Comments and forex-analytics from FBS

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Loonie may strengthen versus the greenback

On Monday Canadian dollar declined against its U.S. counterpart as weak Chinese export data hurt commodities. According to the data released on Saturday, China posted its biggest trade deficit in at least a decade in February ($31.5bn), fanning concerns about growth in the world's second largest economy. After that the price of crude oil, Canada’s biggest export, fell by 1.9%.

Today USD/CAD is trading at 0.9900 after opening at 0.9924. According to analysts, market sentiment towards the Canadian dollar has turned favorable, with weekly CFTC data showing consistent increases in CAD long positions since mid-January.

Strategists at Scotia Capital say that recent M&A activity, including talk of a takeover of Viterra, Canada's largest grain holder, helps the currency. Typically any large M&A announcement has the psychological impact of reminding market participants that Canada has a lot of interesting assets that can be M&A targets in the future.

Analysts at UBS are bullish on CAD due to the solid domestic macroeconomic data and the fact that the BOC Governor Carney has accordingly become less dovish in his outlook. In their view, although loonie’s rate has already priced in potential policy tightening, loose monetary policy of other major central banks will make Canadian dollar very attractive.

Canadian currency is the best performer among 10 developed-nation counterparts over the past week, adding 1%, according to Bloomberg Correlation Weighted Currency Indexes. The U.S. dollar lost 0.1% and the euro gained 0.3%.

Loonie will trade at parity with its U.S. counterpart by the end of the second quarter, according to the median of 40 forecasts compiled by Bloomberg News.

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Credit Agricole and Commerzbank about AUD/USD

Analysts at Credit Agricole note that Australian dollar reached critical level versus the greenback. To maintain medium-term uptrend AUD/USD must close today above $1.0505 (March 7 maximum, “bullish hammer” reversal pattern). Otherwise, the sideways range may widen or Aussie will start sliding. The bank recommends buying Australian currency at the current levels stopping below $1.0505 and targeting recent highs in the $1.0800 area.

Strategists at Commerzbank think that AUD/USD has topped at $1.0856 on February 29 and is now going to weaken to $1.0406 (200-day MA) and $1.0382 (December maximum). Below these levels the pair will be poised down to the parity and lower. According to the bank, the outlook for Aussie will remain negative as long as it’s trading below resistance at $1.0670.

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Bank Sarasin: comments on franc and euro

Economists at Bank Sarasin are strongly convinced that the Swiss National Bank won’t raise the threshold EUR/CHF higher than 1.20 unless recession continues and deflationary threats keep looming in Switzerland. The analysts say if there was no floor set for the pair, the rate could be as low as 1.10.

Although the franc has strengthened since the start of the year, it has remained above the 1.20 floor, trading at 1.2057 against the euro on March 13. The bank thinks, however, that the threat of further SNB intervention will contain franc’s advance in the near future.

According to Bank Sarasin’s specialists, European growth is going to resume in the second quarter after the ECB liquidity injection. Perhaps, the liquidity will buy the time that is needed for a recovery, and in a long-term period EUR/USD may climb to $1.38 or $1.40. On the other hand, the economists warn that excessive liquidity always weakens the currency.

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Main economic & market news

• FOMC meeting results:

- benchmark rate is left unchanged near zero and it planned to be kept there through at least late 2014;

- additional easing is still an option;

- US economic outlook was upgraded from "modest" to "moderate" growth;

- however, unemployment rate is “elevated” and “significant downside risks” are still in place. Inflation outlook is “subdued.”

• Australian consumer confidence is down by 5% this month, while housing starts dropped in the fourth quarter by 6.9% versus 3% decline expected (q/q).

• Japanese business sentiment sharply deteriorated in the first quarter.

• According to The Telegraph which citing a leaked Troika report, Greek budget deficit will probably fall to 1.5% in 2012 in line with the forecasts but “current projections reveal large fiscal gaps in 2013-2014.”

