4% of days since the 1983. In their view, Aussie may retrace to $1.0300 in near term, though the possibility of the Fed’s QE3 and additional stimulus from the ECB has potential to push the pair above $1.0800. The majority of economists believe that the Reserve Bank of Australia will reduce interest rates on Tuesday, February 7, though Aussie may show little reaction.

[ryuroden]

Yen advances, talks about potential intervention

Japanese yen keeps strengthening versus the greenback for the 6th day in a row.

The market's speculating about potential Japan’s currency intervention and further monetary easing by Bank of Japan – this talk may provide USD/JPY some support keeping it from falling much below 76 yen.

BOJ Deputy Governor Hirohide Yamaguchi repeated today that Japanese central bank is ready to act as the European debt crisis still poses a high threat to the global markets and economy.

The nation’s Finance Minister Jun Azumi and Economy Minister Motohisa Furukawa spoke about the necessity to overcome deflation. Azumi underlined that “speculative moves are increasing in the market and we can’t overlook them” signaling that the Federal Reserve is partly to blame for yen’s recent advance.

Strategists at Bank of America Merrill Lynch think that Japanese monetary authorities may intervene if USD/JPY falls below 75 yen in order to save the national exporters. Last year Japan sold 14.3 trillion yen ($187 billion).

Never the less, analysts at JP Morgan believe that yen-selling intervention is highly unlikely even if the pair renews the record minimums as the United States strongly criticizes Japan's unilateral interventions.

At the same time, Nomura Research Institute argues that Japan has to abandon the intervention approach as stronger yen makes lower the cost of fuel imports – a very important expense item for Japan given its current nuclear capacity issues.

[ryuroden]

Get ready to sell euro

The negotiations between Greece and its private creditors are still going. On January 31 Greek Prime Minister Lucas Papademos claimed that the nation will try to make the agreement reached by the end of the week.

Bloomberg reports that there’s speculation that Athens managed to persuade bondholders agree to lower coupon on the new 30-year securities from 4.25% to 3.6%.

The hopes of soon Greek deal allowed the single currency to gain despite all the worries about the euro zone’s future. At the same time, many experts say that when the deal is actually reached, one should sell euro.

Analysts at BMO Capital claim that the Greek negotiations could continue into March, when Greece has a big bond payment due. The specialists are also deeply concerned about Portugal’s fate. The yield on the nation’s 10-year bonds is above 15% after Monday’s peak of 17.4%.

According to BMO, investors should sell EUR/USD at $1.3185 with stopping at $1.3285 and targeting $1.2885. Those investors who would rather wait for a potential rise on news of a Greek deal can just adjust the trade levels to reflect the same 3:1 ratio of target to stop, says the bank.

Analysts at TD Securities point out at the risk of euro’s decline. Bank of New York Mellon thinks the success of the Greek deal is already prices in euro’s rate and there won’t be much of an advance. Westpac keeps expecting move up to $1.3400 to sell there.

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Lloyds: EUR/CHF will breach SNB’s floor

Analysts at Lloyds Bank believe that the single currency may break the floor versus Swiss franc set by the Swiss National Bank in September at 1.2000.

The specialists claim that the long-term chart still shows that EUR/CHF may drop to 1.1311 before the 4-year downtrend is over. In their view, the pair has so far tested trend resistance on the monthly chart, but didn’t manage to break above.

According to the bank, resistance for the pair for the month end is at 1.2490, while support lies at 1.1274 (monthly Ichimoku conversion line).

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Morgan Stanley cut EUR/USD forecast

Analysts at Morgan Stanley lowered their forecast for EUR/USD’s minimum this year from $1.20 to $1.15.

The specialists note that ECB’s expanded its balance sheet and expect more easing from the central bank.

“We believe that the relative performance of money multipliers will be a significant driving force for currency markets in the coming year. We see the ECB liquidity as a negative for the EUR,” said the economists.

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Euro’s affected by the Greek uncertainty

The lack of agreement between Greece and its creditors is weighting on the rate of the single currency. The weekend approaches, but the uncertainty remains strong.

Analysts at Mizuho claim that Greek creditors have no incentive to voluntarily agree on a debt write-down, so it would be very difficult for the nation to reach the deal with the bondholders. The specialists say that EUR/USD should fall below $1.20.

The single currency may show the weekly decline as it’s trading in the $1.3150 area, below Monday’s opening at $1.3222.

Analysts at RBC Capital Markets think that the downtrend will become evident if euro closes the day below $1.3028 (February 1 minimum). That would mean that the pair has topped and will be targeting $1.2875. On the upside, the upward move will be confirmed by the pair’s close above $1.3220. In this case, EUR/USD will head to $1.3291 and then to $1.3469.

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Analysts’ comments on SNB’s floor

The European currency has so far approached the critical level versus Swiss franc at 1.20. Swiss National Bank interim President Thomas Jordan expressed resolve to defend EUR/CHF floor set in September with all efforts. Here are the analysts’ comments on this issue.

