Analytics from FBS Holdings Inc.

Scotia Capital: loonie and Aussie under pressure for now

Canadian and Australian dollars have suffered from rising demand for safe-haven currencies, such as Japanese yen, Swiss franc and US dollar after Japan’s earthquake that broke out on March 11.

Currency strategists at Scotia Capital note that there are several factors influencing the loonie’s rate. The specialists underline that Canada’s dollar is a currency that performs well during periods of global growth and underperforming when global growth fades. As a result, the recent rise in risk aversion, a dampened outlook for global growth, a drop in commodity prices and a firming in the US dollar have pushed the pair USD/CAD above the 50‐day MA. The impact on Australian dollar will be stronger as Japan is Australia’s second largest trading partner.

However, in the longer Scotia Capital still expects that Canadian currency will reach 0.95 by the end of the year. Nomura Securities announced earlier that it was closing out its short Australian dollar positions.

BNY Mellon: investors will sell emerging market currencies

Currency strategists at BNY Mellon claim that it’s possible to observe the net outflow from higher yielding currencies such as the South African rand, Russian ruble, Hungarian forint, Brazilian real, Argentine peso and Turkish lira. Investors’ risk sentiment has deteriorated after the Japanese disaster. The market’s participants poured their money into Swiss francs, US dollars and even yen.

J.P. Morgan also turned bearish on emerging-market currencies cutting the currency exposure in its Global Bond Index-Emerging Markets portfolio by 10%, with especially large reductions in the Brazilian real, the Chilean peso, and the Russian ruble. According to the bank, there’s the risk that Japanese investors will sell emerging-market currency-related debt to buy yen.

Credit Suisse: BOJ should lower rates

Analysts at Credit Suisse claim that the Bank of Japan has to cut short-term interest rates in order to stop yen’s appreciation to the record maximums. In their view, this would be better than the government intervention in the currency market.

Japanese currency climbed yesterday to 76.31 yen versus US dollar rising above the previous post-World War II maximum at 79.75 yen per dollar reached in April 1995.

The specialists believe that the pair USD/JPY will stay in range between 78 and 79 yen unless the spread in short-term interest rates between Japan and the United States widens.
The central bank should lower the interest rate on a 30 trillion yen ($378 billion) credit program, as well as the interest on excess reserves held by financial intuitions at the BOJ.

On March 14 Japanese monetary authorities doubled the size of its asset-purchase plan to 10 trillion yen and kept the benchmark interest rate at 0-0.1%.

Mizuho: Japan, US and Europe may conduct joint intervention

Analysts at Mizuho Securities think that Japan, United States and Europe may conduct joint currency intervention.

The specialists say that if G7 nations agree that yen is showing excessive volatility and disorderly movements, then Japan, the US and Europe may join their efforts to sell yen for dollars and euro.

Japanese currency climbed yesterday to 76.31 yen versus US dollar rising above the previous post-World War II maximum at 79.75 yen per dollar reached in April 1995. After that the pair USD/JPY managed to recover to the 79 yen area on the expectations that Japanese monetary authorities will intervene to weaken the national currency.

Analysts on SNB rates

Analysts at BNP Paribas note that the markets wasn’t surprised by today’s decision of the Swiss National Bank to keep the benchmark interest rate at the current 0.25% level and increase growth and inflation forecasts as investors were looking forward to exactly the same outcome.

The specialists note that the SNB was very careful not sound too hawkish as Swiss franc is strengthening and there's high uncertainty about the scale and implications of the Japanese crisis.

Economists at UniCredit claim that the possibility of the rate hike has declined. In their view, Japanese earthquake and its impact on the ***ushima power plant introduced a “new element of risk”. UniCredit supposes that the SNB won’t start lifting up rates until September.

Specialists at Moody's also believe that SNB is likely to keep its key interest rate on hold for the next several months as the strong Swiss franc and the euro zone economic weakness will affect Swiss exports.

Strategists at Citigroup expect Switzerland’s monetary authorities to begin raising rates in the third quarter. The exact term depends on how the near-term uncertainties are resolved. The interest-rate bias seems upside as the SNB dropped previous references to the danger of deflation. On the contrary, its statement indicates concern that low interest rates are encouraging undesirably strong growth of credit and broad money.

Commerzbank: comments on USD/JPY

US dollar has compensated yesterday’s decline rising from the new record minimum at 76.60 above 79.00. Then, however, the pair USD/JPY once again headed down, this time at lower pace.

Technical analysts at Commerzbank note that resistance for US dollar is found at 79.78 and 80.60 levels representing 50% and 61.8% Fibonacci retracements of the rate’s decline during the past week.

According to the bank, bearish pressure on the greenback will ease only if it overcomes January minimums at 80.93.

BNP Paribas cut Japan's growth forecast

Analysts at BNP Paribas reduced their Japanese economic growth forecast for 2011 due to the 9.0 magnitude earthquake in northern Japan and the nuclear crisis at the ***ushima power plant.
The projections for the fiscal year growth were lowered from 1.6% to 0.9%, while the estimates for the calendar year were cut 1.6% to 1.2%.

The specialists expect the country’s economy to contract severely in the first two quarters of the year. In the third quarter Japan will likely return to the positive growth. In 2012 Japanese GDP may add 2.9% helped by the reconstruction.

These forecasts are based on assumption that the ***ushima crisis will be contained and the rolling blackouts by Tepco will finish as planned at the end of April.

Deutsche Bank: QE2 turned out to be efficient enough

Monetary stimulus measures conducted by the Federal Reserve have shown rather impressive results.
Since the Fed’s Chairman Ben S. Bernanke claimed on August 27 that it’s necessary to launch additional asset purchase program, the Standard & Poor’s 500 Index of stocks gained 18%. According to Bank of America Merrill Lynch index, the risk premium on high-yield, high-risk bonds decreased from 6.81% to 5.16%. Inflation expectations rose by 44.4%, while the unemployment rate has fallen to 8.9% in February, the lowest since April 2009.

Analysts at Deutsche Bank Securities approve the approach of US monetary authorities noting that the deflation risk has been successfully eliminated that helped the stock market rise.

The QE2 began on November 3 and is scheduled to last until the end of June. The Fed pledged to but $600 billion of Treasuries. The QE1 accounted for $1.7 trillion of asset purchases and finished in March 2010. The QE was criticized by the Republicans who feared the surge in prices. However, core inflation rose in January only by 0.2% in comparison with 2010 level.
 
UBS: G7 intervention will be a success

Analysts at UBS expect that the coordinated intervention of G7 nations to weaken Japanese yen’s rate will turn out to be efficient enough and manage to attain its goal.

After having analyzed the data for the last 30 years the specialists note that in 4 out of 5 cases the joint action helped to reverse the currency’s rate in the desirable direction. The bank says that the interventions were successful as G7 central banks were intervening in correspondence with the changes in the interest rates differentials.

UBS forecasts that the pair USD/JPY will rise to 83.00 yen in 3 months. In June the Fed will end the second round of its quantitative easing program. The European Central Bank is likely to lift up the benchmark rate already in April. The BOJ, on the contrary, is expected to keep its rate close to zero.

US dollar is expected to decline in the long term

US dollar has been weak for many weeks. Even as the G7 nations conducted a joint intervention to weaken Japanese yen didn’t help US currency to gain versus its other counterparts.

Barry Eichengreen, professor of economics and political science at the University of California Berkeley, thinks that there is no longer a logical reason for the dollar to be the world's only reserve currency as the US accounts for only 20% of the world’s economy. The specialist expects that the European currency will become a global currency in 5 years. Eichengreen also believes in the Chinese government's plan to internationalize yuan by 2020.

