Comments and forex-analytics from FBS

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CFTC trader positioning data

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

• Net euro shorts rose from 101K to 118K;

• Net sterling shorts down from 19K to 13K;

• Net yen shorts down from 66K to 58K;

• Net Swiss franc shorts up from 10K to 14K;

• Net loonie longs up from 28K to 38K;

• Net Aussie longs up from 39K to 48K;

• Net kiwi longs up from 7K to 12K;

• Net US dollar longs down by 4% to $21.65 billion.

Investors continued to make big bets that the single currency, Japanese yen and Swiss franc would weaken against their US counterpart. Commodity currencies such as the Australian and Canadian dollars continued to be favored versus US dollar.

Speculative investors slightly pared their anti-yen bets a little more than a week before the Bank of Japan's upcoming meeting. Anti-yen fervor increased steadily in recent weeks on rising expectations the BOJ would announce new easing measures on April 27.

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.

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Banks' forecasts for FX majors

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Key options expiring today

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).

Here are the key options expiring today:

EUR/USD: $1.2900, $1.3100, $1.3200;

GBP/USD: $1.5910, $1.6000, $1.6200;

EUR/GBP: 0.8175, 0.8200;

USD/JPY: 80.00 (large) 81.00, 81.50 and 82.15

EUR/JPY: 105.00 (large) and 106.00;

AUD/USD: $1.0300, $1.0400.

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Waiting for the BOJ: USD/JPY prospects

Economists are almost sure that the Bank of Japan will deliver additional monetary stimulus at its meeting on April 27.

Morgan Stanley: there’s “near 100% probability” of more easing this month.

JPMorgan Chase: “Expectations that the BOJ will ease policy further at this week’s meeting may keep the yen weaker over the next few days. We expect the central bank to add 5 trillion yen to purchases of long-term government bonds.”

Mizuho Securities and SMBC Nikko Securities: there will be more easing.

CMC Markets: the recent rally in USD/JPY will continue for the rest of the year as a result of the Federal Reserve's current policy to avoid further monetary easing. “There is a very good correlation between 10-year US bond yields and USD/JPY, because when yields go up, the dollar goes up. With the Fed deciding not to continue with QE for the time being, QE will only happen if the US economy starts to fall off a cliff.”

UBS: “While yen bears welcome an expansion of the BoJ's regular outright JGB buying operations or a doubling of the inflation goal to 2%, the most the BoJ may be willing to concede at this juncture would be a 10 trillion yen increase in the APP. The gradual Fed-BoJ policy divergence should serve to keep risks tilted towards a move higher towards 85 USD/JPY on a 3-month horizon. While the Fed will be in no rush to categorically rule out QE3, we maintain the case for further easing is less convincing in the US than Japan.”

BNP Paribas: “A modest increase in the asset purchase target being announced next Friday, in the order of 5 trillion yen, looks to be discounted. As such, more than this may be required to see the USD/JPY rally extend. That said, any decision to increase the maturity of JGBs purchases beyond the current 1-2 years could also help support USDJPY.”

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Netherlands' budget debate: to cut or not to cut?

The tensions in Europe keep mounting: now we've got negative news from the Netherlands. The nation's political authorities didn’t manage to come to an agreement on budget cuts, making elections almost unavoidable. Diederik Samsom, head of the Labour Party, said that the elections will take place in September- October 2012.

Centre-right Prime Minister Mark Rutte said on Saturday the negotiations broke down because Geert Wilders, the leader of the Party for Freedom, refused to agree to 14-16 billion euros of budget cuts indispensable to eliminate the excessive budget deficit. Wilders is strongly against the budget cuts in welfare, health and unemployment benefits.

The negotiations between the political parties started after the Dutch economy entered the recession this year. According to forecasts, by the end of 2012 the Dutch budget deficit will increase to 4.6% compared with the 3.0% ceiling set by the ECB.

The uncertainty over budget cuts and reforms, and the time it takes to organise elections, may lead to higher interest rates and higher yields on Dutch government bonds.

If the Netherlands does not cut spending, it is likely to lose its coveted triple-A credit rating, leading to higher borrowing costs. The country may step into a lingering political crisis, hindering the euro zone’s economic rebound.

On Monday Dutch government holds an emergency meeting.

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RBS: comments on GBP/USD

Analysts at RBS claim that there’s less upside for GBP/USD as Britain and the United States have very similar economies and the relative out-performance of the US economy may push GBP/USD lower over the short-term.

At the same time, the specialists don’t see the potential for significant declines as the Federal Reserve is still a long way from raising interest rates. In addition, there will be more concerns about US fiscal policy later this year and into 2013.

