Comments and forex-analytics from FBS

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Investors may sell yen on its advance

Japanese yen rose versus euro, the greenback and growth-linked currencies. Never the less, the majority of experts see yen’s recovery as a chance to open new shorts on yen.

Analysts at CIBC World Markets claim that the market has gone too short on yen, so now we are seeing a correction in USD/JPY and EUR/JPY. The specialists expect the greenback to rise to 85-85.50 yen and think that euro will consolidate after reaching 5-month maximum above 110 yen. Strategists at Credit Suisse think that US dollar’s ability to resume rebound against Japanese currency will depend on further actions of the Bank of Japan.

The BOJ may continue monetary stimulus after it surprised the markets with unexpected easing last month, but didn’t expand its asset purchase program in March. Investors will likely keep using yen as a funding currency in carry trades (borrowing in low-yielding yen in order to buy higher-yielding assets). US dollar has become less attractive for this purpose because of rising Treasury yields.

However, Japanese companies tend to buy yen in March ahead of the end of the nation’s fiscal year on March 31 – this may encourage demand for yen.

One should also watch New York Fed President William Dudley’s comments later today as he’s known as a dove and may emphasize that the chance of further stimulus could not be ruled out unless the U.S. unemployment rate declines more.

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CFTC: yen net shorts at maximum since 2007

According to Commodity Futures Trading Commission, net shorts positions on Japanese yen reached the maximal level since May 2007 of 42,380 contracts. Sterling short positions also rose to the highest level since the beginning of December of 41,848 contracts. The value of net long position on US dollar declined from $19.27 billion (March 6) to $19.0 billion (March 13).

JAPANESE YEN (Contracts of 12,500,000 yen)

6,393,314,023.65

3/13/12 week 3/06/12 week

Long 22,249 33,281

Short 64,629 52,639

Net -42,380 -19,358

EURO (Contracts of 125,000 euros) 16,243,919,400.00

3/13/12 week 3/06/12 week

Long 40,325 39,943

Short 139,661 156,416

Net -99,336 -116,473

POUND STERLING (Contracts of 62,500 pounds sterling)

4,108,165,850.00

3/13/12 week 3/06/12 week

Long 21,924 22,308

Short 63,772 59,407

Net -41,848 -37,099

SWISS FRANC (Contracts of 125,000 Swiss francs)

2,003,845,737.19

3/13/12 week 3/06/12 week

Long 9,351 8,114

Short 24,149 27,592

Net -14,798 -19,478

Data from CFTC, Reuters

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NZD/JPY: Elliott Wave forecast

According to Forecast Pte, NZD/JPY may reach 69.63, its highest level in almost 2 1/2 years. Specialists believe the kiwi is rising in line with the Elliott Wave Theory and now is on its 5th wave.

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: Nov. 24 - Dec. 2 (rally from 57.03 to 61.12);

Second wave: Dec. 3-15 (decline from 61.12 to 58.26);

Third wave: Dec. 15 - Feb. 27 (rebound from 58.26 to 68.35);

Fourth wave: Feb. 28 - March 6 (drop from 68.35 to 65.31);

Fifth wave: began on March 7 (increase from 65.31).

Analysts at Forecast Pte are convinced there is a strong resistance line at 69.63. NZD has already approached this level in Oct. 2009 and in May 2010.

Today New Zealand’s dollar is trading in the 68.67 area. Yesterday it rose to 69.14, the highest since May 2010.

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BBH: bullish on AUD/USD

In the middle of the last week the Australian dollar held support near $1.0420, but then closed the week rebounding to the $1.0600 level.

BBH analysts remain bullish on the Aussie because the possible rate lowering from the RBA in May is already priced in.

Specialists believe the Aussie to pass the $1.0640 resistance line, which corresponds to the 20-day moving average, and to test the $1.07 area before the end of the week. In a longer outlook AUD/USD may reach the $1.08-$1.0850 level.

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RBC, Commerzbank: resistance for EUR/JPY

Technical analysts at RBC Capital Markets note that “bullish engulfing” pattern seen at EUR/JPY daily chart (February 15, 16) made the pair break through the key resistance at 107.45 yen.