Analysts at J.P.Morgan note that US dollar is close to the record minimums on the trade-weighted basis. In their view, there’s a structural shift in the currency markets. The strategists recommend diversifying 15-20% of the investment portfolio to non-dollar assets.

The specialists at BMO Capital Markets are bullish on American currency in the short term. During the next 1-2 years, however, emerging market countries will start regarding inflation levels as too high and will stop trying to depreciate their national currencies against dollar. As a result, the specialists see strong potential decline ahead of the greenback.

Commerzbank: 1.4283/93 – resistance for EUR/USD

The single currency has at last overcome the 1.4200 level and is now consolidating below the 4-month maximum at 1.4281.

Technical analysts at Commerzbank note that the pair EUR/USD is facing strong resistance in the 1.4283/93 zone of November 2010 maximum and the 3-year resistance line. The specialists expect euro to fail at these levels.

If the European currency will somehow manage to rise above 1.4380, it will get strength to advance to the long-term double Fibonacci retracement at 1.4425 and 1995 maximum at 1.4535. The odds that euro’s rates will be rejected there are very high.

Strategists at Barclays Capital say that the bias for EUR/USD is bullish and upside pressure will ease only below 1.4040.

Forecasts for Japanese economy in 2011

Economists expect that Japanese economy will rebound in the second half of the year. However, their views vary on the point whether Japan will slip into a recession or not.

Analysts at Mizuho Securities are sure that the country’s economy will contract, while the specialists at Barclays Capital don’t think Japanese GDP will drop in any quarter of 2011. The median estimate of Bloomberg survey is that Japan will add 0.4% in the second quarter on the annual basis.

The size of its decline in the first half will depend on the magnitude of electricity disruptions caused by the earthquake and tsunami, notes Goldman Sachs. The analysts underline that it’s very difficult to measure the negative effect on Japanese production, but it’s clear that various elements of the supply chain will be affected.

Economists at Deutsche Bank say that even if panic buying of daily necessities may temporarily boost the demand, the level of economic activity will be lower” because of fears of radiation from the power plant and electricity shortages. It’s necessary to remember that in the fourth quarter of 2010 Japanese economy will lose 0.3%. Deutsche Bank analysts now see a second straight drop in GDP, with a return to growth in April to June.

Analysts at Credit Agricole underline that a lot of wealth was lost as a result of the disaster and the country’s economy will find itself under negative pressure in the medium and long term.

Specialists at Morgan Stanley Mitsubishi UFG Securities expect that Japan’s GDP will decrease by 6-12% in the second quarter on the annual basis. All in all, the economists think that Japanese economy will lose 1-3% in 2011. The forecasts for 2012 differ from contraction by 1% to 3% recovery.

BNP Paribas: negative factors for EUR/USD

Analysts at BNP Paribas believe that the European currency is beginning to lose upside momentum trading versus the greenback.

The specialists note that there are no factors that could push the pair EUR/USD above resistance at 1.4280. The Bank of Japan made no new actions, while the positive outcome of the upcoming EU summit has been already priced in euro’s rate as well as the April rate hike. According to the bank, the bank may ignore more hawkish comments from ECB.

Moreover, BNP Paribas expects that Portugal's debt problems will force the country to apply in April to the EFSF for bailout.

In addition, the analysts say that German IFO economic sentiment index that is due on Friday may show a sharp fall in the market’s expectations.

J.P.Morgan: strategy to buy loonie

Analysts at J.P.Morgan expect oil price to advance. In their view, there can be no doubts that if the crisis in Libya continues, oil prices will stay high. Moreover, the specialists think that even if the tensions in the Middle East ease it will encourage economic growth, which will eventually stimulate demand for oil.

As Canada is the world's sixth largest oil exporter, J.P.Morgan is bullish on the Canadian dollar.

The bank recommends waiting until after Tuesday, when Canada is discussing its budget to eliminate the event risk. Then the strategists advise to sell US currency and buy loonie at 0.99 expecting that the pair USD/CAD will fall to 0.95. Stop orders should be placed in the 1.0150 area.

It’s necessary to remember, that the Canadian currency is highly correlated with the S&P 500 index, so loonie’s purchases mean betting on higher US stock market. J.P.Morgan, however, doesn’t worry about this saying that US stocks will rise as the American economy recovers.

Mizuho: EUR/JPY may break higher

Technical analysts at Mizuho Corporate Bank note that the single currency is consolidating at the upper border of the broad range in which it was trading versus Japanese yen during the past year.

The specialists claim that the technical picture says that the pair EUR/JPY is likely to break higher soon. In their view, this may also happen in other yen crosses.

According to Mizuho, it’s necessary to buy euro at 115.00 adding on dips to 114.55. The bank recommends placing stop orders well below 114.00. The targets for EUR/JPY are found at 115.50 and 116.00.

Investec: pound may rise to $1.66

Analysts at Investec claim that if British pound closes today above $1.64, it will get chance to rise to $1.66.

The specialists note that, according to the data released today, UK inflation pace has increased to the highest level in more than 2 years encouraging speculation that the Bank of England may raise interest rates.

In February CPI added 4.4% on the annual basis, while the economists were looking forward to only 4.2% growth.

The pair GBP/USD rose today to the highest level since January 19, 2010 at $1.6401.

The minutes of the BOE’s March decision will be published tomorrow.

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Europe: Portugal’s debt rating reduced, EU summit

Standard & Poor’s lowered Portugal’s credit rating by two notches from A- to BBB with the negative forecast 2 days after Fitch Ratings cut Portuguese long-term debt rating from А+ to А-.

Analysts at Credit Suisse claim that the country’s downgrade affected the market. In their view, investors don’t want to buy euro while they’re closely watching if there’s any progress at the EU summit. The specialists note that there are still many negative factors for the single currency.

According to Bloomberg, two European officials with direct knowledge of the matter claimed that the bailout for Portugal may total 70 billion euro ($99 billion). The country hasn’t asked for financial help yet.

On the first day of the summit yesterday the European leaders agreed on Germany’s proposal to spread contributions to the future permanent rescue fund – European Stability Mechanism – over 5 years. The initial amount of the fund will be equal to less than the expected earlier 40 billion euro of paid-in capital.

CharmerCharts: sell EUR/USD on advance to 1.4200/20

Specialists at CharmerCharts, analytical firm providing technical analysis, note that the single currency jumped yesterday to the 1.4200 area versus US dollar.

In the medium term, however, the analysts regard the outlook for euro as negative and advise investors to sell on the pair’s advance to 1.4200/20. According to the analysts, such trade should be stopped if EUR/USD manages to break above 1.4300.

CharmerCharts says that support for the pair is found in the 1.4030/50 zone. Below these levels euro will be poised for a decline to 1.3860.

HSBC: ECB and BoE may repeat Japan’s mistake

European inflation broke above the ECB’s 2% threshold in December rising to 2.4% in February, while the British CPI growth accelerated last month to 4.4%, twice higher the 2% BoE target level. As a result, the European Central Bank announced about its readiness to raise interest rates and more and more members of the Bank of England’s MPC call for monetary tightening. Analysts at HSBC, however, claim that the central banks should take into account Japan’s unsuccessful experience in this field.

In their view, the inflation threat may misguide the European monetary authorities and, as a result, the region’s economy may suffer like Japan did in the past quarter century. At the beginning of 1990s, the Bank of Japan increased its key rate in more than 2 times to 6% as the Gulf War pushed oil prices and inflation to 4.%. However, when inflation was soon eliminated the central bank has to cut back the rate to less than 2% by the end of 1993.

