Comments and forex-analytics from FBS

[ryuroden]

Yen: volatile week ahead

Japanese yen opened the week on the down versus the greenback on the weak economic sentiment data: Tankan manufacturing index was unchanged in the first quarter from -4 at the last 3 months of 2011. The negative reading means that there are more pessimists than optimists.

Such figures encouraged the talk about the prospects of more easing from the Bank of Japan. The BOJ policy board members are set to meet April 9-10 and April 27.

However, the advance of USD/JPY stalled at 83.30 yen and the pair began once again drifting lower. Dollar’s move higher was probably constrained by the selling from exporters.

Standard Chartered: “Exporters are clamoring for a weaker yen, but the Cabinet office survey and the Tankan survey suggest you have to take some of those complaints with a grain of salt because both measures suggest Japanese exporters had adjusted to the strong yen in the low 80s.”

Trading will likely be quite volatile this week. US dollar will have support at 82 yen – the level from which it has recoiled up 4 times in March.

[ryuroden]

CFTC trader positioning data

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

•The value of the dollar's net long position rose to $19.58 billion in the week ended March 27, from $11.67 billion the previous week.

• Euro shorts grew by 6.2k to 89.1k contracts. The euro's volatility (3-month implied volatility) is at its lowest level since August 2008.

• The net short pound position declined by 4.7k contracts to 11.1k, the minimum since last September. Small longs were established (658 contracts) and short were pared by (4.1k).

• Net short Japanese yen positions jumped 41.8k to 67.6k contraction, the smallest since mid-2005. This was a function of new shorts being established (17.8k contracts) and longs being cut (24k contracts).

• Swiss franc net shorts dropped 3.9k contracts to 15.1k. Both longs and shorts decreased (5.5k and 1.5k).

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]

USD/JPY: analysts’ forecasts

Bullish views

UBS: as new fiscal year started in Japan, yen will lose support of the seasonal repatriation conducted by Japanese companies. USD/JPY will rise to 85 yen in 3 months. Among the factors positive for the pair there are: possibility of higher US Treasury yields in the coming months, more optimism about US economy and more easing from the BOJ. As the central bank meets twice this month, if the policymakers “decide to keep policy on hold on April 10, they can always choose to ease further on April 27,” claim the analysts.

J.P.Morgan: in the longer term USD/JPY fair value lies at 115 yen.

Bearish views

BNP Paribas: USD/JPY will fall to 80 yen in Q3 and to 78 yen by the end of 2012.

Standard Chartered: USD/JPY will decline to 77 yen in Q3 and to 74 yen by the end of 2012 as investors seek Japan’s real yields and the US recovery stagnates.

It’s also necessary to note that the BOJ has signaled that it doesn’t want the government to become dependent on it printing money. There is a limit to how much the central bank can do, so the bets on weaker yen may shrink.

Nomura Securities: yen’s decline which started at the beginning of February was caused mainly by global factors (US yields, stabilization in the euro area). Now reversal is likely, so sell USD/JPY stopping at 84.00 yen and targeting 80.00.

[ryuroden]

Standard Chartered: ECB may have to conduct another LTRO

Analysts at Standard Chartered Bank expect further contraction of euro zone’s GDP. In their view, there are 3 main concerns: austerity measures, credit squeeze and high oil prices. The specialists underline that confidence isn’t back and credit isn’t flowing into the real economy (the money, which the ECB provided the region’s banks through LTRO, hasn’t reached households and companies). The unemployment rate will likely continue to rise (10.8% in February).

The bank claims that “the ‘true’ firewall remains the European Central Bank”. The ECB’s 1 trillion for banks is “the magic number the market wanted to see.” With 2 rounds of loans committed already, “if the crisis escalates, we think the ECB will have no other option but to provide another”.

According to Standard Chartered, EUR/USD will weaken due to the growth differential between the United States and Europe. Euro will be also under pressure due to the ECB’s liquidity increase.

[ryuroden]

The outlook for RBA’s actions

The Reserve bank of Australia meets tomorrow for an interest rates decision. The majority of the economists expect the central bank to leave the rates changed. Here’s more detailed into on the issue and the expectations of future RBA’s moves.

