Comments and forex-analytics from FBS

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Euro area: auctions, yields and euro

The market’s opened in the risk-off mode today: Asian shares dropped today after S&P 500 lost 1.7% yesterday and European stocks fell to 10-week minimum on Tuesday.

Italian 10-year yields rose yesterday to 5.69%, the maximum since February, while Spanish ones reached the highest level since December of 5.99%.

Note, however, that the picture for today isn’t entirely grim as Italian/German and Spanish/German 10-year yield though slightly, but narrowed.

Investors are waiting for Italian debt auctions: the nation aims to sell 11 billion euro ($14.4 billion) of bills today (3 billion euro of 91-day bills and 8 billion euro of 361-day bills) and longer-term debt tomorrow (due in 2015, 2020 and 2023). Results are due around 10:10 GMT.

In addition, Germany plans to sell up to 5 billion euro of 10-year bonds. Results are due after 09:30 GMT.

Analysts at Mizuho see no reason to buy euro. Nomura adds that if EUR/USD closes below $1.3050, it will slide to $1.2600.

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JPMorgan: EUR/JPY’s facing resistance

Technical analysts at JPMorgan Chase believe that EUR/JPY may decline to the minimal level since February of 104 yen.

The specialists note that the pair has reached resistance in the 105.65/106.00 area (38.2% Fibo retracement of an advance from January minimum to March maximum, 200-day MA and March minimum).

Japanese currency weakened versus the majority of its peers as the Bank of Japan has left yesterday its policy unchanged and the market’s now pricing in easing at the BOJ’s second meeting this month that will take place on April 27.

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USD/JPY: upward correction may be coming

US dollar keeps trading within downtrend versus Japanese yen sliding from March maximums above 84 yen.

USD/JPY has reached the lower line of the price channel and is now likely rebound targeting the upper line of the channel during the next several days.

The greenback may get support from strong bids in the 80.50/55 area and October 2011 maximum in the 79.50/55 region.

State Street Bank: “It’s a bit too early now for the market to trade on the Bank of Japan's meeting on April 27. But expectations of further easing mean the yen is unlikely to keep rising, beyond the 80 yen mark. But the market will probably start trading on it perhaps next week.”

Longer-term outlook

Warning from RBS: “There’s an unrealistic expectation of how early central banks will tighten in the world outside Japan. If the market moves to reflect that and we see 2-year yields in the US and the rest of the world come down back toward Japanese levels, the upward pressure on the yen will reemerge.” The 2-year yield spread between US and Japanese bonds widened to 0.20 from 0.08 percentage point in January. RBS thinks USD/JPY may decline to 73 yen by the end of 2012.

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SocGen: trading EUR/USD

Strategists at Societe Generale advise to go short on the EUR/USD, entering the trade at 1.3100 with a stop at 1.3250 and a target of 1.2600.

According to analysts, unsuccessful bond auctions in Europe and recent negative U.S. NFP data point to likelihood of another possible round of QE. Before the lackluster reports were out, investors believed QE3 may be beneficial for risky assets. However, now it became clear that the further monetary easing will point at grave problems in the global economy. The risk-off market mode and troubles in Spain and Italy will weigh on the common currency.

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Commerzbank: technical levels for EUR/USD

Technical analysts at Commerzbank claim that support for EUR/USD lies at $1.3032. If the pair drops below this level, it will decline to $1.2974/54 (February minimum and 61.8% Fibonacci retracement of the single currency’s advance from January minimums to February maximums) and then to $1.2624.

The specialists claim that resistance for euro is found at $1.3207 (55-day MA) and $1.3487 (February maximum).

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Large options expiring today

Here are the options expiring today at 2 p.m. GMT.

EUR/USD: 1.3025, 1.3080, 1.3100, 1.3145 and 1.3200;

GBP/USD: 1.5800, 1.5900;

USD/CHF: 0.9140;

AUD/USD: 1.0250, 1.0300 and 1.0425 (large);

EUR/GBP: 0.8260;

AUD/JPY: 83.70;

USD/JPY: 81.00 (large), 81.50, 81.65.

Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure.

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Westpac: trading EUR/CAD

Strategists at Westpac Institutional Bank are bearish on euro vs Canadian dollar and advise to sell the EUR/CAD at $1.3080 level with a stop at $1.3170 and a target of $1.2770.

In their view, Canada’s surprising job growth (82K in March versus 11K forecasted) and possible hawkish actions of the Bank of Canada (on a meeting 17-18 April key interest rate may be hiked from current 1%) will support the loonie. However, if the U.S. labor market data will remain negative, it may weigh on the Canadian currency.

