Comments and forex-analytics from FBS

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July 5: economy and currencies

AUD/USD fell from a 2-month high as the demand for risky assets is down. Asian stocks dropped amid signs of a global economic slowdown: the MSCI Asia Pacific Index (MXAP) of shares lost 0.5%. Moreover, a report showed today that the Australia’s trade deficit increased to 0.29B in May from 0.03B in April, but came out below forecasts.

EUR/USD is crawling in the $1.2525 area, 23.6% Fibonacci retracement from May decline. Italian Prime Minister Mario Monti told yesterday after a joint press conference with German Chancellor Angela Merkel that Italy’s deficit would rise from 1.3% predicted to 2% of GDP. German finance ministry revised German deficit forecast down from 1% to 0.5% “thanks to the favorable overall economic development”. Francois Hollande, the French president, announced tax increases of 7.2 billion euro in order to ease upward pressure on the country’s large debt burden. French government is counting only on 0.3% growth in 2012 compared with previous estimates of 0.7%.

USD/JPY rose to the highest level in more than a week before sliding below the day’s opening level as Asian shares declined.

Events to watch today:

Euro zone: Markets stand still ahead of the important news to come out. German factory orders are expected to increase by 0.1% in May after a 1.9% contraction. Spain and France holds a 10-year bond auction on Thursday, while the ECB is to announce its rate decision. Many analysts forecast the regulator to cut rates to 0.75% today. Yet, risk rally has tempered as traders feared Mario Draghi, president of the ECB, would again resist the pressure to act. Later in the day the ECB press conference will take place.

Great Britain: The house price index is to decline by 0.3% in June after a 0.5% growth. The BoE meeting is an important event of the day: will the regulator add stimulus? Markets expect the expansion of the asset purchase program to 375B. The official bank rate is to remain unchanged at 0.50%.

US: ADP non-farm employment may improve by 103K in June compared with a 133K change in May. The number of unemployment claims is to increase to 385K, what means that the labor market remains weak. ISM non-manufacturing PMI is expected to contract to 53.1 in June from 53.7.

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European agenda this month

On Monday, June 9, there’s a scheduled Eurogroup meeting within which Troika officials will conduct the first discussion on the mission’s ongoing inspection to Greece and try to develop an approach for the negotiation of the updated bailout agreement. According to the sources from Luxembourg, until the revised bailout agreement is signed, there will be no further disbursements from the ESM to Greece beyond the 1 billion euro that had been withheld from the May tranche.

In addition, the European Commission, the ECB and the IMF will discuss Greece’s bond maturity on August 20 which the nation won’t be able to pay unless it gets ESM funds. A month’s extension could be granted, although several European governments will likely object. Another item on the agenda will be Spanish and Cyprus requests for entry into the ESM.

Moreover, the Eurogroup may call an extraordinary meeting on July 20 to talk over the ongoing situations in Greece and Spain, reports say. That is when the Troika will receive its political instructions regarding its negotiating mandate and signal what kind of concessions European governments are ready to make. The new round of talks with the Greek side will begin on July 24.

Photo from thefinancepages.co.uk

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Nomura: bearish on EUR/GBP

Analysts at Nomura are bearish on EUR/GBP ahead of the ECB and BoE meetings. They recommend selling the pair at current levels, targeting at 0.7700 and with a stop at 0.8170.

According to specialists, both banks are likely to ease monetary policy on Thursday. In their view, the downside risk for GBP is rather limited as the British currency is no longer being sold off on QE announcements. The ECB meeting, on the contrary, is expected to be euro-negative: a larger-than-expected rate cut would be good for the currency at least in a short-term, but it is not likely. Moreover, Mario Draghi on a press-conference is not expected to hint on the new unconventional measures.

Chart. Daily EUR/GBP

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Commerzbank: technical levels for GBP/USD

The fundamental picture for GBP/USD seems negative as the market’s awaiting the Bank of England’s decision to announce additional asset purchased today.

However, technical analysts at Commerzbank think that sterling still has chance to retest resistance in the $1.5752/1.5786 area (200-day MA and 50% Fibo retracement) as long as the pair holds above support at $1.5544. Other support levels lie at $1.5408 (June 5 maximum) and $1.5269/33 (2012 minimums).