The specialists underline that euro finds itself inside a “declining wedge” seen on the monthly chart. If the single currency closes March above 107.45 yen, it will be able to test resistance levels at 111.67, 114.05 and 120.95 yen. The bank expects bulls to become more active at 107.45 and 102.20 opening new longs on the dips.

Analysts at Commerzbank also think that EUR/JPY may strengthen to 113.29 yen if it overcomes resistance at 111.57.

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RBC: spring NFP figures may bring negative surprises

Analysts at RBC claim that while US economic fundamentals (particularly, the labor market ones) have likely improved so far, some of the recent favorable indicators’ glow may be attributed to the better weather – the winter of 2011-2012 in the US was the forth warmest since 1920.

The specialists conducted an interesting research: they analyzed Non-Farm Payrolls data for the last 15 years and came to conclusion that data surprises tend to be positive during warm winters and the actual figures are much higher than on average (this winter NFP beat expectations 3 times increasing by 250K per month on average). Such trend may be explained by rising construction activity and retain spending during mild winters.

Spring payroll surprises, on the other hand, tend to be negative and also higher than average. This happens because market’s participants revise up their expectations after winter’s positive figures, so that the next time it’s much more difficult for the actual data to surpass the elevated estimates.

What are the implications for trading? According to RBC, after such warm winter of 2011-2012, spring data release may surprise the markets to the downside. How will US dollar react to such data releases?

The negative correlation of the greenback and risk sentiment has seemed to wear down (earlier better US data caused American currency decline as risk appetite improved and investors were reducing dollar positions because the greenback was perceived as a safe haven) and for now dollar is acting as a growth-linked currency. So, if RBC’s projections get confirmed, US currency will likely find itself under bearish pressure.

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JPMorgan Chase: the risk of hard landing in China

While many economists worry about China’s economic slowdown, analysts at JPMorgan Chase think that the nation has already started to experience “hard landing”: “Car sales are down, cement production is down, steel production is down, and construction stocks are down. It’s not a debate anymore, it’s a fact.”

Earlier in March China’s Premier Wen Jiabao announced that China’s 2012 economic growth target is set at 7.5%, while during the previous 7 years it was always at 8%. China’s factory output in the first two months of the year rose the least since 2009, retail sales increased less than expected and inflation eased to the slowest pace in 20 months, while foreign direct investment in China declined in February.

JPMorgan Chase warns investors about the situation at China’s property market. As Wen claimed that home prices are still “far from a reasonable level,” there are concerns that Chinese government will maintain restrictions on the property market for an extended period that will have negative effect on economic growth.

“What you can look forward to is to see a pickup in property demand that will clear up the inventory; that doesn’t appear likely. We don’t see any evidence of a policy move that will cause the economy to reaccelerate,” say the specialists.

Gary Shilling (A. Gary Shilling & Co.) also thinks that China’s heading towards hard landing and defines this term as a growth rate below 6%.

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UK economy: there’s some improvement

On Wednesday, March 2, Chancellor of the Exchequer George Osborne is expected to present an annual budget and to report there is no threat of recession hanging over Great Britain.

Dow Jones analysts believe that Osborne may make some amendments to tax legislation, but basically leave the budget neutral.

Specialists say the budget deficit has improved. Public-sector net borrowing will be about 125 billion pounds ($200 billion) in current fiscal year that ends this month rather than the 127 billion pounds forecast by the OBR in November, according to a survey of 27 analysts compiled by the Treasury last month.

Morgan Stanley: The deficit is likely to improve next fiscal year to about 120 billion pounds.

According to analysts, the U.K. economy definitely returned to growth in the first quarter after a 0.2 percent contraction in the last three months of 2011. Manufacturing and services continued to expand in February (PMI is above 50), while consumer confidence index is forecasted to grow (held at the highest since June).

Office for Budget Responsibility is likely to reflect weak improvement in the labor market with jobless claims seen reaching 1.75 million people this year. Data last week showed Claimant Count Change in February turned to be bigger than expected adding 7.2K versus forecasted 6.5K.

The data, released today, revealed a decline of CPI to 3.4% in February from 3.6% in January. Inflation, therefore, edged down in February to the lowest level in over a year keeping hopes that easing inflation will allow consumers to increase spending this year and to boost the economy. The main projection for CPI is to fall below the 2% target level by the end of the year.

