Comments and forex-analytics from FBS

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Commerzbank: EUR/USD technical levels

Technical analysts at Commerzbank claim that support for the single currency versus the greenback lies at $1.2809 (78.6% Fibonacci retracement of euro’s advance from January minimum to February maximum). In the longer term, the main downside target remains at $1.2624 (January 16 minimum, 2012 minimum).

As for resistance, the specialists name $1.2911 (May 9 minimum) and $1.2954 (61.8% Fibonacci retracement of the same move). In their view, as long as EUR/USD is trading below $1.3026/33 (minimums of early February and early April) and $1.3055 (50% Fibonacci retracement).

Chart. Daily EUR/USD

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Sell EUR/USD on the recovery

The single currency recovered from almost a 4-month minimum in the $1.2810 area to the daily high at $1.2869.

Germany surprised analysts posting 0.5% q/q growth in Q1 – 5 times more than the market had expected. As a result, the concerns about the euro zone’s crisis and its impact on the region’s economic growth have a bit subsided. Note that demand for US dollar is also lower due to the Fed’s April 25 meeting minutes release tomorrow – the Chairman Ben Bernanke said that day that he’s prepared to “do more” to boost the economic recovery and underlined that inflation remains close to target.

The medium-term forecasts for euro are still quite negative. As a result, it looks like a chance to sell on rallies. We see that Italian GDP figures (-0.8% q/q vs. -0.7% expected) have already made EUR/USD pull back a little lower.

Resistance for the pair is situated at $1.2870 (today’s highs) and $1.2935 (May 14 maximum), while support is at $1.2807 (January 17 maximum, $1.2733 (January 18 minimum) and $1.2700.

Chart. Daily EUR/USD

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GBP enjoys demand vs. EUR and USD

British pound steadily strengthens against the euro (12% growth since June 2011, new surge in April 2012) and the greenback (5.5% growth since January 2012). What are the reasons for the sterling’s strong performance versus its major peers?

Pound’s status of a “safe haven” tends to attract investors on the back of a total economic and political instability in the euro zone. What is more, speculations about a further QE started to fade after the inflation exceeded the expectations (CPI in March reached 3.5% after previous print 3.4%; annual PPI output in April exceeded estimates of 2.9 % by coming in at 3.3%). According to the BoE governor King, the inflation is still too high.

Moreover, the UK economy attracts foreign investors as the world’s the second largest market for M&A. According to most analysts, M&A inflows contribute to the sterling’s growth and increase the pounds prospects in a longer term. This year foreign investors have bought the biggest amount of the UK assets since 2008 ($32.6 billion-worth).

However, a note from Deutsche Bank warns that the strong pound is already affecting on the poor UK economy which is in a recession itself. For now sterling's crearly appreciating, though it's attactive mainly due to the problems elsewhere. The situation may change quickly enough, so use it while it's still here.

Chart. Daily EUR/GBP

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RBS: recommendations for AUD/USD

Technical analysts at RBS claim that AUD/USD recovered enough and now one may once again go short. In their view, the pair is capped by the 5-day MA which has been limiting the bulls since the beginning of this month.

The banks recommends selling Australian dollar versus its US counterpart at the current levels targeting $0.9860 and then $0.9667 and stopping today at 1.0113 (10-day MA).

According to the specialists, support levels are situated at $0.9860 (December 15 minimum), $0.9715 (2 minimums posted in 2011) and $0.9404. Resistance levels for AUD/USD lie at $1.0095, $1.0140, $1.0436 (the inverse head and shoulders pattern would trigger further upside from here) and $1.0496/1.0509.

Chart. Daily AUD/USD

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USD/JPY: technical analysis

After sharp decline at the end of April USD/JPY consolidated during the past week between 80.50 and 79.50. US dollar is currently trading above 100-day MA in the 79.76 area which is now acting as support.

One may see on H4 chart that US currency approached resistance provided by the descending Ichimoku Cloud which has already stopped the bulls on their way up several times. On the daily chart the pair is also not far from Kumo which is hanging above it.