Outcome Looking Ahead

ANZ Hold Cut in May

NAB Hold Cut in May

JP Morgan Hold Hold in 2012

HSBC Hold Cut likely in May

TD Securities Hold Two cuts in May/June

UBS Hold Hold in 2012

StanChart Hold

Westpac Hold Two cuts in May/July

Citigroup Hold Cut in May

CommSec Hold Cut likely in May

Deutsche Bank Hold Cut in May

AMP Capital Hold Cut in May

Moody's Hold Hold in coming months

Barclays Hold Expect more easing

St George Hold Cut likely in May

Macquarie Hold Cut in May

Nomura Hold Hold in 2012

RBC Capital Hold Two cuts in 2012

Goldman Sachs Hold Cut in May

RBA Hold Two cuts in May/June

[ryuroden]

RBS: trading recommendations on EUR/GBP

The RBS analysts recommend going short on EUR/GBP at current levels, targeting at 0.8000 and with a stop on a 2-day close above 0.8510.

The reason why the specialists propose such trade is that the common currency is extremely vulnerable to any market pressure. Credit spreads narrowed due to LTRO, but the market sentiment toward financials remains unchanged.

[ryuroden]

RBS: trading recommendations on AUD/USD

Specialists at RBS recommend buying the Aussie against the dollar, potentially targeting at 1.0751 and stopping at 1.0290. The support lies at 1.0337/54 and at 1.0238 levels, whereas the resistance is placed at 1.0496 (previous support, now resistance), 1.0612 (76.4% retracement of the previous range), 1.0691 and 1.0856 (2012 maximum).

According to RBS analysts, going long on AUD/USD may be one of the best trading strategies of April 2012, because the Aussie is strengthening every April at an average of circa 4%. Moreover, the slowing of a downside momentum in the MACD seems to be a positive sign.

[ryuroden]

GBP/USD: analysts’ forecasts

According to market strategists at J.P. Morgan Asset Management, nowadays the U.K. currency is on the rise due to high merger-and-acquisition activity in the country, demand for Britain's triple-A bonds, and rising stock prices.

However, analysts at Shelter Harbor Capital say from the $1.6000 level problems for the U.K. economy will start; therefore the demand on the sterling is expected to contract. Strategists recommend going short on the pound against the greenback at $1.5991 level with a stop at $1.6100 and a target of $1.5600.

Specialists at Westpac Institutional Bank also do not believe the sterling is a reliable currency today, considering the fact that two members of Britain's Monetary Policy Committee are in favor of further QE.

[ryuroden]

CMC Markets: EUR/USD, USD/CHF and AUD outlook

Analysts at CMC Markets believe that EUR/USD will fall to $1.20 over the next 12 months. IN their view, USD/CHF would rise from 0.90 to 0.92 in a year.

“There was a concern that the Swiss National Bank would not tolerate a stronger Swiss franc and that turned out to be the case.” The specialists expect EUR/CHF floor to hold in the short to medium term.

According to CMC Markets, Australian dollar is significantly overvalued and could weaken this year. “There will be further rate cuts out of Australia over the coming months because of deteriorating economic data and a possible slowdown in China.” The economists don’t mean the hard landing scenario in China, but think that demand out of China will diminish for Australian commodities and that will drive flows out of Aussie.

[ryuroden]

BarCap: euro expected to decline

Analysts at Barclays Capital advise investors to watch ECB policy rate press conference on Wednesday (14:30 GMT) for the hints on whether the central bank will move away from full allotment* – this question should be resolved by the end of June. If there are signs of normalization, euro may get some support. Never the less, the economists don’t regard such outcome as very likely.

The specialists think that the single currency is likely to get under pressure. The bank draws the market’s attention to the fact that euro area’s Manufacturing PMI remained below 50 in March – not a good sign.

According to BarCap, although German economic growth will improve the region’s economic outlook, for now its economic strength is being more than offset by weakness elsewhere. So, despite the fact that the bank expects German industrial production (released on Thursday, 12:00 GMT) to exceed forecasts posting the reading of 0.3% (m/m) vs. the consensus projection of -0.1%, the analysts don’t think that this would lead to the steady growth of the single currency.