• The Fed released US banks stress test results: 15 of 19 banks would be able to maintain capital levels above a regulatory minimum in an “extremely adverse” economic scenario. The 4 banks which wouldn’t have enough capital if economic situation worsens (13% unemployment) are Ally Financial, Suntrust, MetLife and Citigroup. Analysts at RBC Capital Markets showed that the fact that the majority of the banks succeeded in passing the test shows that US banking system is strong.

DJIA reached the highest level since 2007. Yields on 10-year Treasuries increased to 2.13%. Specialists at Bank of Tokyo-Mitsubishi UFJ think US yields rise because the nation’s economy strengthens. In their view, the Federal Reserve may be forced to raise the key rate before the end of 2014, probably the next year. American currency generally strengthened.

Asian stocks rose, EUR/USD went a bit lower to yesterdays’a minimums in the $1.3050 area. The pair opened below 55-day MA. USD/JPY keeps rising.

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Sumitomo Mitsui: euro will rise on the 5th Elliot Wave

According to Sumitomo Mitsui specialists, EUR/JPY may strengthen to 112.80 by May, its highest level in more than 7 months. Strategists say it makes sense to apply the Elliot Wave Theory to analyze the current euro movements.

The Elliott Wave Principle, proposed by accountant Ralph Elliott in the 1930’s, is a form of technical analysis based on the theory that investor psychology moves between optimism and pessimism in natural sequences. It seeks to predict prices by dividing trends into 8 waves.

First wave: Jan. 16-26 (rally from 97.04 to 102.21);

Second wave: Jan. 27 - Feb.1 (decline from 102.21 to 99.25);

Third wave: Feb. 2-27 (rebound from 99.25 to 109.93);

Fourth wave: Feb. 28 - March 6 (drop from 109.93 to 105.65).

Sumitomo Mitsui: EUR/JPY is now in the middle of the fifth wave of the multi-month upward cycle,” which is projected to end around April. The market swings follow a predictable five-stage structure.

Today EUR/JPY is trading at 108.47 after having risen more than 11% over the past 2 months.

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Barclays Capital lifted up USD/JPY forecast

Analysts at Barclays Capital increased forecasts for USD/JPY from 82 to 90 yen in 6 months and from 84 to 90 yen in a year.

As the reason for such revision the specialists cited Japan’s current-account decline and differences in monetary policy of the 2 nations’ central banks: the Fed’s statement showed a gradual reduction in the central bank’s dovish stance, while the Bank of Japan will likely increase monetary stimulus to achieve 1% inflation goal.

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Analysts: Comments on FOMC statements

On Tuesday FOMC decided to leave the strategic points of its monetary policy unchanged not excepting the cash rate and quantitative easing program. However, additional easing is still an option. Specialists were not long in commenting the recent data.

Wells Fargo Securities: For more stimulus the economy had to weaken again, but FRS is still not slamming the door on more QE.

International Strategy and Investment Group: The FOMC’s meetings in April and June would be good opportunities for the Fed to do something if policy makers see additional stimulus as needed.

Capital Economics: The Fed can hardly be accused of acting as a cheerleader for the recovery. Nevertheless, the improvement in the incoming data may persuade the Fed to shelve any plans it had for additional monetary stimulus in the near term.

Tokyo-Mitsubishi: The Fed's direction will become clearer in late April when policymakers meet next and update their projections for economic growth, inflation, unemployment and interest rates.

BNP Paribas: Either the economic outlook will continue to improve, or the Fed will take action to inject more liquidity into markets.

Nomura: Within the next six months $500 billion operation is expected to occur, consisting of purchases of both mortgage backed securities and Treasuries. Asset purchases would be “sterilized” using reverse repos and term loans in order to appease inflation hawks.

Most analysts agree that growth in the current quarter and throughout the rest of the year will be slower than in last year's fourth quarter.

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Societe Generale: risks from China property market

Economists at Societe Generale warn that investors’ optimism for the global economic prospects is vulnerable to the signs of fragility in U.S. growth momentum or of the slowdown of Chinese property market and bank loan growth.

The specialists claim that in the second quarter China's property sales may contract by about 10% in weighted prices losing nearly 20% of volume. In their view, while the decline may be rapid, it will be constrained. This year will likely be the bottom for Chinese property market.