According to HSBC, oil-price surge can create sometimes more deflationary than inflationary risks as it is squeezing spending power. The specialists warn that that’s what may be currently happening in Europe as crude oil approached maximum in more than 2 years above $100 a barrel.

HSBC notes that among the longer term costs of the monetary policy mistake there are stagnation, deflation and economic underperformance. To receive evidence one must just look at Japan: the country has to keep rates at the record low, while its debt is twice the size of the nation’s economy.

Wells Fargo: the outlook for major currencies

Analysts at Wells Fargo claim that there are 2 opposing forces influencing the pair USD/JPY. On the one hand, there is the speculative upward pressure on yen due to the anticipation of the repatriation flows. On the other hand, Japanese officials have drawn the line in the sand to prevent further appreciation of the national currency. The specialists believe that this kind of mixed environment for yen is going to prevail for at least several months. The specialists, however, don’t think that Japanese currency will once more test the postwar maximums as it did on March 16 when it reached 76.31 yen.

Wells Fargo says that 80 yen mark is certainly a psychological level below which the intervention risk is high. The economists are speaking not so much about the actions of other central banks, but about the efforts of both the Bank of Japan and the country’s Ministry of Finance. Judging from the degree of momentum at the market the pairs USD/JPY and EUR/JPY will be the primary crosses affected by potential intervention, though the Bank of England and the Bank of Canada have also sold yen.

The strategists note that though the amount of the international participation probably isn’t very strong, it will send a strong message to investors indicating the high degree of the authorities’ commitment.
The market has priced in about a 100 basis points interest rates hike over 12 month – quite significant pricing in – so it can be argued that there’s still some place for Euro to reflect the expectations. The problem is still in the European debt concerns. Wells Fargo believes that some of the euro zone’s indebted nations, especially Portugal, may soon need a bailout.

As for Portugal, April is a very important month in terms of the debt’s refinancing. This could be the point where the forex market will come more in line with the fixed income market. It’s necessary to note that Portuguese bond market is still showing a significant amount of investors’ stress. It’s just the forex market that hasn’t paid much attention to the euro area’s debt problems so far.

The specialists say that the greenback will be on the defensive due to the hawkish signals from the ECB and the Bank of England until the second round of the QE ends in June. Wells Fargo expects June to be an important threshold for the currency market. The transition from easing to neutral policy is going to be significant itself, even if the Fed doesn’t start hiking rates quickly.

Commerzbank: EUR/GBP eroded long term resistance

Technical analysts at Commerzbank note that the single currency bounced yesterday versus British pound breaking above the key resistance in the 0.8758 area eroding the long term downtrend.

The specialists say that as long as the pair EUR/GBP is trading above the mentioned trend line it has potential to advance to the 0.8935/45 area representing the 50% retracement of the decline from 2009 and the October 2010 maximum.

According to the bank, bullish pressure on euro will ease only below the short term uptrend at 0.8672 and the pair will be poised lower to 0.8605 then 0.8560.

Barclays Capital: Australian dollar may rise to 1.09

Analysts at Barclays Capital note that Australian dollar is under bullish pressure versus its US counterpart as long as it holds above 1.01. In the near term the pair AUD/USD is likely to fluctuate near the post-float maximums in the 1.0260 area. If Aussie decisively breaks up through these levels, it will get chance to climb to 1.0650 and 1.09 in the medium term.

SNB quarter report released

The Swiss National Bank has released today its quarterly report. The central bank announced that the tensions in the Middle East led to the new strengthening of Swiss franc versus the European currency and US dollar.

According to the central bank, franc’s appreciation has so far had only a moderate effect on the import price index. The Swiss franc prices of some import goods react with a time lag to the exchange rate’s moves, as the companies adjust them at irregular intervals.

Switzerland’s monetary authorities also said strong national currency made the country’s exports lose considerable momentum. The SNB expects that Swiss GDP will gain about 2% in 2011.

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Japan’s unemployment rate fell in February

Japan’s February data released today was surprisingly good: the unemployment rate dropped from 4.9% in January to 4.6% last month (+370,000 jobs, figures don’t include data from Iwate, Miyagi and ***ushima prefectures). The job-to-applicant ratio rose to 0.62 that means there were 62 positions for every 100 candidates in February, the highest since January 2009. Retail sales showed annual increase by 0.1%, while the economists were looking forward to 0.5% drop.

As a result, it’s possible to conclude that the country’s economy was on the improvement path before the March 11 earthquake that damaged northeastern regions.

However, it widely believed that such data is not enough for the bright outlook. Analysts at Goldman Sachs expect that Japanese GDP will contract in the second quarter. The specialists revised downwards their growth forecast for the fiscal year starting April 1 from 1.3% to 0.7%.

The Nikkei 225 Stock Average lost about 10% since the temblor. Economists surveyed by Bloomberg News expect that industrial production that will be published tomorrow declined by 0.1% in January. The government estimates damage from the disaster by 25 trillion yen ($306 billion).

UBS: bullish outlook for EUR/CHF

Technical analysts at UBS are still betting on the single currency’s advance versus Swiss franc. In their view, if the pair EUR/CHF breaks above 1.3004, it will manage to climb to the 1.3138 zone. The bank claims that support for the pair is found at 1.2788.

The specialists say that Portugal has low systemic relevance for the euro area as a whole and the fact that the country can count on bailout in case it can’t solve it debt issues on its own, so the country’s problems, according to UBS, won’t have very lasting and strong impact on euro.

BNP Paribas: bullish outlook for AUD/USD

Australian currency advanced yesterday versus its US counterpart renewing the absolute maximum at 1.0313. Then the pair AUD/USD corrected dipping to 1.0225 and recoiled up from this level.

Analysts at BNP Paribas think that the pair's dynamics is determined more by the greenback's weakness than by Aussie's strength. In their view, Australian dollar will remain high helped in the short term by Japan’s elevated demand for coal and by rising demand for iron ore in the longer perspective that will be needed for post quake reconstruction.

According to the bank, AUD/USD is going to retest Friday’s maximum at 1.0295.

Mizuho keeps advising to sell USD/JPY

US dollar is slowly moving up to the 82.00 area trading versus Japanese yen. Analysts at Mizuho Corporate Bank note that the pair USD/JPY returned above the broken support line of the triangle pattern that held for the previous 5 months.

The specialists, however, claim that weekly and daily Ichimoku charts still suggest short position despite the short-squeeze that started on Friday.

According to the bank, resistance levels for US currency are found at 81.79/81.85, 82.00 and 82.35, while support levels are situated at 81.30, 80.87 and 80.50.

BNP Paribas: pound under bearish pressure

Analysts at BNP Paribas and Barclays Capital claim that British pound seems to be under bearish pressure trading versus the greenback. The pair GBP/USD dropped below the key support level at 1.5980 and may now fall to 1.5750.

The specialists note that US economic data that will be released this week is going to be potentially negative for sterling.

BMO Capital: factors negative for euro

Analysts at BMO Capital Markets draw investors’ attention to the fact that last week the Federal Reserve announced the beginning of the series of press conferences after policy meetings as it usually happens in the European Central Bank. The specialists regard this as a sign that the US monetary authorities are preparing the ground for the monetary policy change.

According to BMO, the risks for euro could be from more hawkish Fed’s stance and the possibility that the ECB stays on hold longer than the market is anticipating. However, the comments the ECB President Jean-Claude Trichet made on Monday are setting strong market expectations for the rate hike. Trichet claimed that inflation rates are now durably above the common definition of price stability in the euro zone.

