Comments and forex-analytics from FBS

[ryuroden]

BOTMUFJ: EUR/USD technical forecast

Technical analysts at Bank of Tokyo-Mitsubishi UFJ claim that the single currency may rise to the 200-day MA at $1.3722.

The specialists note that EUR/USD’s 5- and 21-day MAs are both pointing up – long-term bullish signal.

At the same time, the bank says that if euro doesn’t manage to overcome $1.3509 (38.2% Fibonacci retracement from the pair’s decline from the May 4 maximum at $1.4940 to January 13 minimum at $1.2620), it may slide to the 90-day MA at $1.3243. As the recent advance of the single currency was very rapid, EUR/USD may survive short-term correction.

[ryuroden]

ECB allotted 530 billion euro to euro zone’s banks

The single currency fell versus the greenback after the European Central Bank the injected a huge amount of three-year cash into the banking system.

The ECB allotted 530 billion euro in 3-year contracts at 1% interest. The first long term refinancing operation (LTRO) in December accounted only for 489 billion euro. However, the figure was close to what the market has been expecting, so EUR/USD got limited on the upside.

One may see that euro’s correlation with risky assets has broken as higher-yielding currencies such as Australian and New Zealand’s dollars rallied against US dollar. The reason is that increased liquidity may boost carry trades in which investors use lower-yielding currencies buy riskier assets, so that EUR will get under pressure.

On the one hand, money from the ECB will help the region’s banks to meet their financing needs and continue easing tension at the euro zone’s bond market. On the other hand, LRTO can’t resolve the euro zone debt crisis and the excess liquidity could weigh on the single currency in coming months.

Support levels for EUR/USD lie at $1.3400 and $1.3388, while resistance levels are situated at $1.3485, $1.3500 and $1.3547.

[ryuroden]

The essentials of Ben Bernanke’s testimony

- The Fed’s Chairman confirmed that the interest rates are likely to stay low at least until the end of 2014 as unemployment level is still high and inflation outlook is subdued.

- Bernanke didn’t mention additional monetary stimulus measures like QE3.

- “Gasoline prices have moved up, primarily reflecting higher global oil prices – a development that is likely to push up inflation temporarily while reducing consumers’ purchasing power.”

- Comments on the situation in euro area: “if Europe has a mild downturn… and if the financial situation remains under control that the effect on the US might not be terribly serious”. At the same time, there is “significant risk” of stress and contagion from “a major financial accident”.

Analysts at Barclays Capital note that US central bank is passively moving away from excessive easing approach that will be a positive factor for US dollar.

According to the data released yesterday, US GDP added 3% in the final 3 month of last year (vs. the consensus forecast of 2.8% growth). Conference Board said that confidence among US consumers climbed to a 12-month maximum in February.

Beige Book, regional business survey, also published yesterday showed that American economy expanded at a “modest to moderate pace” in January and early February, the main driver of the expansion was manufacturing.

Bernanke will continue giving its semiannual testimony to the House Financial Services Committee.

[ryuroden]

Comments on EUR/USD

Today is the first day of EU economic summit. The meeting of the European leaders will be focused on the ways of reviving the region’s economy postponing the discussion of Europe’s financial-crisis firewall.

Analysts at Mizuho Securities claim that the markets are still concerned about the future of the euro area. The specialists are bearish on EUR/USD expecting the pair to slide to $1.25 by June 30.

The single currency dropped versus the greenback yesterday from nearly 3-month maximums in the $1.3480 area to the levels around $1.3315 after the ECB allotted 530 billion euro of cheap three-year credits to the European banks as investors were “buying on rumors, selling on facts”. Then euro was hit after the Fed’s Chairman Ben Bernanke didn’t signal another round of quantitative easing.

Support for EUR/USD is currently situated at $1.3293 (100-day MA).

[ryuroden]

Commerzbank is bearish on EUR/USD

Technical analysts at Commerzbank think that the pair EUR/USD may have reversed downwards.

The specialists claim that support for EUR/USD is situated at $1.3318 (February 1 maximum), $1.3293 (February 21 maximum), $1.3199 (late December maximum), $1.3126 (the uptrend channel support) and $1.3066 (55-day MA).