China’s Premier Wen Jiabao claimed today that the nation’s home prices are still are still significantly above the reasonable level. Wen underlined that China would have to maintain efforts to curb real estate speculation as the property bubble would harm the economy if it burst.

Property sales in the world’s fastest-growing economy fell by 20.9% in the first two months of 2012 from a year earlier as the government had introduced a series of measures including property sales taxes and lending restrictions to curb speculation.

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Greece defaults… Who’s next?

During the recent weeks the market was focused on the events unfolding in Greece. At the same time there are other nations in the list of the euro zone’s problem economies.

As a result, the question arises: was Greece a “completely unique case” as German Finance Minister Wolfgang Shaeuble said last week or will the indebted peripheral countries follow its path (conducting debt swaps and retroactively enacting collective-action clauses in its debt contracts)?

The yields of peripheral European debt have been relatively quiet so far. Portugal's 10-year yields, for example, slid from the record maximum of 18.29% in January to 13.71%, though still far from normal levels. Are we witnessing the first signs of improvement or is it a lull before the storm?

Portugal

Portugal is seen as the first candidate for default. The nation’s sovereign debt is lower than the Greek one, but Portugal has a far higher level of private sector debt – 200% of GDP versus Greece’s 120%. Such level of debt is hardly sustainable and will need writing down through the banking system and, consequently, sovereign help to support the banks.

Analysts at Deutsche Bank think that talks about a second international bailout for Portugal may begin later this year as the current 78 billion-euro aid plan will keep the nation funded only through September 2013 and the IMF “cannot disburse if a twelve-month funding outlook is not guaranteed.”

Portugal's economy fell by 1.6% in 2011 and may lose 3.0% this year, Troika experts say. The European Commission, the ECB and the IMF appraised Portugal for austerity measures. However, the specialists point out that last year the nation manages to lower deficit to the 5.9% level which is in line with the target only through transferring funds (5.6 billion euro or 1.9% of GDP) from the banking-sector pension system to the government social security one. The country’s public debt may reach 118% of GDP in 2013 from 102.7% of GDP last year.

Spain

According to governmental forecasts, Spanish economy will contract by 1.7% in 2012. The nation’s jobless rate is the highest in Europe: unemployment rose from 21.7% in December to 23.3% in January and is expected to reach 24.3% this year.

Spain was supposed to cut its deficit-to-GDP ratio to 4.4% in 2012, a goal agreed with EU finance ministers, but the new government announced earlier this month that it would only be able to cut its deficit to 5.8% of GDP for this year and promised to maintain a 2013 target of 3%. On Monday European finance ministers ordered Spain to bring its deficit down to 5.3%.

Meanwhile, the Spanish employees demonstrate against the government's new labor reform. It affects most worker entitlements, making the dismissal of employees simpler, reducing salaries and increasing working hours. The government is aiming at revitalizing the economy and proving that Spain will not require a bailout to overcome its problems. However, opponents of the reform say it does nothing towards creating new jobs in the country and represents profound social regression.

All in all, the threat of contagion remains an urgent problem and Europe may have to spend much more than it already did to keep all the member states funded. Europe must assure markets that such big economies as Spain (and Italy) won’t default on their debts. The euro area will likely remain in stress as contracting GDPs in peripheral countries will undermine their efforts to reduce debt and deficit ratios. To some extent, Greece’s scenario in other nations would help the currency union as it would at least lower the degree of uncertainty. Emergency financing from the European Central Bank is no more than a temporary solution. Postponing the final reckoning will only increase the economic pain and the cost of the inevitable bailouts.

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US: Lacker comments, upcoming data releases

Jeffrey Lacker, president of the Richmond Federal Reserve Bank claimed today that he thought interest rates would need to be raised in 2013. Lacker underlined that US economy is expanding at a moderate pace, while inflation is close to the FOMC's 2% target level.

US dollar has strengthened this week versus its major counterparts as the possibility of QE3 in the US declined.