[ryuroden]

AUD: RBA rate statement lowered the Aussie

Australian currency declined against all of its 16 major counterparts.

The Reserve Bank of Australia left its cash rate intact at 4.25%, coming up with expectations. However, according to the chairman Glenn Stevens, the RBA board decided to see forthcoming key data on prices to reassess its outlook for inflation, before considering a further step to ease monetary policy.

The release of the first-quarter CPI is scheduled on April 24 (5:30 GMT). According to the Melbourne Institute, the nation’s consumer prices rose 1.8% last month from a year earlier, the slowest pace since October 2009.

United Overseas Bank: The tone of the RBA’s statement was quite dovish. Interest-rate expectations are going to fall; this will continue to weigh on the Aussie.

Moreover, retail sales rose 0.2% in February, below the forecasts and the January print, both at 0.3%.

In addition, on May 10 (10:30 GMT) the annual budget release is expected. Prime Minister Julia Gillard said today the government will deliver a “tough budget”, when the Treasury presents a spending plan for the coming fiscal year.

Societe Generale: If the signal from the budget is deep fiscal cuts, there is no option for the RBA but to ease monetary policy to accommodate tighter fiscal conditions.

On the other hand, China, Australia’s biggest trading partner, posted upbeat figures today. China’s non-manufacturing PMI climbed to 58.0 in March from 57.3 in February.

AUD/USD is currently trading around $1.0380, below the 50-, 100- and 200-day MA. Most analysts forecast the bearish pressure on the Aussie to continue. The support for the currency pair lies at $1.0370, $1.0355, $1.0335, $1.0305 (local minimum) and $1.0260, whereas the resistance – at $1.0415, $1.0450, $1.0485, $1.0510 and $1.0600.

[ryuroden]

Merrill Lynch: trading recommendations on EUR/AUD

Strategists at Bank of America Merrill Lynch recommend going short on the euro versus the Aussie, entering the trade at the current levels with a stop at 1.3050 and a medium-term target of 1.2200.

Analysts believe the Australian dollar is a profitable bet these days: copper prices are rising, and Australia is the major copper exporter. Moreover, April is the strongest month of the year for the Aussie historically.

The common currency prospects, however, are not so clear-cut. The European bank stocks are weakening and interest rate spreads between German and Spanish bonds are widening. One can’t say with certainty that European economic unease will not resume in the nearest future.

[ryuroden]

Dollar rises on FOMC minutes

The greenback strengthened against a basket of currencies on the backdrop of the release of the minutes of the FOMC’s meeting on March 13.

The March minutes show decreased urgency to add stimulus with no sentiment expressed for additional easing unless the economic conditions worsen. The Fed also affirmed its plan, first announced in January, to hold low interest rates through late 2014.

Rochford Capital: The U.S. monetary policy will stay status quo for the foreseeable future. The EUR/USD is a bit of a sell at these levels in the short term.

However, the policymakers pointed the labor market still remains weak. They expect the unemployment to remain high till the end of 2012. U.S. factory orders in February increased 1.3%, offsetting a similar decline in January, though were below the consensus forecast (1.5%).

Economic data to watch

Today at 13:15 GMT the ADP non-farm employment indicator is expected to show a 206,000 increase in the number of employed people during March versus a gain of 216,000 in February, the biggest in two months. The weekly number of unemployment claims, released tomorrow (13:30 GMT), is forecasted to decline to 355,000 against 359,000. Non-manufacturing PMI release is scheduled on Wednesday (15:00 GMT).

EUR/USD

The currency pair declined today to $1.370 level. Economists expect EUR/USD to trade at $1.310 by the end of 2012.

[ryuroden]

FBS Quarterly Report

Q1 Review

Traders will remember Q1 2012 for mixed economic data. On the one hand, US economy kept improving. On the other hand, we got some disturbing news from China and the threat of recession in Europe. Geopolitical risk (Syria) and sovereign debt worries (Europe) were also among the main drives of the global financial activity in the first quarter.

American stock markets rallied aiming to return to the levels seen before Lehman Brothers collapse (NASDAQ was up by 18%, S&P was up by 14%). Brent crude oil price remains in the area of 125 dollars per barrel. On the upside oil prices are affected by the Iran, on the downside – by the talks about the potential release of strategic petroleum reserves. Higher prices harm global demand hurting the developed economies.