From the fundamental point of view, continuing risk aversion will keep capping the greenback, while the expectations of more actions of the BOJ, on the other hand, will tend to limit yen’s appreciation. It’s possible to expect that the sideways trade will be in place until the end of the week with USD/JPY moving slowly but surely to the resistance line which is going down from March maximums.

At the same time the main downtrend is still in place: although the speed of decline reduced, dollar’s slide below support at 79.67 (yesterday’s minimum) and 79.42 (May 9 minimum) would provoke the decline to 79.15 (61.8% Fibonacci retracement of the rate’s advance from February to March). The most important support lies at 78.30 (previous resistance) – the prices will likely recoil up from this level.

US currency will be able to keep rising if it manages to overcome yesterday maximums (80.18) and get above Kijun-sen on the daily chart (80.65). In this case USD/JPY will climb to the previous resistance in the 81.80 area (early March maximums, April 20 maximum). Note that the bulls won’t be able to feel at complete ease until the prices remain below or inside the daily Cloud, so the key longer-term resistance is situated in the 82.40/50 zone.

Chart. Daily USD/JPY

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NZD/USD: technical comments

NZD/USD keeps trading on a downside since the end of April and reached a four-month low.

According to Westpac analysts, on the back of the global risk aversion NZD/USD will eventually reach $0.7600. On Monday the cross lost 0.90% on the Greek concerns, even though the Europe’s problems do not directly affect the kiwi.

On Monday statistics revealed that core retail sales in New Zealand declined in March by 2.5% against forecasted 0.3% growth and 2.3% growth in February.

The cross has breached the $0.8060 support (200-day MA), and then dropped to $0.7750. The nearest support for NZD/USD lies at $0.7740 (21-week lower Bollinger), $0.7700 (78.6% retracement from Dec.2011 - Feb.2012 growth) and $0.7620, while resistance – at $ 0.7813, $0.7825 (May 14 maximum), 0.7887 (8 May maximum).

Chart. Daily NZD/USD

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Euro zone avoided recession… for now

Euro area managed to escape recession in Q1 with frat GDP reading (q/q), while the economists were looking forward to 0.2% contraction.

Germany surprised analysts posting 0.5% q/q growth in Q1 – 5 times more than the market had expected. France showed flat results, while Italian economy contracted by 0.8% in the first 3 months of the year vs. projected decline of 0.7%. Even the Netherlands regarded as strong economy experienced economic contraction of 0.2%.

Societe Generale: national GDP releases created the picture of an increasingly divergent euro area with the contrast between the northern and southern economies growing ever starker.

Capital Economics: “The region remains heavily reliant on Germany. Policymakers’ talk of growth seems unlikely to amount to anything in the foreseeable future. The danger of a euro zone break-up is as great as ever.”

ING Bank: “Our base case scenario is still for a gradual return to modestly positive euro zone growth in the second half of this year. But a further escalation of the debt crisis, let alone a Greek euro exit, could well derail the envisaged recovery.”

IHS Global Insight: “There seems a compelling case for the European Central Bank to cut interest rates from the current level of 1%. But we suspect that the bank will remain reluctant to do so.”

The European Commission expects euro zone’s GDP to decline by 0.3% in 2012 and then add 1% the next year.”

Photo by EPA/BGNES

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May 16: economic background

As many have feared, Greece political parties (New Democracy, PASOK, Democratic Left and SYRIZA) failed to form coalition government. Today Greek leaders will try to reach consensus on an interim government which will schedule new elections (around June10).

French President Francois Hollande and German Chancellor Angela Merkel promised yesterday to pool efforts to promote economic growth in the region, although they are known for differences in views on how to overcome the European crisis (Merkel insists on austerity, while Hollande – on growth). Merkel seemed to tone down the austerity rhetoric that made her extremely unpopular these days. Moreover, leaders of the euro zone's two largest economies expressed their wish for Greece to stay in the single currency union.

Risk aversion remains strong. EUR/USD tested the levels below $1.2700, commodity currencies opened in red. Yen weakened on poor machinery orders data. Asian stocks slumped by 2.3% (MSCI Asia Pacific Index). Kiwi is sold after disappointing dairy auction (important industry for New Zealand).

