Comments and forex-analytics from FBS

[ryuroden]

Japan conducted stealth intervention in November

Japanese yen declined versus US dollar and the single currency as the government data showed that Japan conducted stealth intervention in November in order to weaken the national currency. Stealth intervention is carried out without any official announcement from the finance ministry.

Japan’s Ministry of Finance reported today that the nation sold 1.02 trillion yen ($13.6 billion) against the dollar in markets on the first four days of November in addition to an 8.07 trillion-yen sale on October 31. Finance Minister Jun Azumi said he won’t rule out any options to curb the currency’s appreciation.

Analysts at Bank of Tokyo-Mitsubishi UFJ claim that yen’s drop reflects the increasing risks that the Japanese authorities may intervene again to make yen depreciate.

Specialists at Commerzbank think, however, that interventions won’t reverse major USD/JPY downtrend as their effect seems to be short-lived.

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Jordan: SNB won’t allow franc to strengthen

ТThe Swiss National Bank’s interim president Tomas Jordan said today that the central bank will not tolerate a breakdown of the CHF 1.20 threshold.

According to Jordan, the SNB is more than ever “committed to defending the cap” and can’t allow further appreciation of the national currency as strong franc affects Switzerland’s economy. To do that the central bank is ready to buy unlimited amounts of foreign currencies. The main risks come from further escalations of the euro zone’s debt crisis.

The pair EUR/CHF is trading in the positive zone, right below the daily peak at 1.2087. Resistance for euro is found at 1.2109 (January 25 maximum) and 1.2128 (January 13 maximum). Support for the pair lies at 1.2053 (200-day MA) and 1.2028 (February 1 minimum).

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Will the ECB lower rates?

The European Central Bank meets this Thursday. The majority of the economists expect the ECB to keep the borrowing costs unchanged. Some specialists, however, think that the central bank may cut its benchmark rate from the current level of 1%.

The arguments for the ECB’s staying on hold: better-than-expected key economic indicators released so far in the euro zone, successful bond and T-bill auctions in Germany and peripheral nations, positive impact of ECB’s LTRO which helped to increase liquidity.

The arguments for the ECB’s rate cut: austerity measures affecting the European economy and creating the threat of the region’s recession, the expansion of the central bank’s balance sheet as a result of the LTROs, unresolved negotiations in Greece.

Analysts at UBS think that the ECB will reduce interest rates. In their view, EUR/USD will stay under pressure ending 2012 at $1.1500.

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Greek deal speculation encourages euro

The single currency surged versus the greenback setting new daily maximum at $1.3197 after Reuters reported that “Greek government is drafting agreement on bailout deal to be put to political leaders for approval later today” citing the words of the unnamed government official.

Analysts at BNP Paribas claimed that “the whole focus on austerity measures is that it’s the prerequisite for the second bailout package. It would be a step closer to everything fitting in to place. The market has reacted very positively.”

Resistance for EUR/USD if found at $1.3200 and $1.3225 (January 30 maximum).

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Morgan Stanley: sell GBP/USD

Analysts at Morgan Stanley recommend investors selling British pound versus the greenback. The specialists advise to place stops for GBP/USD at $1.61 and look for the pair’s decline to $1.5460.

According to the bank, sterling will be under pressure due to 2 factors: UK economic weakness and Bank of England’s quantitative easing – Morgan Stanley expects the BOE to announce tomorrow another 50 billion pounds of bond purchases.

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Commerzbank: comments on NZD/USD

New Zealand’s dollar keeps strengthening versus the greenback. The currency is trading within an uptrend since the middle of December.

Analysts at HSBC claim that kiwi’s dynamics will depend on euro’s performance and, consequently, the result of Greek deal.

Specialists at Commerzbank say that support for NZD/USD lies at $0.8248 (uptrend channel support line). As long as the pair is trading above this mark, the outlook for kiwi is bullish with $0.8400 and $0.8426 in focus, while the decline below this level will trigger the fall to January minimum at $0.8155.

The next important data release: New Zealand’s unemployment level later today.