The analysts also say that European currency may get under some downward pressure if the US employment data due on Friday, April 1, is better than expected.

Barclays Capital raised yen’s forecast

Analysts at Barclays Capital raised their forecasts for Japanese yen:

3 months: from 85 to 82 yen per dollar;
6 months: from 86 to 83 yen per dollar;
12 months: from 90 to 85 yen per dollar.

The specialists note that Japan’s current-account surplus remains large, while net private capital outflows may decline. According to Barclays Capital, yen will begin weakening only from the third quarter and it will happen more slowly than expected before.
 
Commerzbank: AUD/USD on its way up to 1.0500

Australian dollar rose from the minimums in the 0.9700 area hit in the middle of March to renew the long-term maximums above 1.0300.

Technical analysts at Commerzbank expect the pair AUD/USD to continue its advance reaching 1.0375 (78.6% Fibonacci retracement of the decline from 1981 to 2001) and 1.0500.

The specialists note that the strong support for Aussie is found in the 1.0203/1.0175 zone limited by the February and early March maximums and containing internal 3-month support line.

Bank of America: Fed has little incentive to weaken dollar

Analysts at Bank of America Merrill Lynch claim that as the correlation between import prices and US dollar’s rate seems to be low, the Federal Reserve has little incentive to weaken the greenback in order to encourage inflation increasing competitiveness of the national exports or making its debt easier to repay.
The trade-weighted dollar index lost 5.8% during the past year. It happened due to the Fed’s loose monetary policy of extremely low interest rates.

At the same time, import prices excluding automobiles didn’t change much during this period gaining in February only 1.4% after rising by 1.3% in January.

According to Bank of America, 10% decline of US currency is equal to the percentage-point increase in inflation. Consumer prices excluding food and energy showed in February 1.1% annual advance. As a result, it’s possible to say that the link from a weaker currency to higher prices for consumer goods has still been fairly weak.

Pimco advises not to invest in Treasuries

Analysts at Pacific Investment Management Co., the world’s biggest bond fund, believe that US Treasuries have little value due to the rising US debt.

According to Pimco, America owes about $75 trillion in bonds and obligations for Social Security, Medicare and Medicaid. The specialists warn that unless the country’s authorities reform entitlement programs, the United States will face inflation, currency devaluation and low or negative real interest rates.

As a result, the strategists advise investors to sell US debt. In their view, US may have an off- balance-sheet, unrecorded debt burden of close to 500% of GDP. Pimco claims that the situation in the US is even worse than in Greece and that the nation is “out-Greeking the Greeks”.

This quarter US Treasury holders lost 0.1% even after the interest payments, estimates the Bank of America Merrill Lynch. In the final quarter of 2010 the loss was equal to 2.7%. During the presidency of Barack Obama US publicly traded debt rose to the record level of $9.05 trillion.

Barclays Capital recommends watching euro closing levels

Analysts at Barclays Capital note that the risk sentiment has improves so far.

The specialists claim that today is the important day for the market as the month and the quarter ends. In their view, it’s important to watch the closing levels of the single currency versus US dollar and British pound: for the pair EUR/USD the key level is found at 1.4185, while for the pair EUR/GBP it lies at 0.8815. If euro closes above these levels, the bulls will likely remain strong during the rest of the year.

The strategists also say that Brazilian real and the Korean won strengthened today versus their US counterpart breaking out of the established ranges. That means, according to Barclays, that dollar may stay weak in the second quarter of the year.

Commerzbank: comments on USD/CHF

Technical analysts at Commerzbank claim that as long as the greenback is trading above the support at 0.9140 it still has chances to advance versus Swiss franc.

The specialists note that to confirm its upward potential the greenback has to close above the Fibonacci resistance at 0.9205.

According to the bank, if the pair USD/CHF breaks below 0.9140, it will be poised for a decline to 0.9110 and 0.8980/70 on its way down to the minimums in the 0.8852 area.

Ireland: the release of stress tests results

Ireland’s economy minister Richard Bruton commented yesterday on the Irish banks’ stress tests that are released today at 15:30 GMT.

According to the official, investors have to be ready to the fact that the tests will reveal the country’s bank need additional capital. Bruton noted that it’s hard to ease Irish banks' dependence on central bank liquidity as long as they didn’t have enough capital. The minister underlined that Ireland was committed to meeting all its fiscal obligations under the EU/IMF rescue package. The policymaker also spoke against raising the corporate tax rate, saying it would affect investors’ confidence.

Analysts at RBC Capital Markets expect that Irish banks need 15-25 billion euro. So far 10 billion euro of the 35 billion euro provided by the Bank of Ireland has been used. According to RBC, an amount within these parameters would be neutral for euro, while any figure above the 35 billion euro total, that’s though highly unlikely, would be significantly negative for the single currency, while any figure below 15 billion euro won’t be credible.

Financial Times notes that Ireland which is asking the ECB for 60 billion euro in medium-term funding to replace emergency temporary help from Ireland’s central bank won’t get the money. If the stress tests results are discouraging the European Central Bank may cut off existing support of Irish banking sector.

Mizuho, BNP Paribas: forecasts for USD/JPY

Technical analysts at Mizuho Corporate Bank note that the greenback has returned to the large “triangle formation” in which it was trading versus Japanese yen during 5 months since November.
According to Mizuho, the record minimum of the pair USD/JPY at 76.31 hit on March 16 will hold at least during the second quarter of the year. The specialists expect the US currency to continue consolidating between 82.35 and 83.35.

Currency strategists at BNP Paribas note that the greenback’s advance has paused due to the month-end rebalancing. The Bank of Japan will undoubtedly keep monetary policy extremely loose and investors increasingly favor yen as a funding currency. According to the bank, US currency will appreciate to 85.00 yen.

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Ministry of Finance revealed the intervention volumes

Japan’s Ministry of Finance announced yesterday that it sold 692.5 billion yen ($8.4 billion) during the period from February 25 to March 29 to weaken the yen that hit on March 16 postwar maximum at 76.31 threatening the country’s economic recovery from the strongest earthquake in its history.

Japanese government was helped by the G7 nations which conducted the first joint intervention in more than 10 years. The coordinated actions helped to reverse the pair USD/JPY upwards. The greenback is currently trading above 83 yen level.

Analysts at Barclays Bank regard this intervention as very efficient as it managed to stop yen’s appreciation with amounts of money than those used in Japan’s unilateral intervention in September when the country sold 2.12 trillion yen when its national currency strengthened to 79.75 yen per dollar.

In addition, it’s necessary to note that Japanese central bank pumped 40 trillion yen into the banking system in successive one-day emergency cash operations from March 14 to March 22 to help financial markets restore after the March 11 disaster.

Nomura, Sumitomo: forecasts for USD/JPY

According to the Bank of Japan’s Tankan survey published today, the median forecast of large Japanese manufacturers is that the national currency will trade at 84.20 during the year through March 2012. It’s necessary to note that almost three fourths of the responses to the survey came by March 11 when the country was stricken by the magnitude-9.0 earthquake and the following tsunami.

Analysts at Nomura increased their yen forecast expecting the monetary inflows from repatriation of overseas assets owned by Japanese investors. The specialists now think that at the end of June the pair USD/JPY will be at 82.5, while in January they were looking forward to 87.5.

Strategists at Sumitomo Trust & Banking, on the other hand, say that Japanese currency may weaken as the other world’s economies are likely to show sustainable growth that will make investors’ risk sentiment improve.

Standard Life Investments: euro may retreat downwards

The European currency rose in the first quarter encouraged by the expectations that the European Central Bank will raise the interest rates. However, euro’s prospects may be not quite optimistic.