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Analysts: outlook for sterling

Analysts at Morgan Stanley are bearish on the euro and the pound vs. the greenback. In their view, in a year the EUR/USD and the GBP/USD will weaken to $1.15 and $1.46 respectively. According to the specialists, there are signals that the market's optimism has started to fade as the European economies are still facing plenty of difficulties. Risk aversion and increased asset market volatility will hurt the pound.

UniCredit currency strategists also don’t expect the cable to climb higher than $1.60 unless something extraordinary happens.

However, Mizuho analysts believe the U.K. economy is gradually growing, and the sterling will gather momentum when the global markets stabilize. Moreover, the pound benefits from serving as a safe haven within Europe.

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Euro area: debt auctions, EUR/USD

Germany: sold 3.87 billion of 10-year benchmark bunds euro out of targeted 5 billion euro. Yield declined to 1.77% (from 1.83%).

Italy: sold a total 11 billion of 3- and 12-month BOT’s:

- 3 billion euro of 91-day bills, yield 1.249% (from 0.492%);

- 8 billion euro of 361-day bills, yield 2.84% (from 1.405%).

EUR/USD dip back briefly below $1.3100 on the news that German government failed to borrow as much as it has planned, but then recovered as periphery stocks extended their rallies and as periphery/German bond spreads kept narrowing.

Resistance: $1.3136 (100-day MA), $1.3165 (April 5 maximum) and $1.3200.

Support: $1.3033 (April 9 minimum), $1.3004 (March 15 minimum) and $1.2974 (February 16 minimum).

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SNB and the market’s confidence

The Swiss National bank had no problem in defending the EUR/CHF floor set in September for more than half a year. How the difficulties have finally appeared as last Thursday euro breached the minimal level due to the surge of demand for francs and the SNB had to step in selling about 1 billion euro (so the estimates say) to bring it back.

Swiss monetary authorities repeated their pledges to constrain franc’s appreciation by the level mentioned above. So, if the market once again pushes euro below that point, the SNB will push it up again.

The central bank didn’t eliminate the threat of euro’s plunging below 1.20. The core of the problem is that there are the banks trading EUR/CHF and the transactions of which the SNB can’t monitor in time as they don’t have credit lines with it. If such lines were established and the SNB all dealers on the ICAP-owned EBS system it would be able to prevent piercing of the EUR/CHF floor. In addition, the SNB could mandate some banks to help it defend the floor.

However, the Swiss central bank already accepts more than 100 banks with more than 700 trading desks as counterparties and it’s hard to capture every single legitimate trading account on EBS at all times, so this probably wouldn’t work either.

The fact is: almost a week passed since April 5, but the ‘breaking the floor’ story hasn’t repeated. It means that the market still has enough faith in the SNB. At the same time, new attempts of euro bears to test the central bank’s resolve are still quite likely as the policymakers delivered nothing new.

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Key options expiring today

EUR/USD: $1.3050, $1.3120, $1.3170, $1.3175;

USD/JPY: 81.00, 81.45, 81.50, 82.00;

EUR/GBP: 0.8320;

AUD/USD: $1.0250, $1.0300.

Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).

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Short-term outlook for loonie

Canadian dollar hit yesterday the minimal level against its US counterpart since the end of January: USD/CAD posted high at 1.0051 before returning today to the parity level.

On the fundamental part, CAD has its main drivers rising equities and oil prices in action. The current fluctuations are by the approaching release of the Bank of Canada’s monetary policy report (the central bank will meet on April 17 and publish quarterly report on April 18).

From the technical point of view, there may be a “double top pattern” confirmed in case of steady trading back below the neckline of the pattern at 1.0010, so we may expect more bearish moves today.

Scotia Capital: buying loonie seems OK for now, though one should close USD/CAD shorts if the pair closes above 1.0050/1.0070 breaking out of the range within which it has been stuck for months.

RBS: bullish on CAD versus euro and US dollar. As conditions in Canada, the United States and the world as a while have improved, the BOC should revise up the domestic and international outlook.

Data to watch: Canada’s February trade balance (forecast: 2.2 billion surplus), New housing price index (forecast +0.2% m/m in February).

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AUD/USD grows after employment data

The Australian dollar jumped to a one-week high on the backdrop of the surprisingly positive employment data.

Strong labor market figures lower concerns that the RBA will cut interest rates from current 4.25% level. Australia’s 3- and 10-year bond yields increased 8 and 3 basis points respectively.