[ryuroden]

Euro renewed 2-month highs, all eyes on Greece

The single currency rose to 2-month maximums versus the greenback testing the levels above $1.3300.

The market keeps expecting Greek deal to come: to receive 130 billion-euro ($173 billion) second bailout from the Troika (the European Commission, the ECB and the IMF) the nation’s policymakers have to reach an agreement on spending cuts.

According to an e-mailed statement from the office of Greek Prime Minister Lucas Papademos, the Prime Minister and the leaders of the three parties supporting the government “agreed on all the points of the program with the exception of one which requires further elaboration and discussion” with the lenders. The exception seems to be pension cuts.

The ECB will announce today its interest rate decision (at 12:45 p.m. GMT). The consensus forecast shows that the central bank will keep the rates unchanged. After that euro-area finance ministers will meet in in Brussels.

Analysts at BNP Paribas claim that the pair’s EUR/USD rate has already largely priced in an almost done agreement on an aid package for Greece. However, the specialists expect euro to make a knee-jerk bounce to $1.3500 or $1.3600 as more euro shorts are stopped out. At the same time, sells-off might soon begin as euro will find itself under pressure due to the region’s weak growth prospects and the ECB’s loose monetary policy.

[ryuroden]

Aussie may be overvalued

Adrian Lee, chief investment officer at currency portfolio manager Adrian Lee & Partners, thinks that Australian dollar is overvalued versus the greenback.

Mr. Lee is sure that Australia’s currency will remain strong due to high demand for commodities and growing emerging market economies.

However, the specialist doesn’t recommend investors to buy Aussie at the current levels in the $1.0800 area. In his view, one should wait until AUD/USD weakens to $1.0500 and open longs there.

[ryuroden]

Greek Parliament approved austerity measures

Greek Parliament approved austerity measures needed to secure an international bailout having voted 199 to 74. The situation in Athens is tense as people get involved in disorders protesting against such decision with 10 buildings were set ablaze at the center of the city

The adopted measures account for about 7% of Greek GDP over three 3 and include a debt swap that would shave 100 billion euro off more than 200 billion euro of privately held debt.

Prime Minister Lucas Papademos: “It is up to us, our vote, whether the country will remain in the euro or be led to a disorderly default. Voting for the economic program and opening the road for a loan accord sets the basis for the modernization and recovery of the economy.” In March Greece faces 14.5 billion-euro bond payment. As for the riots, Papademos noted: “Vandalism, violence and repression have no place in democracy and won’t be tolerated. In such critical times we have no luxuries for such conflict.”

The next step is the meeting of the euro zone’s finance ministers on Wednesday, February 15. The region’s finance chiefs are to approve the second aid package.

The pair EUR/USD returned up to the levels in the $1.3259 area after sliding to $1.3155 on Friday ahead of the vote. Resistance at $1.3260 and sell orders not far from there will likely limit further advance of the single currency for some time.

[ryuroden]

Yen weakened on Greek news and Japan’s data

Japanese yen fell as the risk sentiment improved due to Greek Parliament’s approval of the austerity measures reducing demand for yen as a safe haven. In addition, the data released today showed that Japan’s economy contracted in the final quarter of 2011 more than expected undermined by the weakened exports: the nation’s GDP shrank by 2.3% (y/y) versus the median forecast of 1.3% decline.

That made the markets see greater possibility of Japan’s intervention as it seems quite evident that stronger yen’s affecting Japanese exporters. As a result, traders are cautious to go long on JPY. Bank of Japan meets today and tomorrow and more monetary easing steps may be considered.

Comments of Japan’s officials

Prime Minister Noda: Japan does not intervene with specific forex levels in mind.

Finance Minister Azumi: usual statement about decisive action when necessary.

Analysts at Commerzbank note that yen has been trading weaker again recently due to the verbal interventions of Japanese politicians, debates about the nation’s 2011 trade deficit and the smallest current account surplus in 15 years. In their view, as long as markets keep focusing on the deterioration of the trade and current account balances USD/JPY will likely remain supported.