RBS: The U.K. economy is looking marginally better: the euro area crisis has receded and the surveys seem to have got a bit better. Britain could easily get 0.3-0.4% in the first quarter despite some uncertainty around the construction data.

Overall in 2011 the UK economy grew just 0.9 percent. The next set of GDP figures for Britain due out in April.

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Kiwi may stay unaffected by China in longer term

Concerns about China will send kiwi down? Some analysts don’t think so.

Commodity currencies, such as New Zealand’s and Australian dollars, dropped yesterday after BHP Billiton, the world’s largest miner, warned that iron ore demand from China was “flattening”. The producer expects demand growth to slide back into single-digit figures.

Despite the all the recent worries about the potential slowdown of Chinese economic growth – the second largest economy in the world is the biggest importer of commodities, mainly form Australian and New Zealand – some experts are bullish on NZD in the longer term. For example, analysts at financial adviser Macquarie Private Wealth believe that NZD/USD will keep appreciating during the next 3 years. Their main argument is that New Zealand and Australia will attract investors by safe political climate. They do have a point here as in the current condition political safety actually means much.

“If you look at the last 6 months... the New Zealand dollar has risen 8% against the US dollar. Even if the Reserve Bank Governor were to drop interest rates by a full percentage point, it would probably not change the track of our dollar,” claims Macquarie.

The specialists think that the interest gap between the New Zealand dollar and Australian dollar will close over time: “Our official cash rate is 2.5%, and we don't see any downside to that - the next move from New Zealand being up...the likely next moves in Australia is down”.

Economic data

New Zealand’s current account deficit narrowed from NZD4.75 billions in the third quarter of 2011 to NZD2.76B in the final 3 month of last year.

Watch the nation’s GDP release at 9:45 p.m. GMT. The consensus forecast is 0.6% growth in Q4 slightly down from 0.8% in the previous quarter. The expected slowdown is explained by the decline in manufacturing, compensated by strong farming output and better retail trade and construction.

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RBS: how to trade USD/CHF

According to Royal Bank of Scotland, the U.S. dollar may strengthen to Swiss franc because of the U.S. economic improvement and the interest rates increase.

Strategists at RBS are bullish on American currency. They advise to wait for the lower entry levels and recommend buying the greenback when USD/CHF closes below the 200-day MA for two consecutive days (currently at 0.8824). The target level lies at 0.9950. According to an internal model, fair value for the pair is above the 0.9400 level.

Rebounding U.S. economy embraces hope to investors. Inflation is close to a 2% target level and a further quantitative easing is unlikely. The number of Americans claiming new jobless benefits fell to a four-year low (351K in Feb. versus 365K in Jan.). Philly Fed

Manufacturing Index picked up this month (12.5 in Feb. versus 10.2 in Jan.). Number of building permits increased to 0.72M in Feb. from 0.68M in Jan. The overnight index swap market is indicating an interest-rate increase from the Federal Reserve in the fourth quarter of 2013, compared with a July 2014 forecast in February.

The yield spread from purchasing 10-year Treasuries versus similar-maturity Swiss bonds rose to 142 basis points from 127 basis points at the beginning of the month.

Analysts at RBS expect the greenback to trade in the 0.9500 area by the middle of the year before declining to 0.9000 by December.

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RBS: comments on major currencies

- EUR/USD: the pair moved higher in recent days, initially spurred on by mixed US economic data at the end of last week and potentially due to some position readjusting. However, further downside for the pair is likely given increasing rate spreads in favor of the US and recent liquidity expansion in the Euro-area relative to the US.

- JPY: yen is acting more like a funding currency for “risk-on” trades. Strong global equities and narrowing credit spreads in recent weeks appear to be boosting JPY crosses. We still see 85 as a bridge too far at this stage, but base may now be 82.

- CAD: Canadian data was softer, with a drop in foreign interest for Canadian assets and disappointing manufacturing and wholesale sales data. But we still think CAD remains attractive versus the USD and EUR, especially if US data keeps improving.

- NZD: strong rural growing conditions and improving property market are tending to lift confidence. We see scope for NZD to out-perform AUD near term.