In March 44K new jobs were created in Australia versus 6.4K forecasted and 15.4K decline in February. The unemployment rate remains unchanged at 5.2%, compared with forecasts to grow to 5.3%.

BNP Paribas specialists expect the Aussie to trade at $1.0500 level in Q2. Moreover, China’s GDP data on Friday may surprise the market and create additional support for AUD/USD.

However, analysts at Commerzbank remain bearish on the Aussie vs. the greenback. In their view, there is a strong resistance on the $1.0405 level. They expect the pair to weaken to $0.9863 (Dec. 15 minimum).

Early Thursday AUD/USD strengthened to $1.0391, the highest level since April 3.

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Beige book: no surprises

According to the Beige book report, released on Wednesday, each of the 12 U.S. bank districts keeps expanding at a modest-to-moderate pace from mid-February through the end of March.

The Fed pointed at stronger manufacturing sector, consumer spending, better demand for professional business services, increased tourism and some improvement in the real-estate market. The survey also noted that hiring was steady or increased in most of the country.

In general, the estimates remain unchanged from previous Beige book release, but with slightly increased optimism on the back of positive March U.S. data.

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BNY Mellon: USD/JPY is to get higher

Analysts at Bank of New York Mellon think that Japanese authorities will refrain from active monetary interventions for now using only verbal comments ahead of the next Bank of Japan’s meeting at the end of April. BNY Mellon reminds that the quantitative easing conducted by the BOJ in February was much more effective than the previous intervention.

According to the economists, Japanese Ministry of Finance “has (sensibly) tried to keep a degree of unpredictability about its operations in order to preserve their effectiveness.”

So, the bank’s main scenario is more asset purchases on April 27 and positive near-term outlook for the greenback. USD/JPY may rise to 83 and 84 yen.

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UK trade deficit wider than expected

Britain’s trade deficit grew to £8.7 billion in February from revised £7.8 billion in January, despite the forecasted gap of £7.7 billion. The export slippage is caused mostly by decreasing trade volumes with non-EU countries (U.S., China and Russia).

According to recent surveys, Britain has just returned to a moderate economic growth after the threat of a recession blew over. However, a slowdown in Britain's main trading partner, the euro zone, could weigh on exporters' prospects.

The market, however, is reacting on the negative trade balance data oddly: cable climbed to a one-week high $1.5955.

Commerzbank: GBP/USD is rebounding near term from $1.5827 level (55-day MA). We expect the pair to find intraday resistance at $1.5935/65 and continue to view the market as having topped at $1.6062.

Resistance for the pair lies at $1.5937 (Apr. 11 maximum), $1.6062 (April maximim), and $1.6200 (psychological resistance), support – at $1.5850 (Apr. 11 minimum), $1.5724, and $5600 (lowest since March 12).

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Euro zone: Italian auction, Greece, weak data

EUR/USD reiterated from today's highs at $1.3145 affected by the latest news’ releases.

Italian government sold BOT of 4.884 billion euro meeting the targeted amount, though the yields were higher – not an entirely positive picture. Here are the details:

- 2.884 billion euro of 2015 BTP yield 3.89 % (from 2.76%) out of a targeted 2-3 billion euro;

- 2 billion euro of three-off-the run issues due in 2015, 2020, 2023. The off-the-run sale had been announced for an overall amount of between 1.0 billion and 2 billion euro. The overall bid-to-cover was 2.20.

In addition, Greek unemployment rate rose from 21.0% in December to 21.8% in January. Moreover, euro zone’s industrial production declined by 1.8% (y/y) in February.

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World Bank trimmed China’s growth forecast

The World Bank reduced forecast for China’s 2012 GBP growth from 8.4% to 8.2% (13-year minimum). According to the economists, there’s “potential for growth to be bumping along the bottom for longer”.

“We see cyclical weakness continuing, but that the prospects for a soft landing remain high,” said the specialists noting that Chinese authorities have enough resources to help bolster the economy if risks to the downside accelerate.

The main problems of Chinese economy are the decreased external demand for its goods and risks connected with the real estate market.

Note that the World Bank increased 2013 forecast for China from 8.3% to 8.6% expecting activity to rebound next year.

Official data on the nations Q1 economic growth is released on Friday, April 13. Consensus forecast is a gain of 8.4% down from 8.9% in the final 3 months of 2011.

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RBS: trading AUD/USD

Analysts at RBS recommend buying the Aussie vs. the U.S. dollar at the current levels, with a stop at $1.0210 at targeting at $1.0612.

Strategists see support at $1.0320 (recent lows), $1.0240 (61.8% retracement from a Dec. 15 low) and $1.0201 levels, and resistance – at $1.0496 (recent support, now resistance) and $1.0612 (23.6% retracement from a Dec. 15 low).