Let’s begin our analysis with a look at how the economies of United States, euro area and China have been performing since the beginning of this year.

The United States

US GDP growth accelerated from 0.4% (q/q) in the first 3 months of 2011 to 3.0% in the final quarter of the last year.

Source: Bureau of Economic Analysis, U.S. Department of Commerce

Activity in US manufacturing and services sectors is resilient, and manufacturing output has been gaining pace for the 3 months to March. The situation at US labor market has also improved. By March jobless claims have reached a 4-year minimum, while the nation’s economy has been adding in winter over 200K jobs per month, and unemployment rate fell from 9.0% in September, 2011 to 8.3% in January and February, 2012.

However, even in the United States not everything is so bright. First of all, America isn’t isolated from the rest of the world, so China’s landing – soft or hard – and euro zone’s problems will surely affect its state. Secondly, inflationary pressures in the US are slowly picking up, trade deficit is widening, while the housing market is still in trouble.

Note that trying to predict the market’s sentiment is a tricky thing. US investors seem to think that American economy may stay away from the issues elsewhere and keep growing. As the global markets represent a really complicated mechanism they may even be right: China’s slowdown does not pose systemic risks for markets in a way the credit crisis would. If it leads to weaker commodity prices, this could ultimately be a positive factor for future growth.

Europe

Euro zone’s economy contracted in Q4 by 0.3%. Moreover, it’s necessary to note that about a third part of the EA17 nations have already entered recession which is defined as GDP contraction during 2 consecutive quarters.

The region’s manufacturing sector suffered a poor March: Manufacturing PMI of the currency union came in at 47.7, a 3-month low and the eighth month in row in which output has shrank. The unemployment rate across the euro area jumped to 10.8% in February, the maximal level in at least 14 years.

China

Chinese Premier Wen Jiabao cut 2012 growth target to 7.5% from the 8% goal which was in place since 2005 as officials seek to shift the economy toward more consumption. Last year Chinese GDP increased by 9.2%. The Bank of China, however, claimed recently that China’s economic growth will be able to remain over 8% for the whole of 2012.

China posted the largest trade deficit in February in at least a decade of $31.5 billion as import growth exceeded that of exports in more than 2 times. The deterioration of China’s trade balance may be explained by lower demand from the euro area which is suffering from the debt crisis as Europe accounts for 20% of all Chinese exports. Taking into account reduced overseas demand it’s possible to expect China’s exports to stay weak at least for the next few months.

At the end of March the nation’s PMI data made investors experience mixed feelings: while HSBC Manufacturing PMI was below the critical mark of 50, the official index of purchasing managers turned out to be above this level. Official figures helped to lighten the market’s mood, though the concerns about Chinese slowdown haven’t faded and will likely continue haunting investors’ sentiment.

Currency majors in Q1 2012

New Zealand’s dollar was the best performing G20 currency this quarter, rising more than 5% against the greenback. Japanese yen performed the worst, falling more than 7% versus US dollar.

American currency lost to all its major counterparts except yen (due to monetary stimulus by the Bank of Japan). The greenback was weakening in January and February and then retraced some of its losses in March.

Q2 prospects

Euro

European policymakers have finally started showing real efforts in combating the crisis in the first quarter. There was the Greek restructuring deal, approval of the second bailout to Greece and expansion of the anti-crisis firewall.

However, significant risks still exist. Among them one may cite the risks of/that:

- Potential euro zone’s economic slowdown and recession;

- Defaults of other indebted European economies;

- The size of the bailout funds may turn out to be insufficient;

- Of implementation associated with the European rescue and reform packages.

The first risk seems to be the most severe. As the so-called PIIGS countries have to conduct severe austerity measures, it becomes more and more difficult for them to restore their competitiveness that is leading to social unrest. Combined with the electoral cycle in these countries, the political landscape is shifting to right wing nationalist parties. If these parties are successful, the implementation risks surrounding these austerity programs will be escalated. French presidential elections on April 22 and May 6 could also be a catalyst for intensifying trouble.