US data releases to watch today:

- Industrial production (February) – growth expected;

- Consumer sentiment (University of Michigan preliminary index, March) – may have risen to 1-year maximum (Bloomberg News survey);

- CPI (March) – the analysts look forward to biggest increase in 10 months of 0.4% (Bloomberg News survey).

Capital Economics: “Rising gasoline prices aren’t a good thing because households cannot avoid them. But outside of that, inflation isn’t going to really rock the boat too much for too many households.”

Westpac: bullish on the greenback in the coming weeks.

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Societe Generale: comments on Swiss franc

The Swiss National Bank increased its GDP growth forecast for 2012 from 0.5% to 1%. The central bank lowered inflation forecasts for 2012-2013 to -0.6% and 0.3% respectively.

Analysts at Societe Generale claim that although Swiss franc is still overvalued and inflation risks are subdued, the SNB sees no reason to immediately take new initiatives to weaken the national currency.

The specialists underline that the bullish pressure on franc has somewhat eased due to the increased liquidity in the euro area and improved risk sentiment. However, many investors still don’t dare to sell Swiss currency. A continuation of the rally in stocks and commodities alone won’t be enough to make the market players go short on franc. As a result, the prospects of EUR/CHF will depend primarily on further actions of the SNB and the ECB.

Societe Generale don’t see how the European Central Bank will be able to take a less dovish approach amid the euro zone’s economic weakness caused by severe austerity measures. As a result, the analysts see now point in buying EUR/CHF anytime soon.

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BOJ will have to ease policy because of China

The deterioration of China’s trade position may force the Bank of Japan to do more aggressive monetary easing.

Last month China posted trade deficit of $31.5 billion. The nation’s authorities have signaled that it might suspend its long-standing policy of allowing yuan’s gradual appreciation versus US dollar in order to boost its exports’ competitiveness or at least keep them from further shrinking.

As China is Japan’s largest trading partner, Japanese economy will surely be affected by weaker renminbi. As a result, the BOJ will have to take measures to keep yen sliding.

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BOJ meeting minutes: inflation issue

The opinions of the Bank of Japan’s board members on further policy actions divided in February:

- One member proposed to lift inflation target up to 2%. Some members said that 1% CPI growth is enough as the inflation goal for the time being as the current level of

inflation is low, though added that the option of changing the target should be kept for future.

- After discussion about the appropriate terms concerning inflation, members agreed that it would be appropriate to refer to the inflation rate that is consistent with price stability sustainable over the medium to long term as “the price stability goal in the medium to long term.”

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Morgan Stanley: trading recommendations

Analysts at Morgan Stanley suggest 2 types of trade:

- set limit buy order for USD/JPY at 81.80 targeting 95.00 and stopping at 76.00.

- set limit sell order for AUD/CAD at 1.0550 targeting 0.9600 and stopping at 1.0780.

The specialists claim that yield differential between the United States and Japan widened due to better US economic data and less dovish than expected comments of the Federal Reserve. Japanese investors are actively investing to America and in March their US investments may increase even more.

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US dollar slid from the recent highs

The greenback fell against the other major currencies like the euro, yen and Swiss franc after being on the rise last week. However, analysts believe that the dollar’s drop was a typical case of correction following big gains.

Regardless the yesterday’s EUR/USD rise, the euro is unlikely to show a sustainable growth in a long term due to the economic uncertainty in European area and the U.S. robust growth.

USD/JPY yesterday also edged down. According to Tokyo Mitsubishi, it’s just a tiny correction in the uptrend. Analysts expect the U.S. grow quicker than Japan in the coming quarters. Bank of Japan, as distinguished from the Fed, continues to loosen its monetary policy aiming at the weakening of the yen.

Swiss franc yesterday strengthened to the dollar due to SNB’s announcement to keep the Libor rate unchanged in a 0.00-0.25% range and to maintain floor for EUR/CHF at 1.20.

Against the backdrop of improving U.S. economics the dollar’s decline doesn’t raise any serious concerns. According to economists, inflation is close to a 2% target level and there is unlikely to be a further quantitative easing. Data released on Thursday showed the number of Americans claiming new jobless benefits fell to a four-year low last week and manufacturing activity in the Northeast picked up this month.