The pair USD/JPY is trading in the 77.70 yen area up from 76 yen at the beginning of February. The pair EUR/JPY reached 103 yen zone up from 100 yen earlier this month.

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CFTC trader positioning data

The latest Commitments of Traders (COT) report, released on Friday by the Commodity Futures Trading Commission (CFTC), showed that:

• Euro shorts declined for the second consecutive weak. Net shorts account for around 141K contracts, down from the previous week’s total of 158K.

• British pound shorts increased from 26K contracts on January 31 to 33K contracts on February 7 after 2 weeks of improvement.

• Japanese yen net longs declined from 57K contracts reported on January 31 to 55K as the data on February 7 showed. Yen speculative positions are still just below their maximum in over a year which was reached on January 10 when contracts surpassed the August 2 level of 59K.

• Swiss franc net shorts declined from 11K net short contracts on January 31 to 9.7K contracts on February 7. The shorts decrease for the third consecutive week.

• US dollar long positions were reduced from a total long position of $14.22 billion on January 31 to $10.63 billion on February 7.

It’s necessary to note that the figures cited above are always a week old at the time of their release. Never the less, CFTC data gives a good oversight into how the market is positioned and if/how these positions are being unwound.

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UBS: short-term outlook for USD/JPY

Analysts at UBS note that the greenback has posted its biggest weekly advance versus Japanese yen since the Bank of Japan’s record intervention at the end of October 2011.

USD/JPY rose from the 76.50 area on Monday to Friday’s peak at 77.80 yen. The pair went up due to the general strengthening of US dollar as well as on the speculation of potential intervention of Japan’s monetary authorities.

Never the less, the specialists claim that USD/JPY may find itself under pressure in the upcoming weeks. According to UBS, the outlook for the pair is mixed: on the one hand, the economists expect inflows into yen from semi-annual coupon payments of US T-bonds holders and some kind of repatriation due to the Japanese financial year-end; on the other, the Bank of Japan may further ease its monetary policy.

The bank thinks that USD/JPY isn’t likely to rise above 80 yen unless US Treasury yields can break significantly higher.

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UK economic forecasts: update

The Confederation of British Industry (CBI) lowered its 2012 forecast for the UK economy from the 1.2% (November 2011 estimate) to 0.9%.

Although Britain’s GDP contracted by 0.2% in the final 3 months of last year, the specialists think that the nation will manage to avoid technical recession or, in other words, 2 consecutive quarters of negative growth.

According to the CBI, British growth will accelerate to 2.0% in 2013. The economists say that in the quarterly basis growth will remain fragile in the first two quarters of this year (0.2%, 0.2%), improving modestly in the second half of the year (0.6%, 0.5%), as inflationary pressures ease.

The latest forecasts show inflation falling back towards target levels (2.2%) in the fourth quarter of 2012 and then remaining close to the BOE’s 2.0% target throughout 2013. The growth will be driven by trade and business investment. Household consumption, however, will be under pressure from modest wage growth and continuing high unemployment.

Later this week in the UK

On Wednesday the Bank of England will publish its latest quarterly Inflation Report with update forecasts for growth and inflation. The BoE Governor Mervyn King will give press conference the same morning. As the Monetary Policy Committee (MPC) increased asset purchases by 50 billion pounds to 325 billion pounds on Thursday, the forecasts might continue showing lower inflation in the medium term.

On Tuesday the Office for national Statistics will release January inflation data. The CPI growth is expected to slow from 4.2% (y/y) to 3.6%. King will have to write a letter to the Chancellor, explaining why inflation is more than one percentage point above the 2% target.

[ryuroden]

Watch Fed’s meeting minutes on Wednesday

To get insight about the Federal Reserve’s stance toward further quantitative easing one has to watch the Fed's January meeting minutes released on Wednesday.

The minutes will show how the opinions of the central bank’s officials are divided: some FOMC members may have seen the need for additional monetary easing.

This time the central bank for the first time will provide "qualitative" details on officials' views on the Fed's near-record $2.9 trillion balance sheet.