- AUD: recent Australian activity indicators below expectations. Political and budget uncertainty increasing as contentious mining and carbon taxes are introduced midyear. Global risk appetite up, but local factors should cap AUD.

- This is mixed week - higher US rates pushed the USD higher over the week versus JPY, AUD, NZD and CAD while short-covering has pushed up EUR, CHF and GBP.

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UK: public borrowing surges, Posen and Miles want more QE

British pound dropped by 70 pips on the news that UK public sector net borrowing rose in February to the maximal level since 1994 of 12.9 billion pounds versus the forecast level of 5.0 billion pounds.

In addition, the minutes of the Bank of England’s MPC March 8 meeting showed that 2 members of the Committee (David Miles and Adam Posen) voted to increase Asset Purchase Program by 25 billion pounds in order to avoid damage for the supply capacity of the economy. Posen and Miles said that the central bank’s monetary policy should be loosened further to stimulate demand quickly, “but the stimulus could then be withdrawn were it to become clear that there was a significant risk of inflation rising above target in the medium term.”

The agreement to keep the benchmark interest rate unchanged at 0.5% was unanimous. According to the statement, “overall, the Committee judged that the recent data had evolved in line with its expectations and that there had been little change to the balance of risks to UK activity and inflation.”

At the same time, MPC acknowledged the sharp increase in crude oil prices: “If oil prices were to rise to a level significantly higher than the Committee currently assumed, then that would tend to slow the global and domestic recovery, reduce supply growth, and put upward pressure on domestic costs and prices.”

After the market digested the data GBP/USD found support in the1.5856 area and managed to rise to $1.5870.

If the pair manages to rise above March 19 maximum in the $1.1915 zone, it will get chance to strengthen to $1.5966 (Mar. 2 maximum) and $1.5975 (Mar.1 maximum). Support levels for sterling are situated at $1.5831 (Mar. 20 minimum), $1.5823 (Mar. 19 minimum), $1.5798 (21-day MA) and $1.5771 (10-day MA).

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Commerzbank: euro’s advance may prove short-lived

The single currency was trading on the upside versus the greenback today as Greece's lawmakers approved the country's second 130 billion-euro bailout deal.

However, the majority of analysts regard euro’s advance as short-lives claiming that EUR/USD will likely be curbed due to rising U.S. Treasury yields which encourage dollar’s growth.

In addition, analysts at Commerzbank think that the approval “was not a big step but has been perceived as positive by the market”. In their view, “the broader trend is still a stronger dollar and on that point we see the economy picking up in the U.S.”

Brown Brothers Harriman: “If U.S. data remains solid U.S. yields may continue to track higher, while Europe faces some risks from the Italian labor reform talks and continued poor economic news from Spain”.

Many experts say that the Parliament vote was nothing but a formality.

EUR/USD is down from an almost 2-week high of $1.3283 to the levels around $1.3240. Resistance for the pair is situated in the $1.3300 area (61.8% retracement of the decline from the end of February to the middle of March).

Keep an eye on the Fed’s Chairman Ben Bernanke’s testimony to Congress later today and a bunch of European (especially German) PMIs tomorrow.

In the longer term analysts at UBS believe that the ECB would need to keep pumping liquidity into the euro zone’s money markets, so investors will be tempted to seek other foreign assets rather than the euro. According to the bank, EUR/USD will fall to $1.25 in 3 months and to $1.15 by the year-end.

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Citi: USD/JPY ahead of Japan’s fiscal year

Usually Japanese companies tend to buy the national currency in March ahead of Japan's fiscal year-end. This year, however, the traditional pattern seems derailed, says Citi.

“One traditional yen specific factor is the year-end yen buying by Japanese corporates and there has been some of that of late. This time around, however, we have also seen some USD/JPY buying from Japanese energy importers. The latter could offset any USD/JPY selling in coming days."

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Standard Chartered: the greenback and risk appetite

Analysts at Standard Chartered underline that many experts that the greenback has lately been switched from being a safe-haven or, in other words, counter-cyclical currency to a more pro-cyclical, risk-positive one.

The specialists don’t share this point of view. To their mind, that while US dollar has periodically traded in line with higher-beta assets, as opposed to against them, this has not been the case on a trend basis.