As a result, despite the political progress made so far it’s really hard to find in Europe some drivers which are capable to trigger the growth of the single currency in the medium term.

US dollar

One may say with high certainty that the greenback’s performance will depend primarily on further actions of the Federal Reserve. The main question remains the same: will the Fed launch QE3 to promote economic growth or not?

In March the Fed’s Chairman Ben Bernanke acknowledged the US economic improvement, but underlined that the option of more quantitative easing should be left open, because the economy isn't strong enough to continue quickly reducing unemployment. Bernanke doesn’t expect jobless rate to keep declining. The policymaker warned that the recent signs of improvement at the labor market may be the result of statistical errors.

Some experts also note that the market has began expecting too much from US economy and, consequently, may be easier disappointed if the actual data fails to exceed the forecasts which tend to get higher and higher.

Another important development is that the inverse relationship between US dollar and investors’ risk appetite started to fade. Never the less, don’t hurry to take risk. We see steady growth for American currency possible only if QE3 is completely taken out of the Fed’s agenda and that isn’t very likely in Q2.

In addition, US GDP growth may have slowed in the first quarter. Don’t forget about the negative effects of higher oil prices which may increase inflationary pressure and the fact that tax cuts are set to expire by the end of the year.

British pound

UK economy is still having a lot of problems and consumer sentiment is weak as high unemployment and weak wage growth don’t encourage British to spend.

At the same time, there are some positive things ahead: Diamond Jubliee and Olympics will certainly support the nation’s economy. UK inflation is also expected to decline further which would make consumers feel better. In addition, Britain’s Manufacturing and Construction PMIs posted the readings above 50 in March beating the forecasts pointing at the expansion of these industries.

If GBP/USD manages to steady itself above the 200-week MA, its chances to continue growth will significantly increase. Remember, though, that Britain is strongly affected by the situation in the euro area, its main trading partner, so the downside risks still seem considerable.

Japanese yen

Japanese yen has weakened versus the greenback in Q1 as the Bank of Japan has given in to political pressure increasing in February its asset-purchase program by 10 trillion yen ($128 billion) and setting an inflation target at 1%. The greenback on its part was driven by the rising yields in the United States (10-year Treasury yields added 27 basis points).

USD/JPY has managed to break above its long-term downtrend leaving the range within which it was trading in the second quarter of 2011. The pair consolidated above 100-week MA. We’ll get a bullish signal if the weekly Ichimoku Cloud switches upward.

Note though that April has been traditionally a good month for the yen because domestic investors tend to transfer funds abroad the start of the fiscal year after the March repatriation. However, this year the demand for yen wasn’t that high as Japanese importers were selling large amounts of the national currency –

Japan has to import much nowadays (energy resources). So, yen’s expected to weaken modestly due to the BOJ’s loose policy, weak fundamentals and an increase in risk appetite – the factors which don’t encourage demand for yen as a safe haven.

Swiss franc

Although euro zone sovereign debt crisis hurts Swiss exports, Switzerland may avoid contraction with the help of relatively resilient domestic demand. Swiss fundamentals remain very strong: the nation has balanced the fiscal account, public debt is declining and government bond yields are lower than in Germany and the US.

The nation’s economy has regained some strength: investors’ confidence rose for the third month in March. Foreign sales, adjusted for inflation and seasonal swings, increased by 9.2% in February (m/m). The Swiss National Bank raised 2012 GDP growth forecast from 0.5% to 1%.

The SNB’s EUR/CHF floor at 1.2000 helped to stabilize Swiss franc. Market participants expressed enough confidence to this level and we have seen the pair’s trading range narrow to the levels between 1.2000 and 1.2100.

At the same time, deflation remains a considerable threat which could push Swiss economy into recession. If deflationary pressures intensify in the coming months, the SNB will likely opt to raise the currency floor, though with oil prices rising steadily year-to-date, the likelihood of such outcome has diminished. Swiss consumer prices rose by 0.3% in February after decreasing by 0.4% in January.

Australian dollar

Australia is heavily influenced by China’s business cycle. Speculation that China may experience a harder landing than expected weighted on the Aussie dollar this quarter and will likely continue to do so.