To watch today:

• Great Britain: A lot of important news for pound will be released. Claimant count payrolls in April may rise by 4.9K compared with 3.6K rise in March. The Governor of the Bank of England Mervyn King in his speech is expected to signal that interest rates will not rise from their record low until late 2013 at the earliest, as the UK's growth disappoints. The key inflation report may leave the door open to the possibility of more QE, either explicitly or by forecasting that inflation will probably fall below the 2% target within 2-3 years without a change in policy. According to analysts at Citi, such a forecast could prepare the ground for the MPC to resume QE (bond purchases) in coming months if activity data and the European monetary union crisis worsen, or if the inflation worries diminish.

• U.S.: The release of the important housing market data is scheduled on Wednesday. According to forecasts, annualized number of building permits may post 0.73M in April after 0.75M in March. Number of housing starts is expected to have increased from 0.65M in March to 0.69M last month. Industrial production in April may have grown by 0.6% after remaining unchanged in March. FOMC Meeting Minutes probably won’t be a game changer, though the Fed’s Chairman Ben Bernanke said that day that he’s prepared to “do more” to boost the economic recovery and underlined that inflation remains close to target.

• Euro zone: The speech of ECB President Draghi will be scrutinized by the investors, aiming to forecast the euro zone’s future. Germany holds a 10-year bond auction.

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Analysts about EUR: food for thought

The single currency keeps descending versus the greenback: EUR/USD is trading now right below $1.2700. The tension level in the region remains high (new normality for the euro area): Greece drives to new elections, Spanish yields keep rising, while Italian banks have been downgraded. How do the experts estimate the current situation?

Shelter Harbor Capital: if you expect Germany to let others exit the euro zone and keep the euro, so that it becomes a closer proxy for Germany itself, then it should be trading higher. But if Germany bails out its weaker neighbors, he thinks the euro should be lower.

Wells Fargo: “For the moment, Greek headlines rule the day in the FX markets and it appears that there is scope for further near-term losses in the euro and most foreign currencies.”

Barclays Capital: “To arrest market fears, proactive measures are needed. Unfortunately, they seem nowhere in sight. This suggests that risky assets are likely to trade erratically at best, with a bias to underperform.”

Citigroup: the most likely case now involves Greece leaving the euro within the next 18 months, though “policy action in Europe will help limit the fallout.”

Image from praguepost.com

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Trading alert: German and French auctions

09:30 GMT – Germany will offer 5 billion euro of benchmark 10-year bonds (1.75%, July 2022).

09:00 GMT – France will offer 7-8 billion euro of 2-year papers (0.75%, September 2014), 5-year bonds (1.75%, February 2017), 3-year (3.50%, April 2015) and 4-year (3.25%, April 2016) OAT.

09:50 GMT – France will offer 800 million - 1.2 billion euro of euro zone inflation-indexed bonds (1.10% July 2022 OATei, 2.10% July 2023 OATei and 1.85% July 2027 OATei).

Photo by Simon Dawson/Bloomberg

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USD/CAD broke resistance, but may still be capped

The greenback closed yesterday above 200-day MA versus its Canadian counterpart rising to the maximum since the end of January at 1.0130.

USD/CAD is still rather closely correlated with global risk sentiment. Taking into account continuing uncertainty in the euro area, the pair’s advance looks natural.

At the same time, analysts at UBS still favor loonie among other commodity currencies citing “less dovish bent of the Bank of Canada evident in last month's policy statement”. Scotiabank note that Canada’s economy remains relatively strong: “business investment surveys continue to signal strong capital investment intentions in the year ahead, supported by heightened competitive pressures, solid corporate balance sheets and favorable financing conditions.” The specialists expect USD/CAD to drift down to 0.97 in a year from now.