FX Solutions: Consolidation could last another couple of days, but if economic reports continue to be positive, the dollar should once again resume its climb.

BNP Paribas: With the major U.S. equity indices going out at their highest levels for 10 years (Nasdaq), or since mid-2008 (S&P 500), and no sign that U.S. Treasury yields are about to swoon, we look for further dollar advances one side or the other of the weekend.

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Eurostat: recession starts to spread over Europe

Data released this month by Eurostat showed that about a third part of euro zone nations have already entered recession in the final 3 months of 2011 (defined as GDP contraction during 2 consecutive quarters).

Economy declined for the second quarter in row in Italy, the Netherlands, Belgium and Slovenia. Greece’s economy is declining for already 4 years (down by 0.2% in 2008, by 3.3% in 2009, by 3.5% in 2010 and by 6-7% in 2010, according to the estimates). Portugal is deep in recession as well.

In addition, in Q4 we’ve seen the first GDP contraction in Sapin, Germany, Austria, and Estonia and in non-euro Sweden and the UK. Some of these economies may fail to return to growth in Q1.

GDP decreased by 0.3% in both the euro area (EA17) and the EU27 during the fourth quarter of 2011 (q/q). In the third quarter of 2011, growth rates were +0.1% in the euro area and +0.3% in the EU27.

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BBH: where to get trading hints from?

Analysts at Brown Brothers Harriman underline that one can no longer rely on the changes in risk appetite while trying to forecast currency moves. For instance, USD/JPY had a 0.42 correlation with the S&P 500 in January, while now this index switched to -0.11. The greenback used to fall on rising stocks, but so far it has been rising with equities and Treasury yields.

As a result, the analysis of market’s sentiment has lost its relevance for trading. The specialists say that they are “shifting toward the more fundamental outlook for growth.”

So, BBH recommends forex traders to watch:

- Bond markets (the steepness of Treasury yield curve). The specialists claim that a “sharp rise in the 10-year yield is indicative of improvement in the U.S. economy and perhaps the outlook for Fed policy” that means lower odds of more QE and stronger US dollar.

- 2-year yield spreads between U.S. and Germany and U.S. and Japan for hints about the dynamics of EUR/USD and USD/JPY.\

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Crude Oil prices: outlook

On Thursday crude prices dipped after a report that Barack Obama sounded commitment to release oil from the Strategic Petroleum Reserve, the nation's emergency oil stockpile. U.S. reminded traders that governments stand ready to cope with any supply disruptions. The White House later denied the information and said no deal was in place for a release from the reserve.

Straight after the data WTI for April delivery decreased to $105.11 a barrel on the Nymex; in the meanwhile Brent crude dropped to $123.55 a barrel on the ICE.

Before the report oil prices had been demonstrating a consecutive upward trend since February. Light Sweet reached a six-month high ($109.5 a barrel) at the end of February. Brent crude peaked in mid-March ($126.7 a barrel).

However, a wide range of factors will be pushing crude prices up in the longer term. Firstly, tensions in the Middle East increased due to the fears of an escalation of the Iranian nuclear issue. As OPEC's second largest exporter of crude oil, Iran controls the Strait of Hormuz, the world's most important sea transport line of crude oil. Israeli-American military invasion could cause a shutdown of transportation links.

Secondly, the rise of the euro due to progress made in resolving Greece's debt crisis coupled with the falling dollar promoted investment in crude oil futures, thus lifting prices.

Moreover, oil prices were boosted by positive economic figures from the U.S.

Nomura: Oil may have overtaken the euro zone as financial markets’ primary source of concern. Iran’s nuclear program is increasing chances of an Israeli military strike. However, an early Israeli election as well as the US presidential outcome could postpone the attack for another year.

UBS: The Arab awakening and non-Opec shortfalls in 2011 support the supply-side case, and coupled with threats in the Strait of Hormuz, we see continued strength in oil prices next year.