Chart. Daily GBP/USD

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RBC: technical comments for USD/CAD

Technical analysts at RBC underline that the greenback failed to overcome resistance at 1.0353 after last week’s EU summit revived the market's risk sentiment making loonie strengthen.

The specialists claim that all attention is fixed on 1.0119 (uptrend pivot, 200-day MA). If USD/CAD closes the week below this level, bearish trend will return and the pair will get vulnerable for a slide to 1.0050 (100-day MA) and 0.9955 (May 11 minimum). For the uptrend to continue US currency has to overcome 1.0341/62 (late June maximums) and 1.0425 (June 5, December 14 maximums).

Chart. Daily USD/CAD

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Spanish bond auction results

Spanish government managed to raise 3.001 billion euro in auctions out of the 2.5-3.5 billion euro target amount. Cover ratios were lower. Average yield on 10-year bonds rose to 6.430% from 6.044% during the previous auction, while shorter-term maturities have posted lower yields.

France also sold 10-year bonds with yields up from 2.46% to 2.53% and cover ratio down from 2.0 to 1.9.

EUR/USD is trading down by about 20 pips from the opening level. More volatile moves are expected later today with the ECB meeting and press conference on the agenda.

Photo Reuters

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Monetary easing at all fronts

The central banks have come up to the market’s expectations… and even more.

The Bank of England decided to increase the size of its Asset Purchase Program by 50 billion pound to 375 billion. As for the benchmark interest rate, it was left unchanged at 0.50%.

The ECB cut its benchmark interest rate to a record low of 0.75%. In addition, the central bank reduced deposit rate from 0.25% to 0%.

The People’s Bank of China cut benchmark lending rate by 31 bps to 6% and deposit rate by 25 bps to 3%.

We’re waiting for more info and comments.

GBP/USD initially soared to the levels above $1.5600, but then slid to the $1.5560 area. Sterling’s supported by yesterday’s minimum at $1.5554.

Chart. Daily GBP/USD

EUR/USD fell by 70 pips below today’s opening level. Support for the pair is situated at $1.2406 (last week’s minimum). Although the economists were expecting monetary easing in China in the foreseeable future, today’s move was definitely a surprise – good timing on the part of Chinese central bankers.

Chart. Daily EUR/USD

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Analysts: comments on EUR/USD

It seems that the yesterday’s ECB rate cut was just an excuse for a EUR/USD sell-off. Investors remain pessimistic even despite a short-term burst of optimism on the EU summit results: direct bank recapitalization is a positive measure, but it doesn’t resolve the initial problems. Recent data show the consequences of a debt crisis start trickling into the key euro zone’s countries and the overall economic situation remains gloomy.

Most analysts expect EUR/USD to continue a downward movement. For example, Societe Generale strategists expect EUR/USD to slide to $1.21 by the end of 2012 and to $1.19 by the end of Q1 2013. Analysts at Bank of America expect EUR/USD to slide to $1.2289 and lower in the nearest future. In their view, yesterday’s break below $1.2409 signaled a continuation of a long-term downtrend.

Specialists at Lloyds, however, recommend going long on EUR/USD at current levels, targeting at $1.3241 and with a stop at $1.2192. In their view, technical indicators show that the downtrend started in February weakens, paving the way for a strong reversal.

Resistance:

1.2409 (June 28 minimum);

1.2540 (July 4 maximum);

1.2527 (23.6% Fibonacci retracement from a Feb. - May decline);

1.2746 (38.2 % Fibonacci retracement and June 17 maximum)

Support:

1.2300 (psychological);

1.2289 (June minimum);

1.2150 (June 2010 low);

1.2054 (200-month MA)

Chart. Daily EUR/USD

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UBS: outlook for EUR/GBP

On Thursday EUR/GBP has dropped by 50 p.p. to the 0.7980 area after the ECB cut rates to 0.75%. On Friday EUR/GBP keeps moving on a downside.

Analysts at UBS expect EUR/GBP to decline to its lowest level in more than three years ina short-term. Specialists forecast the single currency to decline to 0.7781 pounds (61.8% Fibonacci retracement from a 2007-2008 growth in a 0.6536/0.9788 range). In their view, a new bearish leg began after the pair fell below the trend line that connects May and June minimums.

Chart. Daily EUR/GBP

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Waiting for the NFP

Several hours are left before the US NFP release due at 12:30 pm. GMT.