What interests us now, is technical picture. According to MIG Bank, if the bulls by chance manage to overcome resistance at $1.0160 (January 20, 23 maximums), USD/CAD will rise to $1.0250 (middle of the triangle seen in autumn) and go up towards 1.0424 (December 14 maximum). However, we already see a kind of pullback on the H1 chart. Expect support at 1.0065 (May 9 maximum), 1.0040 (200-hour MA), 1.0015 (support line) and around 1.0000.

All in all, if USD/CAD manages to close the day above 200-day MA, the outlook may be regarded as significantly improved. Don’t miss US data releases later today.

Chart. H1 USD/CAD

Chart. Daily USD/CAD

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Ireland: another threat for EUR?

On May 31 Ireland holds a referendum on the Europe’s fiscal treaty which presumes automatic sanctions in case the European nation’s budget deficit exceeds 3% of GDP. The opinion polls still show the “yes” side ahead; however, the results of Greek and French elections, where people rejected the pro-austerity politicians, make the Irish vote questionable.

Ireland’s government has already introduced 24 billion euros ($31 billion) of budget cuts since the economy went into a recession in 2008, and the austerity has already become a pain in the neck for the voters.

Irish business leaders believe the “no” vote will force the country to leave the euro zone and create a new wave of panic on currency markets. А «yes » vote is very important to guarantee stability and business confidence.

Photo: AP

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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: $1.2625, $1.2700, $1.2750, $1.2800, $1.2850, $1.2900, $1.2925, $1.2930, $1.2950 and $1.3000;

GBP/USD: $1.6050 and $1.6100;

AUD/USD: $0.9850, $0.9950, $1.0000 (large), $1.0020 and $1.0100;

USD/JPY: 79.50, 79.55, 79.60, 79.75, 79.80, 80.00 (large), and 80.50.

Photo from Reuters

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RBS: don’t rush into EUR/USD shorts

Analyst at RBS recommend investors (especially those who currently don’t have position at this market) to take a “wait & see” approach trading EUR/USD.

In their view, it’s now too late to rush in the current bearish trend – better to wait until euro tests $1.2624 (2012 minimum, target from the “head and shoulders” pattern) and see whether it holds or gets broken. If the support is breached, the single currency will be vulnerable for a decline to $1.2329 (2008 minimum).

As for resistance, it’ situated, according to the bank, at $1.2774, $1.2933, $1.3004 (2 previous monthly lows and the pattern break down area) and $1.3092.

Chart. Daily EUR/USD

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BoA: pressure on GBP may strengthen

Analysts at Bank of America believe that pound’s decline versus the greenback can make futures traders reduce their bullish bets on sterling.

Data from Commodity Futures Trading Commission (CFTC) shows that GBP/USD longs increased in the week to May 8 to 25K contracts, the maximal level in a year. Now the pair slumped to the levels around $1.5920, and the speculators will have to trim their bullish bets. As a result, negative pressure on British currency will increase driving it down to 200-day MA which now finds itself 100 pips below the current rate.

“People have gotten longer and longer. That just makes it vulnerable,” warned the specialists.

Chart. Daily GBP/USD

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Hard job for the Bank of England

On Wednesday sterling fell to a four-week low after the BoE inflation report showed the prospects for UK GDP growth are “unusually uncertain”.

According to BoE, the economy may grow by about 0.8% this year vs. previously expected 1.2%. The inflation is likely to stay above the 2% target at least in the next year. Weak growth and high inflation make the choice of monetary instruments difficult for the MPC.

The euro zone’s debt crisis threatens expansion despite the loose monetary policy is supporting the economy. The BoE governor Mervyn King said the euro area “is tearing itself apart without any obvious solution”. According to King, if the situation in Europe deteriorates, the bank will "react in many ways" (both QE and asset purchases remain on the table).

Morgan Stanley: “The increased magnitude of the euro crisis will likely hit the pound via economic second round effects. While the pound should still maintain its medium-term advantage against the euro, there is increasing evidence that the pound has topped against the US dollar.”

BoE Inflation Report (May 2012)

Photo: Guardian

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French & German auctions: yeilds declined

German bond yields fell to 1.47% from previous 1.77% at today’s auction as the Greek problems increase demand on safe assets. However, Germany fell short of the targeted amount (4.1 billion euro vs. expected 5 billion).