According to RBS analysts, the Australian dollar will be the best performing currency in April due to seasonal patterns. Specialists also point that a lot of negative news were priced into the AUD/USD, that’s why they advise to play on the dips now.

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Friday, April 13: economic news and outlook

China’s growth slowed down

The market has been expecting Chinese economy to slow down, but the actual data came even worse than the projections: the nation’s GDP added only 8.1% in Q1 vs. the forecast of 8.4% and down from 8.9% increase in the last 3 months of 2011. This is the slowest expansion in almost 3 years.

The data has naturally hit Australian dollar (remember Australia exports commodities to China?). Aussie weakened versus all of its major peers, the pair AUD/USD went down from this week’s maximum at $1.0451 reached today to the levels in the $1.0400 area.

Fed speakers

Fed Bank of New York President William C. Dudley claimed yesterday that it’s “too soon to conclude that we are out of the woods” and that the rates should be held at the minimal level until the end of 2014.

Ben Bernanke speaks later today amid the speculation that the Federal Reserve will conduct additional easing as the economic recovery isn’t going as smooth as the central bank thought it would.

American currency weakened versus the majority of its peers ahead of the CPI release later today: the pace of consumer prices growth is seen declining from 0.4% in February to 0.2% in March. Slowing inflation would give the Fed more room for another QE.

Preparing for additional stimulus from Japan

The greenback and the single currency are strengthening against Japanese yen for the third day as the market’s looking forward to more easing from the bank of Japan (though USD/JPY was affected by the weak Chinese data). Today the nation’s ministers will discuss the problem of deflation.

Asian stocks: Nikkei +1.2%; HK +1.6%; Shanghai +0.25%.

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UBS lowered forecasts for USD/CAD

Analysts at UBS think that though the Federal Reserve will start normalizing its policy the next year, the Bank of Canada will start moving in this direction earlier (the reasons – recent strength in Canada’s employment data and the fears about the housing price bubble).

The specialists think that such expectations aren’t prices in the exchange rates and expect the greenback to get under pressure versus its Canadian counterpart, so they lowered forecasts for USD/CAD from 1.0100 to 0.9900 in a month and from 1.0300 to 0.9800 in 3 months.

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Commerzbank: bearish view on euro

Technical analysts at Commerzbank stick to their bearish view on the prospects of the single currency versus the greenback.

The specialists underline that EUR/USD failed to break resistance at $1.3207 (the 55-day MA).

In their view, euro’s decline will resume if it breaks below support line at $1.3035. In this case euro will slide to $1.2974/54 (February minimum and 61.8%

Fibonacci retracement) and below that to $1.2624 (January minimum) and finally to $1.2000.

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Standard Chartered: forecasts for majors

Analysts at Standard Chartered updated ctheir currency forecasts from Q2, 2012.

The specialists are bullish on the greenback and negative on the single currency as teh euro zone's facing the treat of recession and will likely keep suffering from fiscal issues.

Included in the note is their euro exchange rate forecast call.

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RBS: trading updates for GBP/USD

Analysts at RBS remain long on British pound versus the greenback placing the target at $1.6033/72 (tweezer top formed in November) and stops at $1.5790. The strategy is to buy GBP/USD on the dips to $1.5850.

The specialists warn investors, however, that if sterling breaches support of $1.5790, they should switch to short positions citing a “head and shoulders” mode watching for $1.5666 and $1.5585.

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Comments on EUR/USD

The single currency is trading today on the downside versus the greenback as it was unable to overcome resistance of 50-day MA.

The pair EUR/USD keeps trading in range between $1.30 and $1.35 within which it has been squeezed since January. Analysts at Commerzbank believe that euro will be able to break out of this range only in case something big happens such as QE3 or the escalation of the debt crisis in Europe.

The situation in the euro area’s still uncertain: while Italy survived this week’s debt auctions well enough, Spanish 10-year yields remain dangerously close to 6%. The reaction to the news that Spain banks borrowed 316.3 billion euro from ECB in March up from 169.8 billion euro in February was, however, rather muted as EUR/USD’s still above $1.3100.

The European currency was dragged lower mostly by the talk that the ECB may restart its government bond purchase program. On the one hand, such action would ease the stress at bond market; on the other, investors may take such news as a very bad sign.

All in all, from the fundamental point of view, the market’s attention which has returned to Europe in the recent weeks will be staying here for now.

EUR/USD is now trading between 50-day MA on the upside and 100-day MA on the downside.