According to Reuters, technical analysis shows that the pair EUR/USD is in the middle of correction to the downside after it added 6% rising from February 14 minimum at $1.3428 to last week’s maximum at $1.4249.

Resistance is situated at $1.4249. If euro manages to break above this level, it will be able to rise to November 4 maximum at $1.4283. If the single currency falls below the key psychological support at $1.4000, it will mean that the uptrend for EUR/USD has reversed and euro will be poised down to $1.3850.
The fundamental outlook for the single currency seems more uncertain as the concerns about the indebted peripheral nations are combined with the expectations of the ECB rate hike next week.

Analysts at Standard Life Investments expect euro to weaken in the longer term as rate increases are already prices in the pair. In their view, 25 basis points lift up won’t give euro much support. The specialists think that the euro zone’s central bank will then pause to evaluate the effects of the hike.

Mizuho: EUR/USD will advance towards 1.4500

Technical analysts at Mizuho Corporate Bank note that although the single currency went down from 2011 maximum at 1.4247 reached on March 22, the pair EUR/USD remained above support at 1.4000 and closed the month at the highest level since December 2009.

According to the bank, this will have more impact on euro than the slightly discouraging fact that it formed a spike high and closed inside the “flag formation”.

The specialists believe that the bulls are now strong enough to drive euro to the important long term resistance 1.4500 in coming weeks.

Mizuho notes that in the near term EUR/USD consolidate between 1.4125 and 1.4225 moving randomly.

BNP Paribas: USD/JPY may climb to 85 yen

Analysts at BNP Paribas note that the downside correction of the pair USD/JPY has stopped already at 83.40. If the greenback gets above 83.65 versus Japanese yen, it will be able to strengthen rising towards selling offers at 83.80.

The specialists expect some consolidation after the pair’s active growth during the last several days, though they don’t think that such move will last long. In their view, momentum for the greenback is bullish and US currency may climb to 85 yen during the next few weeks.

According to the BNP Paribas, the Bank of Japan has no choice but to keep the interest rates at the record low levels to encourage investors to use yen as the funding currency for carry trades.

Pimco: yen’s repatriation will exceed market’s expectations

Analysts at Pacific Investment Management Co., the world’s biggest bond fund, claim that Japan will repatriate more funds than markets expect as the country needs to finance its reconstruction after the devastating earthquake and tsunami.

The specialists believe that Japan will also be forced to increase borrowing and monetize some part of its debt to fund the rebuilding that, according to the estimates, will require $300 billion.

The forecasts that Japan will issue a large amount of debt in coming years are mostly based on the experience of the Kobe quake in 1995, though now the country’s debt situation seems to be much more complicated, notes Pimco.

The strategists underline that the greenback, the European currency and Japanese yen are currently facing many difficulties, so they advise investors to borrow money in these currencies to invest in the better-performing emerging markets.

Barclays Capital: bearish view on USD/CAD

Technical analysts at Barclays Capital claim that the pair USD/CAD came to the target levels at 0.9680/65. In their view, this area will hold the initial bearish attack. As long as USD/CAD is trading below resistance at 0.9745, the bank has negative outlook for the greenback. If US currency falls below 0.9665, it will be poised for a decline to 0.9600.

Societe Generale: technical forecast for EUR/USD

Analysts at Societe Generale claim that the pair EUR/USD may still fall to Monday’s minimum at 1.4020 and then to the support in the 1.3755/1.3720 area before bouncing to the new 2011 maximums. When the single currency overcomes resistance at 1.4250/55, it will get chance to advance to November 2009 maximum at 1.5145 breaking through resistance at 1.4580.

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Ban Bernanke: the Fed is watching inflation

The greenback is strengthening versus the single currency during the second day: the pair EUR/USD is moving down to 1.4150. US currency is driven by Ben Bernanke’s comments: the Federal Reserve Chairman claimed that it’s necessary to keep a close eye on inflation.

According to Bernanke, inflation expectations are likely to remain stable, while the rise in commodity prices may slow and, consequently, the increase in inflation will be transitory. The policymaker said that if he is wrong in his predictions, US monetary authorities will have to act timely in order to maintain the price stability.

Bernanke noted that the Fed expects many foreclosures this year and this, in its turn, will affect home prices and construction as well as the country’s economic recovery. In his view, the pace of US economic rebound is not as strong as it should be.

Analysts at JPMorgan Chase claim that while Bernanke’s remarks showed the vigilance on inflation expectations, the Chairman was certainly less hawkish than some regional Fed presidents, for example Philadelphia Fed President Charles Plosser and St. Louis Fed President James Bullard.

Economists at Bank of Tokyo-Mitsubishi UFJ say that Bernanke’s comments mean that the market might be underestimating the degree to which the Fed could tighten monetary policy. As a result, US dollar has chances to strengthen. The bank also reminds that the euro zone’s debt crisis is far from being solved and that’s another reason that could push EUR/USD lower.

Specialists at Prestige Economics claim that the Fed seems to be concerned about inflation including the growth of food and energy prices, its monetary policy will depend on what happens with commodity prices. The average price of gasoline in the US rose from $3.07 on January 1 to $3.66 on April 3.

Morgan Stanley: recommendation for AUD/USD

Australian dollar has significantly strengthened from 2011 minimum versus the greenback at 0.9705 hit after the Japan’s earthquake rising to its post-float maximums. The market players are now trying to figure out whether Aussie’s surge will continue or it’s time to turn bearish.

On the one hand, there are still many factors in favor of the pair AUD/USD. Firstly, Australia has the highest benchmark interest rate of 4.75% among the developed nations that makes its assets and currency attractive for investors. Secondly, though the analysts don’t expect the Reserve Bank of Australia to raise the interest rates in the nearest terms they think this will happen before the end of the year. Finally, the country’s economy benefits from the advance of commodity prices.

Strategists at Morgan Stanley, however, warn that Australian central bank may cut the interest rates this year as the non-mining part of Australian economy remains weak. In addition, stronger Aussie can also harm the economic rebound.

To sum up, long positions on AUD/USD are to be kept in place though traders should be ready that the market’s sentiment may change very quickly.

J.P.Morgan, Citigroup: pound will rise versus euro

This week there is a lot of information from the central banks: there are all in all seven central bank meetings and nine Fed officials scheduled to speak. The Reserve Bank of Australia decided to keep the benchmark rate unchanged at 4.75%.

The climax is going to be on Thursday, when there will be rate decisions from the Bank of Japan, the Bank of England and, certainly, from the European Central Bank.

Strategists at J.P. Morgan note that the expectations of higher rates is already priced in the single currency, so euro may decline once any rate hike is announced. As for the Bank of England, no one expects it to lift up the borrowing costs, so if the UK monetary authorities sound hawkish, pound may get some support.

Analysts at Citigroup advise investors to buy pound versus the European currency. In their view, the euro area’s credit risk will increase relative to Britain’s. The specialists believe that the pair EUR/GBP will decline to 0.8400. The trade should be stopped if the euro rises above 0.9062.

Commerzbank: EUR/CHF is likely to decline

The pair EUR/CHF rose from the minimums in the 1.2420 area hit after Japan’s March earthquake to last week’s maximum at 1.3184.

Technical analysts at Commerzbank claim that euro was capped by the resistance provided by 200-day MA and February maximum at 1.3203.

The specialists expect some profit-taking and believe that euro may be now poised for a decline at least to 1.3000/1.2965. In their view, it would be better if euro managed to hold above the 38.2% retracement of the move higher from the 1.2400 spike low.