“The policy mix suggests that most of any GBP/USD declines that are seen over the coming months are likely to be given back into 2013,” the bank says.

There’s significant resistance at $1.6167 (2011 maximum), while support is found at $1.5800/5900.

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April 24: important economic releases

At the beginning of today’s trade all eyes were for Australia: the nation’s annual inflation was at 1.6% in Q1. This is the slowest pace of CPI growth since 2009. Aussie declined versus the greenback as the market strengthened in thought that the Reserve Bank of Australia will cut its benchmark rate on Tuesday, May 1. On April 3 central bank Governor Glenn Stevens signaled he may end a 3-month pause in interest-rate cuts as soon as next month if weaker-than-forecast growth slows inflation.

Data to watch today:

• Great Britain: Public Sector Net Borrowing in March is forecasted to show£15.6 billion budget deficit vs. £12.9 billion deficit in February.

• Canada: Canada’s Core Retail Sales in February are expected to increase by 0.8%. In January the report reflected a 0.5% decline. The BoC Governor Mark Carney in his speech may give a hint on a more hawkish monetary policy: the central bank could raise interest rates from a record 1% low sooner than expected.

• U.S.: The current expectations are that the April Consumer Confidence index may reach 70.1. New Home Sales in March may increase by 321K vs. 313K in February. However, if the number of new home sales will fall, it may further indicate a slowdown in the U.S real estate market. U.S. 2-year notes auction is scheduled.

• Euro zone: Spanish 3- and 6-month T-bill auction; Italian bond (CTZ, BTPei) auction.

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Yen’s strengthening as a safe haven

US dollar has been declining versus Japanese yen since the beginning of this week on the concerns about the battle for leadership in France and the Netherlands and its potential negative impact on the efforts to resolve the region’s debt crisis.

Analysts at Rochford Capital don’t think that yen’s safe-haven status will be steadily undermined because of the Bank of Japan’s very loose monetary policy (the BOJ is expected to announce more QE on Friday after expanding bond purchases by 10 trillion yen ($123.6 billion) and set ting a 1 percent inflation goal).

This week we’ll here from the United States first: the Fed will announce tomorrow the results of 2-day FOMC meeting (monetary policy statement, projections for growth, unemployment and inflation). Strategists at Bank of America Merrill Lynch see risks that economic and rate forecasts will be considered hawkish that is positive for the greenback.

USD/JPY tested today 4-day minimum of 80.85.

IFR Markets: “Despite the push down, Tokyo players still look to be better buyers on dips, especially sub-81.00. Granted, more stops loom below, especially sub-80.80 but a move to this level could be onerous barring more legs down in the JPY crosses.”

Support levels are at 80.60 and 80.30 yen.

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John Taylor: outlook for USD, EUR and JPY

John Taylor, the head of currency hedge fund FX Concepts, expect US dollar to strengthen versus the single currency in the second quarter. The specialist says that “Europe’s going to be in a recession and they’re going to have to print more money and be looser, and the U.S. is going to have a stronger economy than them by quite a bit.”

As for USD/JPY, Taylor thinks that the pair may weaken in the next 2-3 months as prospects for further easing from the Federal Reserve damp investor demand for the greenback: “If we do have a crisis in Europe and a little recession scare in the U.S., that might drive money back to the yen and it’ll be stronger for a couple of months before it weakens”. According to Taylor, if the Fed increased stimulus in the second half of the year, the greenback would also drop against euro.

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Deutsche Bank: FX trade becomes more volatile

According to analysts at Deutsche bank, the trade on the FX market will soon become more volatile: the time of the range-bound markets is coming to an end.

Lately, currency crosses have been trading sideways despite the considerable political and economic changes. However, as history confirms, such range-bound trading periods usually don’t last long. According to Deutsche bank strategists, central banks prepare to intervene into the game (for example, Bank of Canada seems to become more hawkish, while Reserve Bank of Australia – dovish). Emerging markets will also follow a pattern: summer months tend to bring above-average return on investments.

Currency strategists recommend going short on the euro, the greenback and the yen vs. the sterling, the loonie and the emerging currencies, such as Mexican peso, South Korean won and South African rand.

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Commerzbank: comments on GBP/USD

British pound is strengthening versus the greenback for the 7th day in a row. It rose from $1.5820 to today’s maximum in the $1.6157 area.

The bulls got even more active after the release of UK public sector net borrowing which rose from 9.9 billion pounds in February to 15.9 billion in March. The nation’s net debt reaches 66% of GDP, the highest level since the records began.