Bayerische Landesbank: Brent crude could rise to $127 a barrel; oil investment certainly looks like a good investment these days.

Goldman Sachs: Brent crude could rise as high as $127.50 in 2012 and $135 in 2013.

Vitol: It’s unlikely but possible that oil may rocket to $150 in 2012 due to growing geopolitical tensions in the Middle East.

Mirae Asset Management: A period of warmer weather in Europe would reduce demand and pull the prices below $120 if Iran doesn't flare up.

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J.P. Morgan: trading recommendations

Strategists at J.P. Morgan Asset Management claim that the drive to lower interest rates will bring the currencies down. It is therefore beneficial to trade on this tendency.

According to analysts, USD/JPY is going to hit 86 yen in the coming months. Japan’s current account surplus disappeared, and the Japanese investors recommenced putting up money overseas.

Canadian economy will strengthen along with improving situation in U.S., so J.P. Morgan specialists recommend going long on the loonie against the yen. Their advice is to enter the trade at 84.00, setting a stop at 82.00 and a target at 88.00.

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March 19-23: main events of the week

US dollar has significantly strengthened during the last week on the FOMC meeting which gave no hints of QE3, though by the end it has given up some of the rally. American economy kept showing positive figures, but will this trend continue?

The European and the IMF policymakers have finally approved second bailout for Greece and the tensions in the region eased, though the market’s attention started shifting to another problem nations such as Spain and Portugal.

The Bank of Japan disappointed many investors by not increasing monetary stimulus. Despite some correction, yen’s still trading within the downtrend versus the greenback. Many experts think that it will have to do more easing in the coming months. Barclays and J.P. Morgan increased forecasts for USD/JPY by the end of the year.

The Swiss National Bank left EUR/CHF floor unchanged at 1.20 and increased Switzerland’s 2012 economic forecast from 0.5% to 1%. Franc rose on the news.

This week one has to pay attention to the following data releases:

Tuesday, March 20

- RBA March Monetary Policy Meeting Minutes (0:30 GMT).

- UK Inflation (9:30 GMT): British CPI growth pace declined from 4.2% in December to 3.6% in January (y/y). Inflation is decreasing in line with predictions, though is still above the Bank of England’s 2.0% target. Now the analysts expect a further drop to 3.4%.

- US Building Permits (12:30 GMT): there’s a growth trend in US housing sector. The number of building consents may have increased to 0.69 million in February.

Wednesday, March 21

- MPC Macrh Meeting Minutes (9:30 GMT).

- US Existing Home Sales (14:00 GMT): in January the index rose by 4.3% to a 4.570 million annual rate. Last month the existing home sales may have climbed to 4.61 million.

- New Zealand’s Q4 GDP (21:45 GMT): the nation’s economy has been rising since 2009. The analysts expect 0.6% advance after 0.8% growth in the previous quarter.

Thursday, March 22

- US Unemployment Claims (12:30 GMT): last week the index dropped to the 4-year minimum of 351,000 claims. Now a small rise to 355,000 is expected.

Friday, March 23

- Canadian inflation data (11:00 GMT): Canada’s CPI growth pace unexpectedly rose in the first month of the year (by 0.4%, probably due to high energy prices) after 0.6% decline in December. In February consumer priced may have increased by 0.5%.

- US New Home Sales (14:00 GMT): another piece of US housing market data. The number is seen rising to 326,000.

Also note that the Fed’s Chairman Ben Bernanke is speaking on Tuesday evening, while the ECB President Mario Draghi’s speech is scheduled on Thursday.

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Commerzbank: USD/JPY technical analysis

Technical analysts at Commerzbank note that the greenback keeps consolidating/correcting within uptrend versus Japanese yen.

The specialists think that USD/JPY may decline to 82.23 (May 2011 maximum) from the current levels slightly above 83 yen.

According to the bank, support for the pair lies at the base of Ichimoku Cloud on the h4 chart, which lies in the 81.98/61 area. If the support holds, US currency may rebound to 85.53 and 86.80 yen.