Swissquote Bank: “We’re seeing a test of the floor. If European policymakers make a deal, get Greece the money, and if markets cheer on Monday, the SNB is going to wipe the sweat off its brow. That’s the primary determinant.” Never the less, “already there’s a feeling that the longevity of the floor is highly questionable given what we’re hearing out of Europe. There’s also a question about Jordan’s commitment to the floor. Hildebrand had become a figurehead, the guy up front and there’s a feeling of less control.”

Citigroup: “SNB will defend the floor at any cost”.

RBS: “The closer we get, the more excited markets become, and if we touch 1.20, the SNB should be ready to act. It’s obviously watching very closely.”

Standard Bank: “If the euro-franc is sitting just above 1.20 and there’s a shock within the euro zone such as a Greek pullout, the euro could easily plunge through this barrier almost before the SNB has had time to react.”

Commerzbank: “Consumer prices are 0.7% below last year's levels. Excluding energy prices the figure even reaches 1.1%. If the SNB is breaking out in a cold sweat this is more likely to be caused by concerns about deflation. The SNB would be pleased about any franc it can create by intervention.”

[ryuroden]

Forecasts for January NFP figure

US Non-Farm payrolls data for January is released today at 1:30 p.m. GMT.

Bloomberg median forecast: +140K

Reuters’ median estimate: +150K

Prior three months:

December: 200K

November: 100K

October: 110K

ADP Non-Farm Employment Change: +170K vs. +292K in December.

Initial jobless claims 4-week MA: 375.8K vs. 374K at the end of December.

Challenger January job cuts: -53.5K vs. 18-year average of -101K.

Citigroup expects NFP to add only 100K. The bank underlines that the good outcome would only reinforce the recent trend of good US data, while a weak payrolls number could signal that expectations have begun to adjust.

Analysts at Ueda Harlow think that if US labor market figures turn out to be good and stocks rise, investors will get out of the dollar because of the low rates.

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Bullish euro forecast? Really?

Analysts at Bank of New York Mellon think that the dynamics of the pair EUR/USD will depend more on dollar’s prospects than on those of euro.

The specialists think that as US economic data tends to improve that will encourage global risk appetite. As a result, the greenback will be widely used as a funding currency for the carry trade: investors will borrow in US dollars in order to invest in higher-yielding overseas assets. BNY Mellon thinks that American currency will get under pressure, especially in the second half of the year.

According to the bank, EUR/USD may rise to $1.40 by the end of 2012 and maybe even to $1.45.

It seems quite unusual to read such bullish euro forecast, don’t you think?

[ryuroden]

RBA left the rates unchanged

Tuesday, February 7, 2012 - 05:45

Australian dollar surged to the 6-month maximum versus the greenback at $1.0809 as the Reserve bank of Australia surprisingly decided to keep the rates unchanged at 4.25%, while the market was looking forward to a cut. For now the pair AUD/USD has returned back to the levels in the $1.0780 area.

The RBA Governor Glenn Stevens noted that “with growth expected to be close to trend and inflation close to target, the board judged that the setting of monetary policy was appropriate for the moment.”

Analysts at RBC claim that the central bank “has left the door open for a rate cut going forward, but the onus is going to be on the data.” Economists at ANZ think that the RBA is showing no signs of any immediate policy easing. According to the specialists, the policy statement was neutral, while the RBA made little mention of bank funding costs and won't incline to easing unless the global outlook seriously changes.

The RBA lowered costs both in November and December by 25 basis points. The majority of the economists expected the central bank to lower the borrowing costs.

[ryuroden]

Greece: negotiations seem endless

The single currency is under pressure versus the greenback, unable to resume recovery from January minimum at $1.2625. The pair EUR/USD has so far been consolidating in the $1.3035/1.3225 area. The bias is still bullish. On the upside, if euro rises above $1.3233, it may get to $1.3375 (December 12, 2011, maximum). On the downside, below support at $1.3075, the pair may drift to $1.2856/75 (December 29, 2011, minimum/January 2011 minimum).

Investors are worried that the Greece’s policymakers may fail to reach an agreement on terms for a second aid package, which is a condition for the second bailout. Today Greek Prime Minister Lucas Papademos will resume talks with the heads of 3 political parties in his interim coalition government. In addition, Papademos begins today a second round of negotiations with the Troika – the European Commission, the ECB and the IMF.

Analysts at Westpac think that there will be a lot of problems and shocks before the Greek situation is resolved, so they are bearish in euro. The single currency lost 4.5% during the last 3 months.

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UBS on SNB’s policy options

There are 2 things to note about Swiss franc:

1) Hopes that that Swiss National Bank lifts up the floor for EUR/CHF from 1.2000 to 1.25/3000 in order to fight deflation crushed on December 15, when the SNB left the peg unchanged.

2) The market started worrying about the sustainability of the peg after former central bank’s President Hildebrand resigned.

Strategists at UBS claim that although the SNB interim president Tomas Jordan pledged to defend EUR/CHF minimum, the central bank is under pressure due to a lot of stops placed below the threshold: if franc strengthens, it may be very difficult for the SNB to act against the market.

However, the central bank will try to do its best as its credibility is at stake, thinks UBS. The specialists think that the SNB will lift up the floor in the second half of 2012 to 1.3000. The bank recommends watching Switzerland’s CPI figures due on Monday.