According to Standard Chartered, what we see now is not a permanent shift in the relationship between the greenback and risk appetite. The recent dynamics of American currency reflects the cyclical divergence between the US economy on the one hand and those of Europe and Asia on the other, along with diverging portfolio flows.

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MIG analysts: EUR/USD prospects

According to MIG analysts, the EUR/USD growth is targeted at $1.3290 (March 8 maximum). If the currency pair surpasses this level, it will get the chances to break through the $1.3436/60 area and to target at $1.3628 (200-day MA).

If the pair closes below $1.3140 and then $1.3000, a risk of further decline to $1.2630 will arise.

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Nova Scotia: loonie may rise versus Aussie

Technical analysts at Bank of Nova Scotia (BNS) expect the Canadian currency to advance against the Australian.

Specialists are bearish on the currency pair because of the Momentum indicator and as MACD dropped further below the center line.

The decline in AUD/CAD is provoked by the global economic trends. Data from China, the Australian biggest trade partner, show the cutback in manufacturing. Canada, quite the opposite, is benefiting from the rebounding U.S. economy.

According to analysts, if AUD/CAD consolidates below C$1.0337, the chances for further drop to C$1.0260 will increase. Today the currency pair is trading in the C$1.0323 area.

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Aussie’s down after China’s PMI; technical levels

Australian dollar is once again affected by Chinese data. HSBC flash PMI signaled that manufacturing may shrink in China for a fifth month in a row. The economists will now expect Chinese authorities to ease monetary policy, though the risk of building inflation will surely complicate such decision.

Aussie is very dependent on economic situation in China, its key export partner. AUD/USD slid this week from Monday’s maximum of $1.0636 to the levels below $1.0400. Australian currency depreciated by 4% in March due to the general strengthening of US dollar.

Today the pair tested the levels under 200-day MA at $1.0400 and touched 100-day MA at $1.0372. These together with the base of the daily Ichimoku Cloud at $1.0353 are the key support levels to hold Aussie from further slump in the near term.

As for the longer term, analysts at Pimco expect AUD/USD to slide to 0.0900 by the year-end.

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Yen strengthened: analysts’ comments

On Thursday yen went up against other major currencies on the backdrop of the unexpected positive data on Japan’s export. The trade balance in February came to a surplus of 32.9 billion yen ($393 million) regardless the expected deficit of 120 billion yen. Exports dropped only by 2.7% from the previous year instead of the 6.5% forecasted decline.

Forecast Pte: The data suggest that Japan’s economy is doing better. From a fundamental perspective, this is likely to be positive for the yen.

J.P. Morgan analysts refer the yen’s strengthening to yesterday’s “bearish reversal” at USD/JPY chart where the dollar failed to break through the 84.10 resistance area. A breach below 82.85/65 support zone will prove the retracement.

Brown Brothers Harriman: Momentum and other technical indicators warn the market is stretched, after the dollar has rallied more than 10% against the yen since the end of January. A break of the 83.00 area is needed to confirm a top is in place.

Danske Bank analysts advised earlier to open long positions at 83.65 yen, targeting at 84.78 and with a stop-order at 83.01. USD/JPY is now trading at 83.14.

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Analysts’ comments on EUR/USD

Euro-positive

Rabobank: “The calming of markets in the last few months has come from policy measures, and the ability of policy makers to continue delivering supportive packages in large part stems from the strength of Germany. In the near-term the euro may be supported.”

Euro-negative

UBS: “We’re seeing a tussle between investors who think this is a risk-on environment and therefore euro-dollar should go higher, and those that recognize balance sheet expansion by the European Central Bank will likely weaken the euro. A growing number of investors are looking at “the relative policy stance” of the ECB and the Fed.”

Pimco: the specialists are bullish on the greenback and expect EUR/USD to fall below $1.15 this year.

On the odds of additional QE in the US

RBS: if US economy evolves as outlined in the median FOMC forecast released in January, the odds of QE3 this year are about 0.25%. However, given the risks around that forecast, the (unconditional) probability of QE3 is much higher, around 40%.

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BarCap: forecasts for AUD/USD revised down

Analysts at Barclays Capital believe that in April AUD/USD will be trading around the current levels supported by high oil prices on the one side and capped by Chinese economic slowdown on the other side.