Previous: 69K;

Consensus: 97K.

Even though this is a big improvement, it still isn’t enough to sustain US economic recovery (Remember +200K jobs a month in winter? That was OK). The unemployment rate is expected to remain at 8.2%, staying above 8% for the longest period since 1948. So, if the forecasts are met, we’ll get evidence that US recovery is losing steam.

The ISM Manufacturing PMI, one of the leading indicators of overall economic momentum, fell below 50 in June for the first time in almost 3 years, signaling contraction in the industry. The ISM Services PMI slid from 53.7 to 52.1 last month vs. expected decline to 53.1. The number of jobless claims has been also quite high during the recent weeks (374-387K).

On the other hand, the ADP employment report provided a good surprise: non-farm private jobs rose by 176K vs. expected growth by 103K.

Impact on the greenback

If the actual figures are worse than forecasts, the odds of QE3 increase and USD will lose to its riskier counterparts. If actual figures surprise to the upside, the markets which are already prepared for the worst will cheer up, so we’ll be buying USD.

What do analysts expect?

RBS is among the optimists projecting a 110K gain in US jobs: “In June, the drag from construction (-28K in May) could have lessened noticeably, with the category perhaps showing no change in the period. Manufacturing, where payroll growth softened from about 40K per month in the first quarter to an average of 10K in April and May, could have risen by close to 10K again. We expect little change in retail as well, which could have inched up by 5K.” Rabobank is specking about +130K.

Nomura, on the contrary, is a bit pessimistic expecting only a 80K increase. “The unrelenting crisis in Europe and, more recently, uncertainty about US fiscal policy appear to be weighing on business plans for hiring. Though initial jobless claims remain in a pre-recession “normal” range there has been a gradual rise in the 4-week moving average that suggests a softer hiring trend has emerged. To be sure, job growth has slowed markedly since March to a 3-month average of 96K compared with an average 252K in the three months ended February.”

Chart from Forex Factory

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USD/CHF: fundamental & technical comments

On Friday USD/CHF trades above 0.9700 on the back of the economic data released in Switzerland and the US labor market data.

According to today’s report, Swiss CPI declined in line with forecasts by 0.3% in June after remaining flat in May, showing deflation. Specialists at Sarasin Bank say that the negative inflation supports the SNB's policy of maintaining a currency floor for EUR/CHF. Foreign currency reserves increased to a record high of 364.9B, serving as proof of the SNB’s interventions aimed at the depreciation of the national currency. USD is supported by the yesterday’s ADP non-farm employment data, raising hopes that the US labor market is rebounding (number of employed people increased by 176K in June compared with a 136K growth in May and a 103K forecast). Watch out for NFP release today at 12:30 GMT.

On H1 chart USD/CHF consolidated in narrow range between 0.9685 and 0.9715 after climbing by more than 100 pips yesterday. The pair has broken strong resistance in the 0.9600 zone (January maximums). The next resistance levels are at 0.9771 (June 1 maximum) and 0.9800. Support is found at 0.9660/75 – the pair may retreat here before going higher. If the greenback deeps below 0.9600, we’ll get a selling signal.

Chart. H1 USD/CHF

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Commerzbank: bearish on GBP/USD

Commerzbank analysts recommend selling GBP/USD on rallies to $1.5550 and adding at $1.5580.

The pair is expected to continue a bearish movement as long as it's trading below $1.5611 and slide to $1.5407 (June 8 minimum). If the pair breaks this level, a further decline to 1.5268 (June 1 minimum) and 1.5233 (2012 minimum) will become possible.

Chart. Daily GBP/USD

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Monday, July 9: events to watch

Japan: Current account is to increase to 0.42T in May from 0.29T in April. Core machinery orders, a leading indicator of private capital spending, is forecasted to decline by 2.4% in May compared with a 5.7% growth in April. Economists, however, see a forecasted drop as an exception, and expect machinery orders to remain in a moderate increasing trend, supported by reconstruction-related demand.

China: China's annual consumer price inflation in June likely eased to a 29-month low with producer prices falling for the fourth month in a row, giving the monetary authorities more room to stimulate the economy. CPI may increase by 2.4% in June compared with a 3.0% growth in May, while PPI - to fall by 2.0% compared with a 1.4% decline.