OECD: economic forecasts for the second quarter

Pier Carlo Padoan, the OECD chief economist, claimed today that the European Central Bank's anticipated 25-basis-point rate rise won't have any significant negative impact on the euro zone's economy. According to Padoan, the situation in the US is different as the Fed is not as concerned about inflation as the ECB because it still has to fight high unemployment.

The OECD lifted its annualized growth forecast for the US in the second quarter from November estimate of 2.5% to 3.4%, for France – from 1.6% to 2.8% and Canada from 2.6% to 3.8%. The OECD lowered its second-quarter growth forecast for the UK from 1.3% to 1% and Italy from 1.6% to 1.3%. It forecasts growth of 2.3% for Germany, the euro zone's largest economy.

The organization notes that the developed countries should set budget consolidation as their priority. Padoan said that Portugal's instability remains the main source of worry. The country should hurry to solve its political problems and the new government has to be formed as soon as possible.

Commerzbank: comments on GBP/USD

Technical analysts at Commerzbank note that as the British pound broke through resistance band between 1.6170 and 1.6177 versus its US counterpart, it may now rise to 1.63.

Never the less, the specialists believe that the bears will remain stronger as long as the pair GBP/USD is trading below 2010 maximums in the 1.6465 area. According to the bank, if sterling falls below the February minimum at 1.5962, it will be poised for a decline to 1.56.

Julius Baer: SNB will follow the ECB in raising rates

Currency strategists at Swiss bank Julius Baer expect that the single currency will end the second quarter of the year slightly below 1.30 versus Swiss franc. In their view, the Swiss National Bank (SNB) will follow the European Central Bank in raising the interest rates.

The specialists believe that as the euro zone’s debt problems are gradually being resolved, the demand for franc as the safe haven will be limited. According to the bank, during the 3 months from April to June forex market will be dominated by the monetary policy normalization all over the world.

Geithner: US debt will reach ceiling by May 16

Treasury Secretary Timothy Geithner warned the Congress that US debt will reach the country's $14.294 trillion debt ceiling no later than May 16. Earlier the Treasury Department estimated that the limit will be hit between April 15 and May 31.

If US lawmakers don’t raise the ceiling by this May 16, the Treasury will have to employ a range of extraordinary measures to prevent the United States from defaulting on its obligations. However, Geithner said that these measures could put off the inevitable only for eight weeks or so and the US won’t be able to borrow within the limit after about July 8, 2011.

The data on March 31 showed that the debt subject to the legal borrowing limit was $14.218 trillion, or roughly $76 billion under the legal cap. Typically, that's a little over two weeks of borrowing, although debt levels can fluctuate up or down on a daily basis.

Geithner underlined that the Treasury won’t start a “fire sale” of financial assets such as gold because this will damage financial markets making investors lose confidence in the US solvency. If Congress doesn’t increase the debt limit, a broad range of government payments would have to be stopped, limited or delayed, including military salaries and retirement benefits, Social Security and Medicare payments, interest on the debt, unemployment benefits and tax refunds.

According to the official estimates, American government will need to borrow $738 billion by the end of this fiscal year.

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Nomura: euro risks are still high

Analysts at Nomura Securities claim that the single currency has been trading so far as if there was no sovereign debt crisis. The market has ignored the issues in Portugal, Ireland and Greece and the risk premium on euro has been declining since January after risk premiums were driving all the EUR/USD moves in 2010.

The specialists note that in case of positive outlook for euro that wouldn’t be a problem, but since the crisis is still unresolved everything may go wrong. In their view, investors have priced in about 85 to 90 basis points of interest rate hikes this year, so if the ECB doesn’t meet the expectations that will certainly harm the single currency.

The strategists believe that the risks of debt restructuring are rather high. According to Nomura, the restructuring solely in Greece, Ireland and Portugal will cost the core euro zone around $235 billion, while a restructuring that also involves Spain would require from the ECB about $480 billion. These numbers aren't insurmountable, but getting to them would be very difficult from the political point of view.
The analysts recommended selling euro versus Norwegian krone and maybe British pound.

BofT-Mitsubishi: yen will keep weakening

Japanese yen fell to the 6-month minimum at 85.52 versus the greenback. After G7 nations conducted joint intervention on March 18 to stop yen’s appreciation that hit the postwar record maximum at 76.25 yen per dollar, the currency lost 5.1% surviving the biggest decline among 10 developed-nation currencies.

Analysts at Bank of Tokyo-Mitsubishi UFJ expect that the Bank of Japan will fall behind the other major central banks in ending monetary stimulus measures as the nation’s economy needs support to recover from the biggest earthquake in its history. In their view, yen is likely to remain the weakest currency for a long time.

The BOJ 2-day policy meeting has begun today and it is thought that the country’s monetary authorities may decide on new fund-providing measures. According to Bloomberg that is citing unnamed sources, the central bank is considering offering a credit program to spur banks to lend to companies with cash-flow shortages.

UBS, ING: comments on Swiss CPI growth

According to the data released today, Switzerland’s CPI added in March 0.6% from the level of the previous month, while the economists were looking forward only to 0.2% increase.

Analysts at UBS note that such unexpectedly strong growth of Swiss consumer prices was due to the technical factors. The specialists draw investors’ attention to the fact that the CPI basket was revised: clothing was given much heavier weighting and, as a result, the index has become more volatile.

Currency strategists at ING explain the surprising advance of Swiss prices by the seasonal energy and clothing price increases. In their view, these factors are temporary, so there’s still no reason for the SNB to end its expansive monetary policy. The analysts reminded that, according to the Swiss National Bank forecast, the headline inflation won’t break above the 2% threshold before middle of 2013.

Commerzbank: USD/JPY on its way up to 94.50

US dollar recovered from the record minimum at 76.31 hit on March 16 reaching the 6-month maximums above 85.00.

Technical analysts at Commerzbank note that the pair USD/JPY is coming closer to the key resistance in the 85.62/84 area, representing the top of the 2007-2011 down trend channel and the 50% retracement of the decline from May 2010.

The specialists expect that although there will be some profit taking at those levels, US currency will manage to get higher to 87.55 and 94.50.

Barclays Capital: yen will lose to euro and dollar

Technical analysts at Barclays Capital believe that the pair EUR/JPY is getting ready to reverse its downtrend that was holding since 2008. In their view, if the single currency breaks above 122.30, it will get chance to advance to 127.95. If euro closed the week above the top of the Ichimoku Cloud at 121.95, the bulls will become strong enough to push the rate higher to 139.00 later in 2011.

As for the pair USD/JPY, its recent advance means that the greenback has formed an important base and may now move up towards the top of the weekly Cloud in the 88.40 area. The strategists expect US currency to consolidate above 83.85, ideally 84.50. According to them, the outlook for the pair will remain bullish. Resistance levels for USD/JPY are found at 85.95 and 87.15.

Pimco: Portugal won’t be able to withstand on its own

Analysts at Pacific Investment Management Co., the world’s biggest bond fund, claim that the increase in the ECB interest rates and the resulting stronger euro will have a very negative impact on Greece, Ireland and Portugal.

The specialists claim that although the European Central bank has to make decisions for the euro area as a whole, it should probably consider the possibility of hiking rates for the strong countries while conducting more loose policy for the weakest peripheral countries.

According to Pimco, the best thing to do for the European monetary authorities is to acknowledge the fact that Greece, Ireland and Portugal face significant solvency challenges and some or all of them will need to restructure their sovereign and sovereign-guaranteed debt. The strategists point out that Greece’s second review of its program with the International Monetary Fund showed that the program is not working.