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BCA: positive outlook for euro and riskier assets

BCA Research, leading provider of global investment research, recommends maintaining a “pro-cyclical currency” (currency that has a strong positive correlation with economic growth: AUD, CAD, NZD) strategy despite the recent unpopularity of such currencies.

The specialists underline that risky currencies made a significant advance at the beginning of the year, but then retreated since the end of February. One of the causes for such a pullback was the outcome of the Greek debt swap. However, these currencies were overbought and due for correction.

BCA has modeled EUR/USD against the behavior of other key currencies from 1999 to 2009 (before the beginning of the euro zone debt crisis). The analysis showed that the currency pair stands more than 20% below the model’s estimated value. Stated differently, the market has priced in a lot of bad news and the dip in risky currencies is just a healthy technical correction.

As can be seen from the above, BCA is convinced that in the future the commodity and riskier currencies will become much stronger and less vulnerable to the euro zone’s debt crisis.

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Ichimoku. Weekly forecast. GBP/USD

Weekly GBP/USD

British pound tested levels below the Standard line (1) on the weekly chart, but managed to return last week above it paring the decline it made the week earlier.

The lines Tenkan-sen and Kijun-sen, as expected, formed the “golden cross” (3), though the signal isn’t very strong as it happened below the Cloud. Kumo itself began narrowing (4) as Senkou Span A turned upwards.

With both the Standard (1) and the Turning (2) lines as support the only resistance ahead for the pair GBP/USD is the Cloud which is thin in the place where the prices are projected to approach it (5). All in all, the chances of the bulls have improved. We may see the beginning of a move up or a broad sideways trading.

Daily GBP/USD

On the daily chart pound keeps moving sideways – the bullish Kumo continues narrowing.

The pair didn’t fall to the lower border of the Cloud, as we feared, managing so hold around Senkou Span A and finally make a significant breakthrough on Friday overcoming both Tenkan-sen (2) and Kijun-sen (1), which formed the weak “dead cross”.

If sterling manages to stay today above the Standard line, it will be able to get higher, though any advance will be constrained by late February/early March maximums. However, resistance in the $1.5860/5900 band seems high, so the slide back to Senkou Span A also seems quite possible.

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UBS: Treasury yields may increase

Analysts at UBS believe that that government bond yields will start trading within the long-term uptrend.

The specialists give the following reasons for such shift:

- the Fed won’t undertake another round of QE;

- US economy shifts to a sustainable recovery;

- private sector credit in the US expands;

- China and other major emerging economies rebound after dipping in the first half of the year;

- euro zone’s recession doesn't shock the global economy.

The bank revised up 10-year Treasury yields forecasts from 2.4% to 2.7% by the end of 2012 and from 3.0% to 3.3% by the end of 2013.

According to UBS, higher US yields will push up USD/JPY and USD/CHF. As the ECB and the BoE conduct more loose monetary policy than the Fed, the greenback will be also supported versus euro and pound.

The analysts claim that commodity currencies “will be less affected”. Canadian dollar will benefit from US economic growth. Australian dollar, on the other hand, may be vulnerable because of China’s economic slowdown.

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Euro zone’s leaders may combine EFSF and ESM

European officials consider combining two bailout funds to increase the region’s financial firewall from 500 to nearly 700 bln euros, said German Chancellor Angela Merkel on March 16.

Finance ministers and CB governors will discuss the capacity augmentation of the permanent (European Financial Stability Facility, EFSF) and temporary (European Stability Mechanism, ESM) funds on a March 30-31 meeting in Copenhagen.

By the existing rules the joint lending volumes of the 500 bln-euro EFSF and the 400 bln-euro ESM cannot exceed 500 bln euros. However, investors insist on the expansion of the fund in order to make sure that the region has enough facilities to cope with the debt crisis, but Germany opposes such outcome.

According to one of the euro zone’s officials, the policymakers discuss several variants, one of which is to consider that Greek bailout (192 bln euros) was financed by EFSF, while the ESM will start with new 500 bln. In this case the overall crisis fund will rise to 692 bln euros. The final decision on the issue, however, isn’t made yet.