Technical analysts at Commerzbank note that GBP/USD is facing resistance at $1.6165 (October 2011 maximum and 61.8% Fibonacci retracement of the decline in 2011 and 2012). In their view, sterling will recoil down from this level to support at $1.5984, $1.5874 and $1.5843 (200-day MA). If the pair managed to rise above $1.6167, it will head to $1.6425 (78.6% retracement of the move mentioned above).

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EUR/USD: little reaction to debt auctions

Although the market had been eyeing results of the European bond auctions, we didn’t see much of a reaction to their results.

Spain sold 1.93 billion euro of 3- and 6-month bills. The yield on 3-month bills rose from 0.381% to 0.634%. At the same time, demand exceeded supply 7.6 times versus a bid-to-cover ratio of 3.5 in March. The 6-month yield rose from 0.84% to 1.58%, while the bid-to-cover fell from 5.6 to 3.3.

The Netherlands – one of the few European economies still rated AAA – sold 1.995 billion euro of 2- and 25-year government bonds, roughly in the middle of its target range, a day after Prime Minister Mark Rutte resigned in a crisis over budget cuts.

EUR/USD is little changed on the day. Resistance lies in the $1.3200/23 area. The pair remains trapped between 50-day MA on the upside and 100-day MA on the downside.

Bank of Tokyo-Mitsubishi: “There has been more chat about the resilience of the euro that's spooking some people out of playing it lower over the short-term, but there are some very significant risks ahead. As we move into May and June we could see further volatility and turmoil which we think will see the euro break below $1.30.”

Nomura Securities: “We expect euro/dollar to resume a weakening trend in coming weeks, with a break of $1.30 opening up a trading target of $1.25 within a 2-3 month horizon.”

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USD/CAD: economic news, technical comments

Canadian retail sales came worse than expected declining by 0.2% (m/m) in February, while the forecast was for the indicator to remain unchanged. Core retail sales rose 0.5% vs. +0.4% forecasted and up from January’s -0.8%.

The pair USD/CAD initially rose on the news, but then began retracing down the gains as Case-Shiller HPI which in is measuring change in the selling price of single-family homes in 20 metropolitan areas also turned out to be quite disappointing: the index contracted by 3.5%in February (y/y).

The greenback will gain positive momentum if it manages to rise above 0.9921/23 (100-hour MA and 38.2% Fibo retracement of the decline from yesterday’s high. Support lies at 0.9886 (today’s minimum), 0.9879 (April 19 minimum) and 0.9864 (April 17 minimum).

All in all, USD/CAD is still in range between 0.9840 and 1.0050 within which it has been trading since the end of January. There’s a chance that the pair will retest the bottom of the range, but it will likely soon start drifting to the upper border of the band. Of course, US currency should close the week above 0.9850.

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USD/JPY: trading recommendations

This week the meetings of the Fed (April 26) and the Bank of Japan (April 27) may influence the currency markets. Some analysts believe both central banks will adapt a relatively loose monetary policy to stimulate the economic growth.

However, strategists at Shelter Harbor Capita are convinced that the Fed is leading a much more hawkish policy than it pretends, pointing to recent statements by normally dovish officials.They recommend going long on the USD/JPY, entering the trade at 81.60, setting a stop at 81.20, and targeting a move to 83.00.

Analysts at UBS also advice to buy the USD/JPY on the dips, entering the trade at a current 80.00-85.00 range. They expect the pair to break the top of the range in the next three months. According to UBS analysts, the Japan's inflation in 2012 is likely to remain below the 1.0% target. Therefore, the BOJ has enough reasons to add a ¥5-10 trillion monetary stimulus on a meeting on Friday, April 27.

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April 25: main events to watch

Australian and New Zealand markets closed for Anzac holiday.

Risk sentiment is on due to the news that Apple profit almost doubled in Q1.

Nikkei +0.75%, other regional markets are almost flat.

EUR/USD is almost unchanged, USD/JPY edged higher.

Events to watch today:

• Euro zone: Allotment of ECB three-month long-term refinancing operation. Following the April ECB rate decision in which the rate wasn’t changed at 1% Mario Draghi will speak and may refer to ECB’s plan to calm the markets including implementing LTRO 3 or resuming the SMP. According to UBS analysts, in order to lower the fears circling the euro zone debt situation, ECB's officials are speaking about the likeliness of new SMP. However, Germany is strongly against such a measure or another LTRO, so the ECB may use the strategy of cutting the interest rates. In general, the UBS analysts expect the ECB to remain more dovish than the Fed in 2012.

• Great Britain: The Preliminary Q1 GDP is expected to grow by 0.1%. In the Q4 2011, the GDP contracted by 0.3%.