On a French bond auction yields eased to 1.72% from 1.83% a month ago, showing the markets feel increasingly comfortable with growth-oriented policy of Francois Hollande. France managed to sell 7.9 billion euros out of 7-8 billion expected.

On Wednesday EUR/USD has reached a four-month low. However, the cross is trading in the green ahead of the FOMC meeting minutes. Resistance for EUR/USD lies at $1.2747 (May 16 maximum), $1.2800, $1.2822 (Lower Bollinger) and $1.2870 (May 15 maximum), while support – at $1.2648 (Jan.17 minimum), $1.2624 (Jan.13 minimum), $1.2600 and $1.2588 (Aug. 2010 minimum).

Chart. Daily EUR/USD

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May 17: economic background

According to FOMC meeting minutes, released on Wednesday, several Fed policymakers said the additional QE may be needed if the economy falls back. In April the central bank said interest rates will stay near zero till late 2014 in order to support the economy. Analysts at CBA claim that the greenback may now “start to stabilize rather than continue to rocket higher”.

In Greece Panagiotis Pikrammenos, head of Greece’s Council of State, the highest administrative court, was sworn in as head of the caretaker administration. The date of new elections will be announced after the parliament formed according to May 6 election results is sworn in today and then dissolved.

EUR/USD recovered from the 4-month minimum at $1.2680 hit yesterday to the levels around $1.2745. Risk sentiment was slightly better this morning. Australian and New Zealand’s dollars edged higher versus its US counterpart.

Japan’s preliminary GDP expanded by 1.0% in Q1 close to forecasts, following a flat reading in Q4. Figures reveal that domestic consumption and government outlays for reconstruction are boosting the economy. Gradual growth is expected to continue; however, the further deterioration of the situation in Europe may affect the export-dependent Japan.

Also today:

• Euro zone: Banks in France, Germany and Switzerland will be closed because of the national holidays. Spain holds a 10-year bond auction

.• US: The number of unemployment claims fixed last week may grow by 368K vs. the previous print 367K. Philly Fed Manufacturing Index is forecasted to rise to 10.6 in May. Philadelphia region manufacturers' index declined more than expected in April reaching 8.5 from 12.5 in March, demonstrating the biggest drop in 6 months. However, most analysts believe that improved consumer spending will provide further growth to the manufacturing sector.

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What to expect from the next BOJ meeting?

It seems that the USD/JPY market has no idea where to go – upwards or downwards? The central bank may be hoping to refrain from easing this month in order to have enough firepower in case the euro area goes really bad. Such assumption looks sensible due to the positive data released today: Japan’s preliminary GDP expanded by 1.0% in Q1 after staying unchanged in the final 3 months of 2011.

Dai-ichi Life Research Institute underlines, however, that “the timing of further monetary easing would depend more on (global) financial market movements than on the real (Japanese) economy.” So, everything is about how Japanese monetary authorities estimate the European risks.

At the same time, with all the talk about further monetary stimulus a remarkable thing happened yesterday: the BOJ failed to meet its target for bond buying for the first time since the asset-buying program was launched in 2010. That means that the central bank’s powers aren’t infinite after all. If that happened again the BOJ will have to widen the range of securities which it’s buying under APP adding bonds with longer maturity.

So, next week we’ll likely hear more reassuring comments from the BOJ officials about the central bank’s readiness, but in reality monetary authorities will be careful. The key interest rate will stay unchanged at 0.1%. The BOJ may ease in July when it conducts a quarterly review of its economic and price projections as it may acknowledge that deflation threat is subsiding too slowly.

Chart. Daily USD/JPY

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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: $1.2790, $1.2800, $1.2850, $1.2900, $1.3000;

GBP/USD: $1.5850, $1.6100, $1.6200;

EUR/GBP: $0.8085, $0.8060, $0.8085;

USD/JPY: 79.50, 79.75;

USD/CHF: 0.9350;

AUD/USD: $1.0100.