According to the bank, resistance lies at $1.3389 (yesterday’s minimum), $1.3436 (50% Fibonacci retracement) and $1.3487 (February maximum).

Commerzbank says that the outlook for euro will remain bearish as long as it’s trading below $1.3487. If the European currency overcomes this level, it will get chance to climb to $1.3550 (December maximum) and $1.3628 (61.8% Fibonacci retracement of the decline from October to January).

[ryuroden]

SocGen: China may lower GDP target

The National People's Congress will convene in China on March 5 and last for a week discussing the Government Work Report which will reveal the nation’s targets for growth and inflation, detail the fiscal budget and the priorities for reforms in 2012.

Analysts at Societe Generale believe that the general direction of Chinese policymakers will remain the same: the nation will continue being focused on “making progress while maintaining stability”. In their view, China will reiterate “prudent monetary policy” and “proactive fiscal policy”.

According to the bank, China will likely diminish GDP target to 7.5% indicating increasing commitment to structural reforms and less appetite for aggressive investment stimulus.

[ryuroden]

Rabobank: comments on EUR, AUD, CAD

Analysts at Rabobank believe that the single currency will fall to $1.25 versus the greenback by the middle of May and then return to growth targeting $1.40 in the longer-term as the specialists believe that US dollar will be weakened by the Fed’s policies and economic growth slowdown.

The bank is bullish on the Australian dollar and the Canadian dollar. In their view, these commodity and growth-linked currencies are helped by the success of the LTRO which improved investors’ sentiment. The analysts aren’t sure that Aussie and loonie will be able to maintain the gains for the duration of the year, but for now they seem to be supported well enough.

[ryuroden]

BofA revised forecasts for euro, pound

Analysts at Bank of America claim that although the single currency declined yesterday versus the greenback after the LTRO results and Bernanke’s testimony, EUR/USD prospects have so far improved.

The specialists expect the market’s risk sentiment to stay elevated as the situation at the European peripheral debt markets as well as the general state of global economy improved.

The bank increased EUR/USD forecast from $1.25 to $1.30 by the end of the second quarter and from $1.30 to $1.33 by the year-end. In addition, the projections for EUR/JPY were revised up from 91 to 105 yen by June 30 and from 99 to 109 yen by the end of December.

Bank of America thinks that Canadian, Australian and New Zealand’s dollars have good chances for appreciation. As for British pound, the analysts are pessimistic and lowered forecast for GBP/USD for the end of 2012 from $1.53 to $1.51.

[ryuroden]

Ireland will hold referendum on the Fiscal Compact

Ireland's Prime Minister Enda Kenny announced on Tuesday that he would sign the EU’s new fiscal treaty on Friday, but then the issue will be put on a public referendum. The date for that isn’t defined yet, but it may be scheduled for May or June.

The outcome is uncertain as the Irish rejected the two most recent European Union treaties before passing them in repeat referendums only after concessions were offered.

The fiscal treaty agreed in January by 25 of the 27 EU countries (except the UK and Czech Republic) proposes tough new deficit and debt limits for euro zone members in order to prevent future financial crises. The so-called Fiscal Compact will become binding once 12 of the euro zone's 17 members ratify it, so the Ireland’s decision isn’t critical for the treaty’s fate.

However, as for Ireland itself it seems to be a matter of great importance as the fiscal treaty emphasizes that any members who fail to ratify the pact by March 2013 will be blocked from receiving funds from the future European Stability Mechanism. In 2010 Ireland got bailout from the EU and the IMF and will be funded until late 2013. Never the less, many experts think that the nation will need new loan package next year.

Analysts at Danske Bank believe that the “yes”-vote is the most likely outcome of the referendum. In their view, the Treaty may be possibly ratified in a second vote like it was with the Lisbon treaty.

[ryuroden]

Yen will keep declining due to BOJ’s loose policy

The greenback rose versus Japanese yen approaching February 27 maximum at 81.67 yen.

Yen weakened versus the majority of its counterparts as, according to the data released today, the nation’s CPI fell by 0.1% in January (y/y) declining for the fourth month in a row. According to Bloomberg Correlation-Weighted Indexes, yen lost 6.9% during the past 3 months versus other developed-market currencies.