Last month the Fed revealed its intentions of keeping the rates near zero until the end of 2014 but gave no details on how it should handle its asset holdings.

The argument against QE3 is improved labor market situation (in January unemployment rate declined to 8.3%). However, some experts think that US economy won’t gain enough growth pace to satisfy the Fed.

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Different comments on Greece and euro

UniCredit: if Greece leaves the euro area, it would be a disaster for Greek society, while for the rest of Europe it won’t matter much in the longer term. However, the majority underestimates the risks of Greek default to the global financial markets in general and other European nations in particular.

Bank of Nova Scotia: as Greek parliament approved austerity measures the pressure on euro may ease in the short term.

Societe Generale: speculative positioning data shows that short euro positions are being reduced, but not enough to spark a substantial risk rally. EUR/USD will struggle to break last week's maximum at $1.3330.

Morgan Stanley: EUR/USD correlation with the market’s risk sentiment will break down this year. The single currency will remain under pressure with the ECB’s accommodative increase of euro’s supply, recessionary growth and political uncertainty. Sell euro at $1.3250, stopping at $1.3300 and targeting $1.2390.

Credit Agricole: so much good news is already reflected in the value of the single currency, so even if there is some form of debt deal and second bailout package for Greece EUR/USD’s advance will be limited.

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JPMorgan: buy euro against franc

Analysts at JPMorgan recommend buying the single currency versus Swiss franc. In their view, the pair EUR/CHF will rise to 1.23 in the medium term.

The specialists point out that in Switzerland deflationary forces are mounting, while the economy is close to recession. The bank reminds investors of weak January manufacturing PMI (the indicator declined from 49.1 to 47.3) and high unemployment rate.

According to JPMorgan, the SNB will defend the 1.20 floor or possibly to raise it.

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Moody’s downgraded European nations

The single currency declined versus the greenback for the third day. Euro fell after Moody’s Investors Service downgraded several European nations. US dollar, on the other hand, strengthened versus all of its major counterparts as the market’s risk sentiment deteriorated.

Moody’s cut Spain’s rating from A1 to A3, Italy’s – from A2 to A3 and Portugal’s one – from Ba2 to Ba3 with negative outlooks. The ratings of Slovakia, Slovenia and Malta were also lowered with negative outlooks. In addition, the agency said it may strip France, Austria and the UK of their top Aaa ratings. The rating of EFSF (European Financial Stability Facility) was retained with stable forecast.

According to the Moody’s economists, the downgrade was motivated by the uncertainty over the euro area’s prospects for institutional reform of its fiscal and economic framework and the resources that will be made available to deal with the crisis.

The euro zone’s finance ministers meet tomorrow to discuss a second 130 billion-euro ($171 billion) aid package for Greece which managed to reach parliamentary approval of austerity measures.

Analysts at Mizuho claim that “the ratings agencies behind the curve as the risks have actually been falling in Europe. There may be worries that countries cutting fiscal spending may drag on their economic growth, but the concerns aren't new and the downgrade should have minimal impact on market sentiment.”

Investors’ attention will be also focused on Italian bond auction today (bonds due in 2014, 2015 and 2017) and debt auctions of Spain, Belgium and Greece (bills) and the Netherlands (bonds maturing in 2017) tomorrow.

The pair EUR/USD fell from last week’s maximums above $1.3300 to the levels in the $1.3135 area.

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Bank of Japan increased asset purchases

Japanese yen declined against US dollar as the Bank of Japan increased its asset-purchase program by 10 trillion yen ($128 billion) to 65 trillion yen and set near-term inflation target at 1%. The move was generally unexpected. The BOJ left its benchmark rate at 0.1% (in line with forecasts).

According to the BOJ statement, the central bank’s goals are to “clarify its monetary policy stance and to further enhance monetary easing” to “overcome deflation and achieve sustainable growth with price stability.” Some experts, however, criticize the BOJ for yielding to political pressure. The increase in the asset-purchase facility will be used to fund purchases of more government bonds.