As a result, the specialists think that Australian dollar will be trading sideways versus its US counterpart in range between $1.04 and $1.07.

The bank revised down its forecasts for Aussie from $1.07 to $1.06 in a month, from $1.08 to $1.05 in 3 months and from $1.10 to $1.07 in a year.

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Euro slipped due to declining industry activity

The single currency sank versus the greenback due to weaker than expected PMI data released in Europe today.

According to forecasts, flash Manufacturing PMIs in France and Germany, the leading euro zone’s economies, for March were to post readings above 50 (the actual index above 50.0 indicates industry expansion, below indicates contraction). However, neither of these predictions came true: we see 47.6 for France (down from 50.0 in February) and 48.1 for Germany (down from 50.2 in February). Euro area’s industry activity is also declining – flash Manufacturing PMI was at 47.7 versus the estimate of 49.6 (down from 49.0 in February).

As we see, the economic conditions in the region are far from favorable. Weak European data will fuel concerns about European and global growth outlook.

EUR/USD dropped from $1.3250 to test $1.3130 (support: 50-day MA at $1.3144). Consolidation during the next trading hours seems likely with sales at $1.3175.

The next important release today is the publication of US unemployment claims at 12:30 p.m. GMT.

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Westpac: Australia’s exports will survive

This week negative news Chinese manufacturing prospects put a downward pressure on the Australian currency because of the drop of demand on iron ore. China is the most important Australia’s trading partner.

Westpac analysts, however, are convinced the outlook on the Aussie is not so dismal. They explain the investors missed the fact that Australian energy exports will increase significantly over a 5-year period. The return on enormous investments being made into liquefied natural gas plants (LNG) will start to be seen soon, taking into consideration the perpetual demand from Japan. LNG is expected to become Australia’s second largest commodity export by 2016-17.

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US dollar: up or down?

US dollar has been the one of best performing G10 currencies so far. The greenback’s advance was driven by strong US economic figures (retail sales, labor market, Empire State index and the Philly manufacturing index) and rising Treasury yields. 15 out of 19 American banking giants successfully passed stress tests. Another QE in the near future seems unlikely.

Many experts think that dollar is switching from being a safe haven (counter-cyclical) currency to a growth-related (pro-cyclical) one. However, in the periods of concerns about the global economy which will certainly occur more or less often, investors will still tend to abandon higher-yielding currencies for dollar perceiving the latter as a refuge.

US economy looks much healthier than European and Japanese ones, so it stands out promising more profits than the euro area or Japan and more safety than Australia or Canada. Rising oil prices may contribute to dollar’s appreciation: firstly, expensive oil will increase inflation pressures – an argument against more QE, secondly, further oil price hike can hinder the global economic rebound encouraging safe-haven demand for dollar.

Analysts at RBC Capital Markets warn that as investors start to expect better and better US economic performance, constant increase in the nation’s economic figures will be needed to satisfy the market’s appetite. As a result, traders may get quite disappointed if the further data from the United States doesn’t meet their expectations or if there is some bad news.

Despite all the talk about the potential advance of US dollar, there are the risks associated with being bullish on the greenback. For example, strategists at Merk Investments remind that as Treasury yields rise, their prices decline. In less than a month the US 30-year bond has fallen by about 8.5% in value. This is a negative factor for those who already hold Treasuries. The specialists think that the emergence of Treasury bear market could cause foreign investors to liquidate their US debt holdings repatriating funds or investing them in non-dollar assets. In this case the greenback would weaken.

Analysts at Goldman Sachs think that US dollar’s advance was due to only a few reasons. In their view, when a currency move is narrowly based, not much has to happen for it to change course. As a result, the specialists think that broad dollar’s weakness will resume.

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Goldman Sachs: trading USD/JPY

Analysts at Goldman Sachs advise to sell USD/JPY. The currency pair may weaken to 79 yen because the Japanese currency may rebound after declining since the beginning of February to the middle of March.

The idea is supported by the seasonal patterns as the financial year in the country is coming to an end and the unexpected improvement in Japan’s trade balance (a surplus of 32.9 billion yen against the forecasted deficit of 120 billion yen).

If USD/JPY strengthens, strategists recommend closing the trade above 84.50 yen. Today the greenback is trading in the 82.86 area.