Last month the Bank of Japan set inflation target at 1%, so the market expects that it will keep easing monetary policy in order to meet this goal. The central bank will meet on March 12.

Analysts at Morgan Stanley increased forecast for USD/JPY for the first quarter from 75 to 80 yen citing “more aggressive dovish” approach of the BOJ.

Strategists at UBS don’t agree with the widespread idea that yen may strengthen towards the Japanese fiscal year-end at March 31. The specialists think that Japanese investors won’t need to repatriate their profits as domestic financial sector looks quite healthy. In addition, Japanese investment flows were net buyers of foreign assets in the first quarter since 2007, and that trend seems unchanged. According to UBS, USD/JPY will rise to 85 7yen in 3 months. Among the reasons why to be negative on yen the bank names high likelihood of further monetary easing in Japan, the widening of the gap between the US and Japanese benchmark bonds and the increasing oil prices.

[ryuroden]

Citi: comments on EUR/USD

Analysts at Citi believe that traders will sell the single currency on any rallies versus the greenback unless we see a sustained improvement in euro zone’s fundamentals. The specialists say that EUR/USD may face resistance at $1.3500 marking the level where selloffs are likely to start.

In their view, the ECB’s LTRO made euro often used as a funding currency. At the same time, Citi points out that on the downside, EUR’s decline will be contained as oil exporters convert their dollar revenues into euro and the fact that investors are extremely short on euro. As a result, some short-term short-covering advances may happen. So, Citi expects the pair to trade sideways for some time.

[ryuroden]

RBC: technical levels for USD/JPY

Analysts at RBC Capital Markets claim that if the greenback manages to close today above 81.47 yen, its chances for sustained growth will significantly increase.

The specialists think that resistance for USD/JPY lies at 82.21 and 83.09 yen.

On the downside, if US currency closes the day below 80.02, its rate will decline to support at 79.31 and 78.23 yen.

[ryuroden]

Morgan Stanley increased EUR/USD forecast

Analysts at Morgan Stanley raised forecast for the pair EUR/USD buy the end of March from $1.27 to $1.34.

In their view, the short-term outlook for the single currency has improved as the ECB’s LTROs help to ease the tensions about the European sovereign debt and banking sector.

At the same time, the specialists are still bearish on euro in the longer-term perspective. The bank reiterated that the pair will likely slide by the end of the year, though the projection was lifted a bit higher, from $1.15 to $1.19.

[ryuroden]

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 from the previous week’s total of 142.2K to 109.7K contracts.

• British pound shorts decreased from 31.3K contracts on February 21 to 23.2K contracts on February 28. Sterling positions are now their best level since September 6 when positions accounted for 13.2K short contracts.

• Japanese yen positions declined from 17.3K net long contracts on February 21 to 1.2K net long contracts on February 28. Yen speculative positions have reached minimum since May 31 when positions totaled 1.6K short contracts. Strategists at Scotia Capital note that yen longs have completely capitulated ever since the shift in stance coming from the Bank of Japan of a far more aggressive monetary policy. In their view, although the gross long position in yen shifted lower this week, the gross short has almost doubled in the last four weeks, highlighting the changing market view on the yen.

• Swiss franc net shorts slightly decreased from 19.8K contracts on February 21 to 19.4K contracts on February 28. Short positions increased surpassing small increase of longs.

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. Although the CME speculators represent a small fraction of trading in the currency markets, their trades are widely seen as typical of hedge fund investors' currency movements.

[ryuroden]

Mizuho, Citigroup on USD/JPY

The greenback declined versus Japanese yen as the market players were taking profits after the pair USD/JPY reached 9-month maximum last week at 81.87 yen. At the same time, the pair’s decline was limited as Japanese importers were buying US currency on the dips.

The most eyed event this week is the release of US February Non-Farm Payrolls on Friday. Analysts at Mizuho Corporate Bank claim that if the data is strong, US dollar may add about 1.5 yen to the levels around 83 yen. However, the specialists warned that the things may not go that smooth as the employment component of the ISM manufacturing survey declined last month (m/m). According to the bank, weak payrolls figures will bring dollar down to 80.00 yen.