• U.S.: A bunch of important data is expected. The Federal Open Market Committee will hand down its monetary policy decision. Members have been slightly more positive on the economic outlook; however, it is still very much in the realm of “cautious optimism”. Any discussion about the prospect of more QE will be important. Core Durable Goods Orders (the de-facto gauge of business investment) are expected to increase by 0.6% in March vs. 1.8% rise in February. 5-year notes auction is scheduled.

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Bank of America: outlook for USD/JPY

According to analysts at Bank of America, the greenback will soon resume a bullish trend against the yen after a recent correction. USD/JPY declined 4% since Mid-March before gaining 1% since April 16.

In their view, the cross may go up to ¥ 84.82 or ¥ 85.45 after demonstrating ability to leap from a ¥80.28 low.

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Commerzbank: EUR/USD will decline

Technical analysts at Commerzbank note that the single currency’s facing key resistance versus the greenback in the $1.3300/12 area.

The bank expects EUR/USD to slide to $1.2974/54 (February minimum and 61.8% Fibonacci retracement). There will be some support at $1.3174/73 and $1.3045.

If the pair manages to overcome resistance, it will get chance to rise to $1.3487/1.3510 (February maximums).

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Analysts: outlook for GBP/USD

The British pound strengthened to a six-month high vs. the greenback before a release of GDP data on Wednesday.

According to Bloomberg survey, the preliminary GDP in Q1 gained 0.1% after shrinking 0.3% in Q4. The British economy is expected to avoid recession, reducing concerns that the additional monetary easing will be needed.

Moreover, the “dovish” MPC member Adam Posen stopped standing up for a new round of QE. The U.K. inflation unexpectedly accelerated in March for the first time in six months. Some specialists believe the BoE may stop its 325 billion pound QE program on May, 10.

GBP/USD keeps strengthening for 8 consecutive days. Today the pair trades in the $1.6159 area, facing a strong resistance at this level (a 61.8% retracement of Apr. 2011 – Jan. 2012 decline).

The EUR/GBP pair bounced away from the 19-month low at 0.8142 pounds that the cross reached yesterday. Mario Draghi’s speech pushes the common currency up.

According to analysts at Barclays Capital, EUR/GBP will decline to 0.7600 pounds in a year. They recommend selling the cross at 0.8190 pounds, targeting at 0.7800 and with a stop at 0.8270.

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Westpac: bearish on euro in the medium term

Analysts at Westpac Bank believe that the elections turmoil in the Netherlands, France and Greece will make the single currency breach its trading range to the downside and make it start to “unravel quietly, certainly through the first week of May.”

According to the bank, the current band EUR/USD is trapped in is “almost frustrating”. The specialists say that it seems that “here is a barrier, some sort of physical option structure in the market that's limiting downside through the $1.30 level.” However, euro shorts will mount and once the bears push the pair down through $1.31 and $1.30, downside momentum for EUR/USD will significantly increase. Westpac says that the possibility of euro’s slide to the levels around $1.25 in the second quarter is rather strong.

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GBP/USD down on UK recession

The Great-Britain has slid into a double-dip recession according to today’s GDP data release. The preliminary GDP in Q1 unexpectedly shrank 0.2% vs. a 0.1% gain expected and a 0.3% contraction in Q4. In the same tone, index of services also missed the expectations, rising 0.2% in Feb. vs. a 0.6% growth estimated.

“Abandoning deficit reduction measures would only make UK situation worse. Conditions are very tough and recovery is taking longer than had been envisaged”, George Osbourne said.

The Public Sector Net Borrowing, released yesterday, grew to 15.9 billion pounds in March vs. a 15.0 billion forecast and 9.9 billion in February. However, the U.K. inflation surprisingly accelerated in March for the first time in six months.

The GBP/USD cross fell on GDP data to $1.6086. The sterling had been rising for 8 consecutive days and reached $1.6163, the highest since Nov. 2011.

The sterling also weakens against its other counterparts. Analysts at Goldman Sachs recommend selling EUR/GBP at current levels with a stop at 0.8250 and targeting at 0.8150.

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USD/CAD: technical updates

US dollar keeps losing versus its Canadian counterpart. USD/CAD approached the lower border of the range between 0.9840 and 1.0050 within which it has been trading since the end of January.

The pair has tested today the levels below 0.9864 (April 17 minimum). If this support fails to contain the bearish pressure, US dollar will be heading down to 0.9800. Analysts at RBS think that USD/CAD’s fair value is situated at 0.93. However, for now American currency returned closely to the opening level, so we see something close to doji on the daily chart.