Japanese central bank decided to support national economy which contracted in the final quarter of 2011 by 2.3% (y/y), data released yesterday showed. The BOJ also signaled its resolve to take further action to beat deflation. Nationwide core CPI fell by 0.1% (y/y) in December, the third straight month of decline. Prices haven't risen by at least 1% for any year since 1997.

It’s also necessary to point out that as US Federal Reserve last month set an inflation target and extended its commitment to near zero rates. As a result, pressure on the BOJ strengthened encouraging it to make a move.

Analysts at Sumitomo Mitsui think that the impact on yen’s long-term uptrend will be limited. Specialists at Mitsubishi UFJ Morgan Stanley Securities claim that the BOJ still has further easing options left, such as increasing the amount of assets it buys and buying JGBs with longer maturities.

Economists at Credit Agricole think that the BOJ's decision will help to keep JGB yields low and make yen weaken in the short term. However, the specialists aren’t sure that the impact will be sustained. There needs to be probably more to be done, the buying of JGBs would need to be more intense, says Credit Agricole.

The pair USD/JPY rose above 78 yen mark. Resistance for the greenback lies at 78.29 yen (maximums of the late November and January 25). Above this level the upside momentum will increase.

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Analysts at UBS revised up euro forecast

Analysts at UBS raised 1-month forecast for euro from $1.2000 to $1.3000 and increased the 3-month projection from $1.1500 to $1.2500.

The specialists also lifted up their 3-month forecast of USD/JPY’s rate from 75.00 to 77.00.

According to UBS, short-term risks diminished: the situation in the euro zone’s banking sector will improve due to ECB’s Long-term liquidity operations (LTLO) operations, while the threat of a disorderly Greek default for now subsided.

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China pledged to help the euro area

The single currency went up versus the greenback and reached 2-month maximums against Japanese yen as the People’s Bank of China announced that the nation will take part in resolving the euro zone’s debt crisis.

The PBOC Governor Zhou Xiaochuan said that China can provide help through the central bank, China Investment Corp., the nation’s sovereign wealth fund, and banks including the China Development Bank, Export-Import Bank and other institutions.

Analysts at Royal Bank of Canada claim that we’ll see some growth on the short covering, but the advance won’t be long.

On the upside, euro’s moves are limited ahead of the European finance minister’s teleconference on the second bailout for Greece (the meeting initially scheduled for today was put off to Monday, February 20). European authorities are waiting for written commitments of Greek parties on the implementation of the austerity program. According to Greece’s government, the necessary assurances will be provided today.

The pair EUR/USD rose from yesterday’s minimum at $1.3079 to the levels around $1.3180. There may be some further consolidation between 100- and 55-day MAs.

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Commerzbank: EUR/CAD technical comments

Analysts at Commerzbank are bearish on the single currency versus Canadian dollar. The specialists note that EUR/CAD didn’t manage to overcome resistance provided by the 55-day MA at $1.3258 and is resuming decline.

According to the bank, support levels are situated at $1.3000 (psychological level), $1.2876 (2012 minimum), $1.2777 (2011 minimum), $1.2765 (the 1985-2012 uptrend line) and $1.2613. Resistance levels are situated at $1.3253 (January maximum), $1.3258 (55-day MA) and $1.3398 (September minimum).

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Analysts on USD/JPY prospects

Analysts at BNP Paribas believe that one shouldn’t hurry to turn bullish on USD/JPY. The specialists underline that though the Bank of Japan decided to keep expanding its balance sheet and set a 1% inflation target, it will not be guiding policy any differently. The economists remind that asset purchases didn’t manage to reverse yen’s uptrend either in the past 3 years or during the prior QE in 2002-2004. According to the bank, USD/JPY will trade in 73 yen area in first quarter, 71 in the second one and then decline to 70 in the final 3 months of the year.

Never the less, analysts at Barclays Capital note that the BOJ is trying to "catch up to its counterparts, and this adds to the downward pressure on yen already prevailing from Japan’s ongoing external balance deterioration and the risk of a sovereign downgrade toward fiscal year-end (March 31)”. With Japanese interest rates also “lower for longer” Japanese investors will look abroad for better returns stepping up monetary outflows from Japan. In addition, US dollar will be helped by American economic recovery. In their view, USD/JPY will rise to 79.00, 81.00 and 83.00 yen in 3, 6 and 12 months.