Strategists at Brown Brothers Harriman also advise traders to watch Greece’s debt swap deal as it may increase uncertainty and risk aversion encouraging yen this week. Bondholders have until March 8 to sign up to the agreement under which they will exchange their existing Greek government bonds for new paper in a swap deal that will see the nominal value of their holdings cut by 53.5%.

Economists at Citigroup are positive on USD/JPY in the longer term. The specialists point out that the pair closed in February above 21-month MA for the first time since 2007 – very positive technical signal. However, in the short term there’s the high risk of dollar’s correction to 78.00/50 yen. The longer term target is bullish – 98 yen in the coming weeks. The main resistance for USD/JPY is situated at 100-week MA in the 82.10 yen area.

[ryuroden]

Watch US employment data on Friday

The US nonfarm payrolls report will be released on Friday, March 9.

In January US payroll rose by 243,000 and showed a highest increase during a nine-month period. The expected payroll growth in February is 250,000; however, some specialists forecast even a more significant upturn.

In case if employment increases less than by 200,000, Westpac Institutional Bank analysts recommend selling the dollar against the Japanese yen. However, it is more likely that the payrolls come in better than expected. In this case it will be beneficial to sell the dollar against the Canadian dollar because of the positive impact of the statistics on the Canadian economy. The specialists recommend going short on USD/CAD at 0.9880 stopping at 1.0060 and targeting 0.9400.

Analysts at Deutsche Bank believe that the growth of the Consumer Confidence Index and the labor market expectations point at forthcoming changes in the economy.

[ryuroden]

Deutsche Bank: pound may strengthen vs. Aussie

Analysts at Deutsche Bank believe that British pound may strengthen versus Australian dollar in the coming months.

The specialists give the following reasons for such assumption:

- Chinese economic growth is slowing down. As Australian economy is tightly connected with the China’s one which is the nation’s major export market, Australian dollar will likely get under pressure.

“To a growing cohort of offshore commentators, China is a classic bubble on the brink of collapse. Its economy is chronically unbalanced, over-reliant on investment and cheap manufacturing exports. Financial repression has spurred speculative overbuilding in real estate, and local governments have gorged on credit to fund stimulus projects of dubious value. Central planning never worked and social pressures are starting to boil over”.

Deutsche Bank doesn’t think that China’s economy is going to collapse, but that it will weaken as its economy gradually restructures.

- Aussie is already overpriced.

- Such currencies as Australian, Canadian dollars and Japanese yen have outperformed those like sterling and Mexican peso during the Third Phase of Chinese growth. According to the bank, shorting the outperformers could be expensive, but buying the laggards or constructing relative value crosses seems quite sensible. Judging by the strength of past correlations and dislocation since 2008 Deutsche choose to be long at GBP/AUD.

[ryuroden]

BBH: buy USD/CHF

Analysts at Brown Brothers Harriman believe that euro’s decline versus the greenback which started last week is likely to continue. In their view, when Europe finalizes the amount of private sector participation in the Greek bailout, euro will likely take a blow, especially if participation is low and credit default swaps are triggered.

The specialists think that in would be wiser to stay away from euro this week. As EUR/CHF is close to 1.20, the minimal level set by the Swiss National Bank, “if euro is going to weaken sharply, Swiss franc is going to weaken faster.”

Making such assumption, BBH recommends buying US dollar versus Swiss franc. According to the bank, one should go long on USD/CHF at 0.9150 stopping at 0.8950 and targeting 0.9500.

[ryuroden]

Banks' forecasts for FX majors

The following forecasts were updated on March 2.

Data from FX Week

[ryuroden]

Commerzbank: comments on EUR/JPY

Last week the single currency fell versus Japanese yen sliding From February 27 maximum at 109.94 to close at 108 yen on Friday.

However, technical analysts at Commerzbank note that EUR/JPY has managed to hold above the 200-day MA at 106.88 yen. The specialists believe that the pair will be able to push a bit higher. In their view, resistance for euro lies at 108.85, 109.38/58 (55-day MA, July minimum) and 110.18 (50% Fibonacci retracement of the decline from April to January). According to Commerzbank, the pair’s move up will wear off in the 110.18/111.57 area.

The bank notes that support for EUR/JPY is situated at 106.78 (November 14 maximum).