As for Portugal, Pimco thinks that the resign of the national government last month has only put off the inevitable apply for the bailout.

Analysts at Commerzbank share this point of view claiming that as the Portugal 5-year bond yields are still at 9.9%, it’s only a matter of time until the country has to ask for help. In their view, the outcome of today’s 6-month and 12-month bill auctions doesn’t matter as Portugal won’t be able to deal with its problems on its own.

Rabobank, Commerzbank: comments on EUR/GBP

British pound weakened today versus the European currency as the UK industrial production contracted in February by 1.2% from the previous month’s level, while the economists were looking forward to 0.4% advance. The pair EUR/GBP returned to the trend line support at 0.8775.

Analysts at Rabobank International think that such data means that the country’s economy is still too weak Bank of England won’t lift up interest rates until November. The rate hasn’t changed since March 2009. Bloomberg survey shows that the central bank will likely keep the rates unchanged at its tomorrow meeting.

Strategists at Commerzbank, on the other hand, claim that the BoE will finally tighten its monetary policy and some more hawkish comments from Britain’s monetary authorities will help pound. According to the bank, sterling will strengthen to 83 pence per euro and trade at $1.60 by the end of the year. The median forecast of the economists surveyed by Bloomberg News is that the pair EUR/GBP will end the year at the 84 pence level.

Canadian dollar renewed maximum versus the greenback

Canadian dollar rose to the more than 3-year maximum versus its US counterpart in the 0.9590 area.
Loonie was helped by the growth of the global equities that encouraged the demand for higher-yielding currencies. Strategists at Canadian Imperial Bank of Commerce believe that loonie’s strength is caused mainly by the weakness of US dollar due to the nation’s fiscal problems. In addition, the interest rate differential is in favor of Canadian dollar.

Technical analysts at Commerzbank note that the pair USD/CAD has breached the support line from October to April at 0.9607 and is now poised for a decline to 0.9577 and then to the psychologically-important 0.95 region. The specialists say that they will maintain the negative outlook for the greenback as long as it’s trading below the 55-day moving average at 0.9832.

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BMO Capital advised to sell New Zealand’s dollar

New Zealand’s dollar was rising versus the greenback during 3 weeks reaching yesterday the 0.7846 level. The strategists at BMO Capital think, however, that kiwi’s advance has come to an end.

Among the factors negative for the NZD there are the discouraging consequences of the earthquake, interest rates that were lowered in early March and rather modest fundamentals of the country. So, if stock markets tumble, investors lose risk appetite and the US currency begins rising, it will be gaining at fastest pace versus New Zealand’s dollar, say the specialists.

According to BMO, it’s necessary to sell kiwi at the current levels placing stops above 0.7905 and taking profits at 0.7630.

BNP Paribas: Aussie may keep growing

Australia’s dollar fell the most in 4 weeks against yen and eased from its maximum versus the greenback after Japan raised the severity rating of ***ushima Dai-Ichi power plant, damping demand for higher-yielding assets. According to Tokyo Electric Power Co., the total amount of radiation leaks from the affected power plant may exceed that of the 1986 Chernobyl disaster.

Despite the deteriorated risk sentiment analysts at BNP Paribas claim that the overall outlook for the pair AUD/USD remains positive and Australian currency still has all chances to resume its way up.
The specialists base such assumptions on strong China’s trade data that means the steady demand for Australia’s goods.

In addition the bank draws investors’ attention to the dovish comments of some Federal Reserve members Yellen, Dudley and Evans hinting that the US central bank won’t hurry to raise the rates after the $600-bilion bond purchase program ends in June.

Finally, BNP Paribas thinks that during the meetings of G20 and the IMF the nations will fail to find the solution of the world’s economic imbalances, so the currency reserves diversification is likely to continue encouraging the demand for Aussie.

Stiglitz: new global reserve currency needed

Nobel-prize laureate Joseph Stiglitz believes that in order to prevent trade imbalances that are well reflected in the US national debt, the greenback should be replaced by the new global reserve currency.
Last week US dollar fell to the 15-month minimum versus euro at $1.4480, while the US trade deficit widened in January to the 7-month maximum of $46.3 billion.

The famous economist says that the position of the United States could be much worse if the situation in Europe wasn’t so severe.

Stiglitz notes that the existing monetary system creates high risk that the period of low growth, inflationary bias and instability will last long. Such system is fundamentally unfair, says the specialist, as it means that poor countries are lending to the US at close to zero interest rates. To finance its budget deficits, the USA sells bonds to overseas investors and governments, boosting the dollar reserves of those nations. According to International Monetary Fund, overseas holdings of dollar reserves rose to $3.14 trillion in the fourth quarter of last year.

Commerzbank: bullish outlook for USD/JPY

The greenback’s advance versus yen stalled yesterday at 85.50 and the pair USD/JPY dropped below 84.00. Technical analysts at Commerzbank note that it happened due to the general strength of yen. In their view, the outlook for US currency is still bullish.

The bank says that the pair paused right ahead of the resistance in the 85.62/84 area representing the top of the 2007-2011 down channel and the 50% retracement of the decline from May 2010.
The specialists believe, however, that after some profit taking dollar may rise to 87.55 and 94.50.

UBS: US dollar may advance this year

Analysts at UBS believe that the greenback may climb this year. In their view, the faster-than-expected economic growth and rising inflation will make the Federal Reserve to tighten monetary policy. The bank didn’t specify when it expects US central bank to start lifting up the rates.

The specialists think that when the Fed’s $600-billion asset-purchase program ends in June, investors’ sentiment towards US currency will significantly improve.

According to UBS, the current trading levels of dollar crosses against euro and Australian dollar haven’t priced in the risk that the Fed can end quantitative easing. It has not priced in the risk that US policy will lead to stronger growth in America.

The euro may decline because the market is expecting more interest-rate increases by the European Central Bank than policy makers are likely to deliver. The market is pricing in 5 rate hikes in the next 12 months, says UBS, while the ECB is likely to raise the rates only twice more this year.

The pair EUR/USD added 7.3% this year. UBS forecasts that in a year the euro will be at $1.30.

Barclays Capital: comments on EUR/CHF

Analysts at Barclays Capital expect that pair EUR/CHF to decline to the 1.2930/00 area.
The specialists note that the single currency has formed a small “head and shoulders” top on the daily chart.

According to the bank, bearish pressure on euro will ease only if the pair manages to close the day above 1.3205. In such case the 5-month double-bottom will be completed. The strategists, however, think that such outcome is unlikely taking into account the general strength of franc.

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Societe Generale on ECB, BoE and Fed’s rates

Strategists at Societe Generale claim that the ECB rates stayed at the record low during the 2 years. In their view, the time has come for ECB to show that the borrowing costs won’t stay at the emergency level forever.

The key question is now the extent of the tension between the core inflation in the euro area, which remains very low at round 1%, and the rising non-core components that, according to the market’s expectations, have driven headline inflation in March up to 2.6%.

The specialists say that it’s necessary to regard the ECB rate hike not as monetary tightening but as transfer from the troubled economies to the successful growing ones. As a result, the tensions that already exist in the euro area will strengthen.

“The British MPC regards inflation as a window to be looked through, while the ECB thinks of it as of a wall to be knocked down” says Societe Generale. The strategists mean that the differences in the approaches of the 2 central banks are a bit exaggerated. In their view, the Bank of England won’t lag the ECB following the European Central Bank in May. The BoE is likely to tighten at the similar pace, hiking rates by 25 basis points.