Many economists expect the Reserve Bank of Australia to cut rates in May. The central bank itself decided to take a “wait-and-see” approach intending to take into account the first-quarter CPI data (released on April 24). In March the nation’s consumer prices rose by 1.8% (y/y) showing the slowest pace since October 2009.

In addition, Australian annual budget is released on May 10. If the signal from the budget is deep fiscal cuts, the RBA will likely be forced to ease monetary policy to accommodate tighter fiscal conditions.

Canadian dollar

Canadian economy grew in line with forecast at 0.1% in January. Although the nation’s GDP growth has slowed from the last quarter of 2011, its economic outlook seems optimistic as it gains from US growth and higher oil prices.

As Canada released the spending plan with a goal to balance the country’s budget in 2014-2015 and achieve surplus in 2015-2016, S&P confirmed Canadian top credit rating – the factor which makes Canada stand out among G10 nations. As a result, loonie has all chances to continue gradual appreciation.

Forecasts from major banks

Data was submitted on March 30, 2012.

Source: FX Week

[ryuroden]

Standard Chartered: comments on the euro

• Despite the slight signs of improvement in Europe, economic data, coming from euro zone, show recession is set to continue. European manufacturing PMIs (March) show that only 3 countries performed well last month:

UK: 52.1 (an 8-month high)

Austria: 51.5 (a 3-month low)

Ireland: 51.5 (a 10-month high)

Netherlands: 49.6 (a 2-month low)

Germany: 48.4 (a 3-month low)

Italy: 47.9 (a 6-month high)

France: 46.7 (a 33-month low)

Spain: 44.5 (a 3-month low)

Greece: 41.3 (a 3-month high)

• In Q2 the euro may stop appreciating versus the other key currencies due to following reasons:

- Flow drivers for EUR strength are no longer so supportive

- European banks keep repatriating offshore balance sheets

- Forthcoming elections in France and Greece may resume the crisis. ECB may cut the rates by 25 bps to 0.75% in Q2

- Oil price growth is slowing, so support from oil-related FX reserve diversification is expected to decrease

• The latest IMM Commitments of Traders data showed that non-commercial accounts increased net short positions by 7,194 on the week to 89,180. Within this, 'leveraged funds' (hedge funds and trading models) increased their net shorts by 6,017 to 80,577; and asset managers reduced their net long positions by 5,648 to 8,148.

[ryuroden]

Euro area: economy briefly, EUR/USD fell

- Spanish yields rise

The yields on Spanish 5-year notes rose to 12-week maximum of 4.5% as the nation conducted the first debt auction since announcing that public debt will surge to a record this year.

The auction went bad – Spanish government managed to sell only 2.59 billion euro of debt out of 3.5 billion euro (maximum target). In addition, Spain was forced to pay higher interest rates: the average yield on bonds maturing in 2020 rose to 5.338% from 5.156% at the previous auction of this type.

- ECB policy meeting

The European Central Bank, as expected, left its benchmark rate unchanged at 1%. Watch the central bank’s press conference which is to start in 20 minutes.

EUR/USD

The single currency is testing the levels below 100-day MA versus the greenback. Next support for the pair is at $1.3124 (trend line support).

[ryuroden]

Commerzbank: bearish on NZD/USD

Analysts at Commerzbank believe that the decline of New Zealand’s dollar versus its US counterpart may accelerate in the medium term.

The specialists note that NZD/USD was affected by the unexpected trade deficit in Australia and the speculation about China’s economic slowdown.

The bank underlines that kiwi failed to overcome resistance at $0.8289 (March 19 maximum) and expect the pair to slide to $0.7969, $0.7965 and $0.7922. According to Commerzbank, in the longer term NZD/USD risks to fall to $0.7460/7369 (December 15, 2011 minimum/November 25, 2011 minimum) as long as it’s trading below $0.8471 (February maximum).

[ryuroden]

Draghi: Upside inflation risks seen prevailing in 2012

According to Mario Draghi, the region would undergo a moderate recovery over the course of the year, while inflation in the bloc would remain above 2% for the rest of the year.

However, Draghi claims that ECB possesses all the necessary tools to tackle potential inflation risks. He expects the inflation to fall back below 2% in 2013 and to remain in line with price stability.