[ryuroden]

Fiscal Compact's signed, but crisis is not over

An important «Fiscal Treaty» was signed on the EU summit, held on Friday, March 1-2. According to this document the budget deficit will be limited to 0, 5 % of GDP; the breakers may be penalized.

The pact was signed by 25 EU members, excluding Great Britain and Czech Republic, which are not ready to let the European Commission intervene in its economy. The Fscal Compact is mandatory only for 17 euro-zone countries.

Germany forced the conclusion of the treaty: otherwise she would refuse to finance the European Stability Mechanism. It is important to note that the document requires ratification.

Besides, the EU leaders tried to persuade everyone that the financial euro-zone crisis is over. «EU shifts from austerity measures to economic growth, » said José Manuel Barroso, the President of the European Commission.

However, some analysts find these statements groundless and forecast the situation go from bad to worse.

[ryuroden]

J.P.Morgan: trading EUR/USD this week

There are several central banks’ meetings this week. Today the RBA left rates unchanged at 4.25%. Wednesday is the day of the RBNZ, while on Thursday we’ll hear from the Bank of England, the ECB and the Bank of Canada.

Analysts at J.P. Morgan are focusing on the European Central Bank. In their view, Europe’s monetary authorities won’t change the interest rates. However, the specialists advise investors to pay great attention to what the ECB’s President Mario Draghi will say at the press conference the same day. If the central banker sounds more positive (according to J.P. Morgan, this seems quite likely), euro will get support as the risk aversion will subside. In addition, the European currency will be helped by the high oil prices.

As a result, the analysts recommends going long on EUR/USD at $1.3150 stopping above $1.3000 and targeting $1.3500. The bank warns, however, that one should get out of the trade even of the single currency keeps sliding below $1.3500 as the private sector involvement creates dangerous uncertainty.

[ryuroden]

Scotiabank: comments on USD/CAD

Analysts at Scotiabank note that there are risks for loonie coming from potential slowdown of China’s economic growth – remember that Canadian dollar is a growth-linked currency.

“The most significant development is China’s announcement of a 7.5% growth expectation this year, below last year’s 8% and sending shivers down the spines of commodity currency traders. We are medium term CAD bulls, but view the outlook for China’s growth as one of the keys to CAD strength.”

“Technically, a USD/CAD close above 0.9953 would be bullish for short‐term traders, with the 200‐day MA of 0.9993 serving as the first level of resistance.”

[ryuroden]

UBS: what to expect from the SNB?

Analysts at UBS recommend traders to watch the Swiss National Bank’s meeting on March 15 with great attention. In their view, the pressure on the central bank increased after interim President Jordan confirmed the SNB’s commitment to defend EUR/CHF floor at 1.20 noting that Swiss franc is still greatly overvalued.

The specialists say that one may get some hints on what course the SNB will take from Switzerland’s February CPI figures which are released on Thursday. If consumer prices keep showing increasing deflation, the SNB will lift EUR/CHF peg to 1.30 in the second half of 2012.

Swiss economy has so far showed inspiring results: retail sales added 4.4% (y/y), GDP rose in the final 3 months of 2011 by 1.3% (vs. the forecast of 0.9%).

[ryuroden]

RBA left rates unchanged

The Reserve Bank of Australia left the cash rate unchanged at 4.25%. According to the explanation, given by the RBA Governor Glenn Stevens, the decision was caused by the decrease of concerns, connected with the European economy and by its positive prospects in 2012. However, he pointed that Chinese growth is starting to moderate.

It is important to note that the RBA interest rates stay relatively high in comparison to many developed economies where policy has been loosened to extremes. This fact provides Australia with various instruments to manage the situation in case if the European crisis will gather pace.

"The resilience of growth through to the end of 2011 is notable and is consistent with our view that the RBA does not need to provide any further stimulus," affirm JP Morgan analysts. The median estimate now forecasts growth of around 0.8% in the fourth quarter, from an initial 0.7%. Growth for the year was expected to be 2.4%.

Australia’s dollar weakened to $1.0621 as of 3:18 p.m. in Sydney from $1.0671 yesterday, after touching $1.0612, the lowest since Feb. 23. The Aussie dropped 0.7 percent to 86.45 yen from yesterday, when it fell 0.9 percent.