Image from http://pakcricforum.com

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Commerzbank: bearish view on NZD/USD

Technical analysts at Commerzbank are bearish on New Zealand’s dollar versus its US counterpart.

The specialists note that NZD/USD is now hovering above support at $0.7607 (78.6% Fibonacci retracement of the pair’s advance from November to February). In their view, this support is likely to be breached soon and kiwi will start moving down targeting $0.7168 (200-week MA) and $0.7116 (2011 minimum) in the medium term.

According to the bank, resistance for New Zealand’s currency is situated in the $0.7774/0.7792 area (January 6 minimum, 61.8% Fibonacci retracement). The pair will find itself under bearish pressure as long as it’s trading below these levels.

Chart. Daily NZD/USD

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Spain: bond auction results

Spanish government has managed to sell 2.49 billion euro in bonds out of 1.5-2.5 billion euro target. Such figures may be regarded as an achievement in the current climate. The costs, however, turned out to be high enough. As you may see below, the yields increased in comparison with previous auctions.

- April 2016 bond: average yield 5.106% from previous 3.374%;

- July 2015 bond: average yield 4.876% from previous 4.037%;

- January 2015 bond: average yield 4.375% from previous 2.890%.

Photo: EPA/AP

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Barclays Capital: comments on AUD/USD

According to analysts at Barclays Capital, a combination of global and domestic factors pulls AUD/USD below parity. However, in a short term the Aussie may enjoy a rally on the back of the postponed Greek elections and the softening tone of EU pro-austerity leaders.

Specialists at Barclays Capital lowered their monthly forecast for AUD/USD from $1.0400 to $0.9600. They also cut their three-, six- and twelve-month forecasts to $0.9900, $1.0100 and $1.0200 respectively. Analysts believe the cross will get a yield-support after the middle of June.

According to technical specialists, the pair may touch its 1.5-year lows in the $0.9385/0.9655 area in the medium term. The cross is still trading below the 50-,100- and 200-day MAs and below the daily Ichimoku Cloud.

Chart. Daily AUD/USD

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ECB also started seeing the risks

As the tensions in Europe strengthened, even the European Central Bank dadmitted that the situation’s becoming too dangerous.

The ECB President Mario Draghi announced yesterday that it will temporarily stop lending to some Greek banks to limit its risk. Draghi said that until the banks in question sufficiently boosted their capital, the responsibility for lending to them will be shifted to the Greek central bank (within so-called Emergency Liquidity Assistance). Earlier ECB President acknowledged for the first time that Greece could leave the monetary union.

Greece’s four biggest banks are waiting for European Union’s approval to receive 18 billion euro of bonds issued by the HFSF (Hellenic financial stability fund) for their recapitalization.

Commerzbank: “With market tensions mounting and contagion effects running their course, the ECB might however not be left with much of a choice in the end as capital flight from periphery countries could even accelerate if the probability of a “Grexit” rises. Against this background, the recent EUR/USD rebound is unlikely to be more than a short gasp for air”.

Image from brecorder.com

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Analysts: outlook for GBP

Analysts at Barclays Capital expect EUR/GBP to continue the downward movement. Even though the sterling was hurt by the dovish inflation report on Wednesday, the pressure on the common currency these days is incomparably higher. Analysts at Barclays Capital and ING forecast the EUR/GBP to decline to 0.76 and 0.75 respectively in a 12-month period.

However, analysts at HSBC don’t believe the sterling is so impregnable. Even in calm market conditions most analysts expected sterling to stay firm against the euro, but to weaken against the greenback. If the risk aversion grows further, investors will turn to the greenback – the real safe haven these days. Great Britain has already slipped into recession; in case if UK data worsens (either slowdown in growth or dip in inflation), the sterling will collapse on a possibility of a further QE. Strategists at RBS forecast GBP/USD to be at $1.57 by the middle of the year.

Watch out for important UK data: public sector net borrowings and inflation letter (May 22) and the MPC meeting minutes (May 23).

Chart. Daily EUR/GBP

Chart. Daily GBP/USD