The ECB President repeated several times that downside economic risks prevail and he called talk of an exit strategy from LTO premature. Such comments harmed EUR/USD which fell below the 100-day MA to $1.3105.

[ryuroden]

BMO: trading recommendations on EUR/USD

Strategists at BMO believe that if nonfarm payrolls, released on Friday 13:30 GMT, are greater than 225,000, it will make sense to go short on EUR/USD. In this case they advise to enter the trade at current levels with a stop at $1.3427 and targeting at $1.2550. The currency pair may strengthen to $1.3200 ahead of the data release, but, in their view, the rise won’t last long.

According to specialists, EUR/USD is more likely to be on the ebb in the nearest future, because the ECB is expected to ease monetary policy by cutting rates by the summer. The two-year yield spread is at 16.7 basis points and is increasing in favor of the greenback.

Technical analysts point that if the currency pair breaks the support level $1.3130, the chances to pass through $1.3035 (the neckline of a classic head and shoulders figure) will be high. The break of the neckline should generate a 500-point drop.

[ryuroden]

GBP/USD: technical comments

On Tuesday, April 3, British pound slipped versus the greenback breaking below the short-term uptrend support line affected by the Federal Reserve’s meeting minutes. On the weekly chart pound returned below the 200-week MA after testing higher levels.

The pair found support in the $1.5840/30 area (March 20 & 28 minimums, 200 MA on H4 chart and 50% Fibonacci retracement of sterling’s advance from March minimum at $1.5600 to April 2 maximum at $1.6062).

Chart. H4 GBP/USD

On the downside, there’s an important support in the $1.5770/1.5780 zone (61.8% Fibo retracement of the advance mentioned above and the uptrend line the beginning of the year). The outlook for the pair will turn really bearish only if it falls below this point.

On the upside, if GBP/USD keeps trading within the rising wedge (watch the daily chart), it may get chance to revisit the levels in the $1.6165 zone (October 2011 maximums).

As for the fundamental factors, watch the results of the Bank of England’s MPC meeting due today at 11:00 a.m. GMT and US Non-Farm Payrolls data released tomorrow at 12:30 p.m. GMT.

Edited April 5, 2012 by ryuroden

[ryuroden]

EUR/USD: analysts’ comments

Bank of the West (California): EUR/USD will test its recent trading range $1.30/1.35 on the downside. As the expectations of QE3 in the US have receded, the market’s attention has turned to Spain which is struggling with the deficit targets.

KTB Securities: The debt itself is not an issue as long as there is sufficient enough (economic) growth to support it, but Spain's weak growth outlook does not paint a pretty picture.

ANZ: If the peripheral governments cannot make the necessary reforms, in the long term that’s a negative for euro.

Citigroup: The market has been locked into a range because there was no dominant FX theme. Now it looks as if higher US rates and concern on Spanish debt could be the short-term drivers, opening up room for higher volatility

BBH: Based on current spot and volatility levels, indicative pricing suggests almost a 50% chance of testing the mid-Jan low near $1.26 here in Q2.

Euro faces strong resistance at $1.3380 – this level has been tested several times so far but the pair failed to break above it.

[ryuroden]

What to expect from NFP?

According to ADP employment report released yesterday, US non-farm sector added 209K jobs in March after a revised advance of 230K in February. The figures were slightly above the consensus forecast (206K – Bloomberg version).

Now all eyes are on official Non-Farm Payrolls figures due on Friday at 12:30 GMT by US Labor Department. The economists expect NFP to post 211K after 227K February, while the unemployment rate is seen unchanged at 8.3%.

The experts often use ADP report to amend their estimates of NFP as the former figures are released earlier than the latter, though the 2 sets of data aren’t always well correlated. According to Credit Suisse, over the past year the average difference between ADP's figures and the government-reported private jobs numbers was equal to 1,000.

Analysts at Brown Brothers Harriman think that the decline in the number of unemployed seen so far may be explained by the fact that some people just stopped looking for jobs and not by some real improvement. The specialists warn that there is a risk on the downside for the March jobs report. BBH adds that the advantages from milder weather in January and February won’t likely be seen in March. In addition, the slump in construction spending (-1.1% drop in February m/m) will also affect job figures.