By the way, specialists at Societe Generale point out that the move of Japanese central bank doesn’t look that large compared with ECB’s actions: the BOJ will increase bond purchases by a further 10 trillion yen this year, which could increase the size of their balance sheet by 2% of GDP, while the ECB's December LTRO added nearly 5% GDP to the central bank's balance sheet (remember that there will be another 3-year LTRO February 29). The specialists say that though the fast that USD/JPY rose above 200-day MA is rather promising, the pair still has to overcome the critical 80 yen level.

Economists at CitiFX believe that yen’s depreciation will be short-lived. In their view, it will be difficult for USD/JPY to start sustainable rally until US Treasury yields as a whole start to press higher.

[ryuroden]

HSBC about the forex market prospects

While many experts expect the single currency to keep falling versus the greenback, analysts at HSBC think that EUR/USD will rise to $1.3700 by the end of the second quarter.

The specialists don’t think the market has arrived at any kind of final verdict on Greece. There is disappointment that there wasn’t anything firmer in terms of ring-fencing Greece, but progress has been made and there is political commitment on the outcome. In that environment, people should still buy the euro, claims the bank. In the short term, euro will push higher and some of the doubts will fade away.

HSBC also believe that the Swiss National Bank (SNB) will defend the floor for EUR/CHF which was set at 1.20 in September 2011 without raising it in the near future. As for USD/CHF, it will remain stable at around 0.90 over the next 3 months.

The specialists are bullish on emerging market currencies, even though many are dependent on global growth indicators, and are driven by unpredictable risk appetite.

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Euro’s pressed by Greek uncertainty

The single currency fell to 3-month minimum versus the greenback.

Tomorrow German’s Chancellor Angela Merkel meets Italian Prime Minister Mario Monti. The leaders will hold a joint press conference afterwards.

On Monday, February 20, euro zone’s finance ministers will gather to discuss a second bailout package for Greece. Initially the meeting was scheduled to take place yesterday, but then was postponed. Luxembourg Prime Minister Jean-Claude Junker assured the markets that “all the necessary decisions” on the issue will be taken at February 20 meeting.

The markets worried that a delay in Greek aid will increase borrowing costs for the region. The situation remains rather uncertain. According to Reuters, several EU sources said on Wednesday the euro zone is examining ways of holding back parts or even the entire bailout program until after Greek elections in April while still ensuring it avoids a disorderly default. The risk sentiment was also affected by Moody’s announcement that the ratings of several banks including UBS, Credit Suisse and Deutsche Bank are put on review to the downside.

In the current circumstances watch Spain’s and France’s debt auctions later today. France will offer 8.5 billion euro in 2-, 3- and 5-year bonds, while Spain plans to sell 4 billion euro in securities maturing in January and July 2015 and in October 2019.

Analysts at Nomura believe that by the end of the month EUR/USD will hit $1.2500. In their view, the market has lost confidence and investors won’t have much incentive to buy euro.

The pair fell today below 38.2% Fibonacci retracement of its rally this year at $1.3056 and 55-day MA at $1.3050. Support for euro is now found in the $1.2970 area (50% retracement of the same rally, daily Ichimoku charts' Kijun-sen line and also the Cloud’s bottom).

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ANZ: scenarios for EUR/JPY

Analysts at ANZ underline that the level of divergence in both monthly and weekly indicators suggests that if the current rebound can be maintained, EUR/JPY may also have formed a base.

In their view, the outlook for the pair will become bullish if it overcomes resistance in the 105.50/107.00 area. In such case euro will get chance to repeat the 2009 rally and to climb through 112.00 towards 125.00 and possibly to 133.50.

At the same time, the specialists claim that one can’t rule out the possibility that the single currency may survive a gradual decline to 2000 minimum versus Japanese yen at 88.95 yen. The potential rally of EUR/JPY will be undermined below 100.00 yen.