Analysts at Commerzbank say that if USD/CAD closes today below 0.9842, it will become vulnerable for a slide to 0.9786 (minimum of the middle of September) and then to 0.9726 (end of August low). For the outlook to improve US currency should go above 1.0052. It’s better to wait for the pair’s advance above this week's high of 0.9980 to start thinking about longs.

The Bank of Canada’s Governor Mark Carney said yesterday that “some modest removal of monetary stimulus may become appropriate; interest rates are exceptionally low, won't always be the case”. Such comments make investors expect the central bank to take a more hawkish approach and start removing stimulus which is positive for CAD.

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USD/CHF: technical comments

The greenback keeps trading within short-term downtrend versus its Swiss counterpart.

Ichimoku H4 chart hints at bearish outlook (Kijun-sen and Tenkan-sen are declining with the former lying above the latter). As a result, USD/CHF may decline to 0.9050, the lower line of the triangle formation. There may be some support for the pair in the 0.9080/70 zone (trend line supports, maximums of late March, early April).

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What to expect from FOMC?

Money market investors will look at the Federal Reserve's statement, forecasts and Fed Chairman Ben Bernanke's press conference on Wednesday to assess the prospects for the U.S. economy.

Most analysts don’t forecast any significant changes in monetary policy; however, Ben Bernanke is a well-known wild card. The Fed's fund rate is expected to be kept at 0.00%-0.25% at least until late-2014 and asset purchases program to remain steady at $600 billion. The “Operation Twist”, aimed to lower borrowing costs and to stimulate economic growth, is expiring in June. While the most economists expect the Fed to quit the program in June, there are some who say the program will be extended in June.

Goldman Sachs analysts believe the Fed will announce its decision on further QE today.

According to Nomura and Barclays Capital analysts, despite Bernanke’s insistence that QE3 remains on the table, the Fed will become more hawkish on the back of U.S. economic improvement.

However, the U.S. posted rather negative reports lately (manufacturing indices, housing market data), so the Fed Chairman Ben Bernanke may give a few more dovish comments on the U.S. and global economy. Most analysts expect the 2012 forecast for the unemployment rate to be revised down from the Fed's January estimate of 8.2% to 8.5%. According to Wells Fargo analysts, in 2012 GDP is expected to come in at 2.2% to 2.5%.

Today Core Durable Goods Orders (the de-facto gauge of business investment) fell by 1.1% in March vs. 1.8% rise in February.

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April 26: main economic events

• New Zealand: As expected, the Reserve Bank today left the Official Cash Rate (OCR) unchanged at 2.5% calling this level of the borrowing costs appropriate for the moment. The RBNZ Governor Alan Bollard claimed that “domestic economy is showing signs of recovery” noting though that “the global outlook remains of concern.” Bollard said that if kiwi remains strong with all things equal, “the Bank would need to reassess the outlook for monetary policy settings”.

Coming soon

• Euro zone: Italian T-bill auction. Demand for euro was limited on the back of political concerns which may derail the efforts to stem the region’s debt woes.

• U.S.:

- The Fed’s Chairman Ben Bernanke said yesterday that the central bank is prepared to “do more” if necessary to spur the economy, boosting demand for higher-yielding assets. The FOMC upgraded its forecasts for growth and unemployment this year while repeating their view that borrowing costs are likely to remain “exceptionally low” at least through late 2014.

- Unemployment Claims are forecasted to increase by 378K this week vs. 386K the previous week. U.S. Pending Home Sales in March may increase by 1.4% vs. a 0.5% decline in February. U.S. 7-year note auction is scheduled.

S&P500 was 1.4% up yesterday, the MSCI Asia Pacific Index of shares +0.3% today.

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USD/JPY: any trade ahead of the BOJ?

The greenback’s trading on the downside versus Japanese yen today as lower USD/CNY made traders selling US dollar versus all of its Asian peers.

In addition, USD/JPY also got under pressure due to the corporate flows ahead of the period of Japanese national holidays known as the Golden Week (Japanese Golden Week in 2012 is based on two separate holidays of 3 and 4 days. The first is from Saturday, April 28 through to Monday, April 30 and then Thursday, May 3 through to Sunday, May 6).

At the same time, the moves of the pair seem to be limited as the market awaits tomorrow’s decision of the Bank of Japan. Investors expect more easing from the BOJ. If the central bank does more QE, that should be negative for the yen. If it doesn’t – well, it better be ready to the renewed strength of its national currency, it’s as simple as that.

From the technical point of view, note yesterday’s doji candle on the daily chart. If US currency breaks above the short-term trend resistance line, one may go long. If it doesn’t, then USD/JPY may slide to the lower border of the channel in 80 yen area, though the potential decline will be limited by the hopes about the BOJ.