Europe: there’s a scheduled Eurogroup meeting. Troika officials will conduct the first discussion on the mission’s ongoing inspection to Greece and try to develop an approach for the negotiation of the updated bailout agreement. Another item on the agenda will be Spanish and Cyprus requests for entry into the ESM. 

Great Britain: The BoE’s Deputy Governor Paul Tucker will hold a speech where he will no doubt be defending himself from accusations by Bob Diamond that a call to the bank caused the "confusion" that led to the interbank lending rate to be fixed. Tucker hopes to become the next governor at the BoE when Mervyn King quits.

Canada: The BoC is to release its quarterly business outlook survey.

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Aspen Trading: recommendations for USD/CAD

Analysts at Aspen Trading Group recommend buying USD/CAD at C$1.0200, targeting at C$1.0600 and with a stop at C$0.9900.

According to specialists, the pair is expected to rally on a falling stock market and falling crude oil. Lately Canada has demonstrated weak manufacturing and labor market data. Most analysts don’t expect the BoC to raise interest rates in the nearest future on the back of recent disappointing data.

Chart. Daily USD/CAD

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Analysts: bullish on AUD/NZD

Strategists at RBC Capital Markets recommend going long on AUD/NZD at current levels, targeting at 1.33/1.35 in the next 1-3 month. On Monday AUD/NZD trades on the upside, remaining flat around 1.28. The pair trades above a 100-day MA and close to a 38.2% Fibonacci retracement from a May-June decline.

ANZ Research: The pair is to re-test the 1.30 level in coming months. A paring of Australian interest rate expectations against steady New Zealand rates should see support from the differential. Key NZ commodity prices such as those for dairy products appear set to weigh on the NZ dollar.

Resistance for AUD/NZD lies at 1.2815 (July 2 and June 20 maximums), 1.2832 (50-day MA) and 1.2855 (June 13 maximum and 50% Fibonacci retracement), while support - at 1.2760 (July 5 minimum) and at 1.2737 (July 2 minimum).

Chart. Daily AUD/NZD

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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: $1.2250, $1.2300, $1.2350, $1.2400, $1.2450, $1.2500

• GBP/USD: $1.5400, $1.5450, $1.5500

• USD/JPY: 80.00

• EUR/GBP: 0.8045

• AUD/USD: $1.0150, $1.0200, $1.0250, $1.0265

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EUR/USD down ahead of ECOFIN

EUR/USD touched its lowest level in two years ($1.2255) early Monday ahead of the EU finance ministers meeting, but then bounced to $1.2290.

A two-day Eurogroup/ECOFIN Finance Ministers meeting (July 9-10) attracts the market attention. The policymakers are to discuss the details around the decisions from the EU Summit: on the top of the agenda is the Spain's and Cyprus' rescue. According to the EU diplomats, EU ministers will grant Spain one additional year, until 2014, to meet the 3% deficit target. Moreover, the new Greek Finance Minister will report on efforts to put the country's reform program back on track.

The post EU-summit optimism has been rather short lived as yields on Spain’s and Italy’s 10-year bonds exceeded the pre-summit levels (above 7%) on Monday. The Sentix Investor Confidence index dropped to a 3-year low, coming out below the expectations and adding to investors’ concerns.

Image: Michael Shue

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European irony: French yields decline

There are always plenty of interesting things happening in the euro area these days. For example, the yields on 2-year French debt fell from the levels around 0.6% where they had been in the recent weeks to only 0.17% today.

As borrowing costs in troubled Spain and Italy went up again, France has become the main destination point of safe-haven flows. One may think that being a safe haven in Europe is Germany’s prerogative. However, German yields are already negative and if the situation continues this way, French ones will soon turn negative as well.

Source: Bloomberg

This means that despite the fact that France’s new president Francois Hollande is a socialist who favor spending, the nation is regarded as too big to fail. Spain and Italy, on the contrary, aren’t enjoying investors’ confidence no matter how much effort they show to reign in their fiscal problems.

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Danske Bank: bullish on AUD/CAD

Analysts at Danske Bank are bullish on AUD/CAD in the medium term. The specialists think that the pair has bottomed out around 0.9955. In their view, if Aussie overcomes resistance in the $1.0455 zone (June 29 maximum), it will be able to rise to 1.0520 (19 March maximum), 1.0665 (28 October 2011 maximum) and then to 1.0785 – the bank recommends taking profits here. In the longer term, the bulls may push the pair to 1996 maximum at 1.1090.