Blue – actual data

Yellow line – forecast

Dark blue line – revision

NFP chart

[ryuroden]

USD/CAD: short- and longer-term prospects

The pair USD/CAD is consolidating after yesterday’s advance.

The market awaits Canadian employment data later today (payrolls are expected to increase by 11.3K after declining by 2.8K in February, unemployment rate is also seen higher at 7.5% vs. 7.4%) due at 12:30 GMT. Also watch Ivy PMI at 2:00 p.m. GMT.

Analysts at Toronto-Dominion Bank: if loonie fails to find a powerful growth driver, it will risk declining. However, although USD/CAD looks undervalued it will be difficult for the pair to breach the corridor within which it has been trading since February as it approaches resistance provided by 200-day MA. The specialists are looking forward to gradual appreciation of the greenback. On the downside they see the pair’s decline contained by 0.98 in the near term.

Longer-term

In the first quarter of 2012 Canadian dollar added 2.4% versus its US counterpart gaining from US economic recovery (due to trade connections), high oil prices (exports) and some stabilization in euro area (good for risk sentiment). Analysts at RBS see USD/CAD falling to 0.9600 by the end of June.

At the same time, although loonie has decent fundamentals, there have been some disappointing data so far (retail sales). The Bank of Canada is clearly on hold. Strategists at Scotia Bank expect USD/CAD to rise to 1.0100 by the year-end.

BMO: “Even if we do get a break through 1.0075, it won’t go screaming too much higher given the pent-up interest to sell US dollars at better levels.”

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Pound fell on data releases and the BoE

British pound fell versus the greenback on weak data and the results of Bank of England’s meeting.

The pair GBP/USD tested the levels below the 200-day MA, but found support at 50-day one from which it bounced upwards.

Resistance: $1.5885 (February 9, March 6 maximums) and $1.5922 (March 21 maximum).

Support: $1.5818 (today’s minimum, 50-day MA), $1.5775 (uptrend support line from the beginning of the year).

UK economy: growing or not? The BoE has taken a "wait-and-see" approach

In contrast with Manufacturing, Construction and Services PMIs which point to accelerating growth in these sectors, today’s data released in Britain was discouraging: UK manufacturing production contracted by 1.0% in February m/m (vs. expected increase of 0.1%). Official forecasts aren’t positive either: GDP growth in Q1 is unlikely to hit the 0.5% q/q as implied in the Monetary Policy Committee’s February forecast.

There is also some disappointing news from the euro area which strengthened the pressure on sterling as Europe is Britain’s main trading partner: German February industrial output data (-1.3% m/m vs. the Reuters consensus of -0.5%).

The BoE decided to leave the rates unchanged at 0.5% keeping the size of the Asset Purchase Facility at 325 billion pounds (the last increase was in February by 50 billion pounds). The central bank said that the MPC expects the asset purchases to take another month to complete and that “the scale of the program will be kept under review.” There’s no detailed policy statement. One will be able to get more hints on the BoE’s policy stance only when the meeting minutes are scheduled for release on April 18.

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EUR/USD renewed 3-week low

The single currency is declining versus the greenback for the fourth day in a row. Today EUR/USD hit 3-week minimum at $1.3056 due to concerns about the euro area, primarily Spain.

Another source of pressure on euro – German February industrial output data: -1.3% m/m vs. the Reuters consensus forecast of -0.5%.

In addition the results of French debt auction conducted today came mixed: the nation managed to sell the planned volume 8.439 billion euro of debt maturing in 2017, 2022, 2026 and 2041 out of a targeted 7-8.5 billion euro, though the yields were slightly worse.

RBC Capital Markets: Euro zone pressures are picking up with the 10-year Italy-Bund spread sitting at 375 bps, the 50% retracement of the January-March tightening. Spain is also underperforming with our rates team noting spread widening is more pronounced in 2-year notes than in 10-year ones.

The technical outlook for EUR/USD seems bearish. However, taking into account the fact that we’ve seen a rapid decline it’s possible to expect some correction before the pair’s slide to $1.3000 and lower resumes.