Chart. Daily AUD/CAD

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Banks' forecasts for FX majors

Here are banks' forecasts for FX majors. Data were submitted on July 6.

Source: FX Week

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EUR's role as a funding currency grows

The single currency becomes more attractive as a funding currency for carry trade operations in the wake of the ECB rate cut on Thursday. The regulator lowered the borrowing rate to 0.75%, while the deposit rate – to zero, so in the nearest future investors are likely to use the euro as a “whipping boy” on the FX market.

Traditionally, investors chose the Australian and the New Zealand dollar to benefit from higher interest rates offered there. However, these days some speculators switch attention to the Hungarian forint, the Polish zloty and the South African rand. Hungary's 10-year bonds, for example, bring nearly 8% compared to just 3.1% in Australia. AUD and NZD, however, remain the most reliable currencies for carry-trade operations: emerging European currencies are less liquid and much riskier.

No matter which currency investors choose for their assets, euro will be the loser anyway as the market players will borrow in euro to invest elsewhere. This is a significant bearish factor for EUR.

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July 10: economy and currencies

Risk aversion dominates the FX market on Tuesday: commodity currencies weaken amid concerns that the European financial authorities may fail to answer the important questions at today’s meeting.

The single currency is trading on the downside today remaining close to the minimal level since July 2010 at $1.2255 hit yesterday.

In Europe French and Italian May industrial production figures draw the most of attention today as the economists are looking for contraction by 0.9% and 0.3% m/m respectively. The data for the whole euro area will be released on Thursday, July 12.

The officials’ comments also weighed on euro. The ECB Mario President Draghi signaled yesterday that the central bank consider another interest-rate cut if necessary. The EU Economic and Monetary Affairs Commissioner Olli Rehn claimed that Spain will have to take additional measures soon to meet budget targets – that’s doesn’t help to ease the market’s worries about the nation’s future. Spanish 10-year yields reached 7.06% on Monday. Yesterday there was a meeting of the Eurogroup (euro zone’s finance ministers). Luxembourg

Prime Minister Jean-Claude Juncker said that Spain will get 30 billion euro for its banks by the end of July. Today there’s the gathering of EU27 financial chiefs (ECOFIN).

High Spain’s and Italy’s bond yields raise demand for safe havens, especially JPY. AUD/USD is near to a one-week low after a report showed China’s import rose less than expected. Chinese growth slowdown will surely affect Australia’s economy. Australian business confidence index fell to a 10-month low in June amid uncertainty about the euro zone and China. NZD/USD is also moving down: New Zealand business confidence dropped to a lowest since Q2 2011.

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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: $1.2300, $1.2400, $1.2475;

USD/JPY: 80.75, 80.85;

GBP/USD: $1.5300, $1.5700;

AUD/USD: $1.0000, $1.0175, $1.0200;

EUR/GBP: 0.7900, 0.8125;

USDS/CHF: 0.9560, 0.9600.

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RBS: bears on EUR/GBP

Analysts at RBS remain bearish on EUR/GBP in a medium term. In their view, a bear flag pattern is targeting 0.7695 (2008 minimum).

Chart. Weekly EUR/GBP

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Analysts: comments on AUD/USD

Specialists at Shelter Harbor Capital, an investment advisor, are bearish on Aussie and recommend going short on AUD/USD at $1.0200 with a stop at $1.0330 and a target of $0.9100.

In their view, Australian economy becomes highly dependent on mining sector. Meanwhile, China, Australia’s largest trading partner, aims to help its economy move to a more developed, postindustrial stage. As a result, China’s demand for resources is likely to decline. Moreover, Australia’s economic growth is slowing and the RBA is expected to keep cutting rates.

This week China is to release a bunch of important economic data (GDP, consumer price inflation, industrial production and retail sales). Where the nation’s economy is heading? BMO Capital analysts point out that China’s GDP growth below expectations (consensus forecast: 7.9%) would raise investors’ concerns and weigh on AUD. Westpac specialists expect China to cut rates further.

Analysts at Aspen Trading Group think that the technical picture for AUD/USD will remain positive as long as it stays above parity.

Chart. Daily AUD/USD