As for the United States, the end of quantitative easing in June may be regarded as relative tightening. The analysts remind that there is the aggressive fiscal tightening to be delivered. The Fed’s standing point is that the core inflation as well as the headline one seems to be well-behaved in the US, so any rate hike soon is unlikely.

RBS lifts up forecast for AUD and NZD

Analysts at Royal Bank of Scotland believe that Australian and New Zealand’s dollars will keep gaining versus their American counterpart during the second and third quarters of the year. Such forecast is based on the assumption that the US Federal Reserve won’t raise the interest rates and, consequently, the greenback will lack strength.

The specialists expect Aussie to reach the maximum of $1.10 by September 30 and then ease to $0.98 by the end of 2012. The kiwi is seen gaining to $0.84 in the third quarter before declining to $0.77 by the end of the next year.

Commerzbank: technical levels for GBP/USD

Technical analysts at Commerzbank note that it seem that the British pound is unable to overcome resistance in the 1.6425/65 area trading versus the greenback. The mentioned zone represents the double Fibonacci retracement and the 2010 maximum.

The specialists think that sterling is now poised for a decline to 1.6180 and even lower mowing down towards 1.5963/1.5880.

According to the bank, the bearish pressure will ease if pound breaks above 1.6465. In such case the pair GBP/USD will get chance to rise to November 2009 maximum at 1.6880 and then to 1.7040/50.

Mizuho: USD/JPY is consolidating in the 83.50/85.50 area

Analysts at Mizuho Corporate Bank claim that in comparison with the USD/JPY volatile fluctuations seen in March, the pair is now going through a consolidation. As it was expected, dollar bounced from the top of the large “triangle” formation.

The specialists expect the greenback to remain today in range between 83.50 and 85.50. In their view, it’s necessary to buy US currency on the dips to 83.80 stopping below 83.45 and taking profit at 84.50 or maybe at 85.15.

BIS: reserve currencies will lose

Economists at the Bank for International Settlements claim that nearly all reserve currencies may depreciate.

After studying the relationship between foreign-exchange turnover and per capita income the specialists came to the conclusion that the richer the country, the greater the turnover in their currency. As a result, it was shown that there is a relatively consistent relationship between forex turnover, trade, and GDP per capita – practically all the countries are found directly at the regression line.

At the same time, according to BIS, such the currencies of the United States, Japan, Great Britain, Australia and some other nations have far more forex turnover than their trade and GDP would suggest. The economists conclude that the demand for these currencies will fall. China, on the other hand, had turnover well below what its fundamental economic activity would suggest, so the forecast for yuan is quite opposite.

Citi: time to cut longs on riskier currencies

Analysts at Citigroup claim that during the last several weeks investors’ trading strategies were determined by the positive risk sentiment. However, it’s time to finish such trade now, say the specialists.

According to Citigroup, the market has already priced in all possible encouraging news. The bank underlines that when the majority of players come to the single view, it should be regarded as a warning signal meaning that the situation may change in the unfavorable way quite quickly.

Such factors as the nuclear danger in Japan and Portugal’s applying for a bailout deteriorate the market’s attitude towards risk. The economists say that investors begin thinking that some currencies, like the Australian dollar, have surged too rapidly.

As a result, Citi recommend cutting longs on Canadian dollar and Norwegian krone and reducing shorts on the greenback and Swiss franc.

The Guardian: 3 possible scenarios for Europe

EU is going to provide Portugal with bailout estimated by 80-90 billion euro on the conditions of severe budget cuts. Yet these conditions may affect the country’s economy as did those imposed on Greece and Ireland. Nouriel Roubini says that such terms are likely to prevent the problem nations from reducing their debt. Irish GDP lost 11% during 2 years, while Greece's economy contracted by 6.5% during the past year.
British newspaper The Guardian outlines for Europe 3 possible scenarios.

1. The "good news" scenario
The peripheral economies continue to shrink, though the contagion won’t spread to Spain. Spanish banking system looks rather solid, while most of the country's sovereign debt is held by Spaniards. In the wake of Portugal's crisis, interest rates investors are demanding from Spain have actually slightly declined. EU officials keep reassuring the market that Spain won’t need financial support, though it’s necessary to remember that the same was said about Portugal last year.

2. The "bad news" scenario
Spain with its slower growth and higher unemployment than in Portugal may seriously suffer from surging yields. As a result, the country may be forced to apply for the bailout. Spanish government has to pay 4.9% to sell 10-year bonds, close to the 5.5% offered by the European Financial Stability Fund (EFSF) for countries that have been thrown out of the financial market. In addition, Spain would probably need more than 400 billion euro. The EFSF that will exist until 2013 can raise 750 billion in total. But with Ireland and Portugal require at least 160 billion euro. Taking into account the fact that from the political point of view it’s hard to expand the rescue fund, Spanish bailout would drain the fund and Belgium or Italy may become the next weak link.

3. The "really bad news" scenario
Although Spain is unlikely to default in 2011, political protests counter the austerity measures are likely to strengthen, while Greece or Ireland may default. As a result, other peripheral nations will get under threat and there will be the risk of multiple defaults and possible rejection of the single currency.

MIG Bank: bullish outlook for EUR/USD

Technical analysts at MIG Bank claim that the single currency has resumed its attempts to break above the multi-month “rising wedge” pattern.

The specialists are bullish on the pair EUR/USD. In their view, the major uptrend from June 2010 is likely to extend and euro may advance to 1.4579 (2010 maximum), 1.4710 and 1.5000 (psychological level).

Support levels are situated at 1.4418, 1.4249 (March 22 maximum) and 1.4000 (psychological level). If the pair falls below this level, it will be poised to fall to the previous reaction minimums at 1.3867 and 1.3752.

According to the bank, it’s necessary to buy euro at 1.4430 stopping below 1.4240 and taking profit at 1.4540/1.4710/1.5000.

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Yen rose on the Chinese data

Japanese yen strengthened today versus all of its main counterparts. The pair USD/JPY continued its way down from the maximum at 85.50 reached on April 6 returning to the upper border of the large “triangle” formation.

Currency strategists at Mizuho note that yen rose as, according to Chinese data released today, the country’s CPI added 5.4% in March on the annual basis. The specialists note that the odds that China’s will take more steps to cool growth have increased encouraging demand for Japan’s currency as a refuge.
It’s also necessary to note that Chinese GDP increased by 9.7% in comparison with the previous year level, while the economists surveyed by Bloomberg were looking forward only to 9.4% growth.

Analysts at TD Securities claim that the biggest Asian economy will keep conducting “prudent” monetary policy to stabilize the consumer prices. The People’s Bank of China has raised interest rates four times since the global financial crisis, so even if the approach of China’s central bank becomes less aggressive, it will all the same lift up interest rate and reserve requirement during the next few months.

Moody’s cut Ireland’s credit rating

Moody’s Investors Service reduced Ireland’s debt rating from Baa1 to Baa3 with negative outlook. The agency noted that the financial strength of Irish government is poised to decline, while Irish economic growth prospects seem to be weak and may deteriorate more.

The main reason of the downgrade was the uncertainty created by ESM solvency test conducted to decide on the provision of future liquidity support to the nation. It’s quite possible that Ireland may need additional consolidation measures to meet the established fiscal targets, says Moody’s.

In addition, the specialists underlined that the ECB rate hike to 1.25% made on April 7 may have negative impact on the indebted nation.

As for some way out of the current poor state of things, the agency said that upward pressure on Irish rating may appear if the country’s budget reduction manages to reverse current debt dynamics. According to Moody’s, despite all the negative factors the Ireland’s long-term potential growth prospects remain higher than those of many other advanced nations.

Commerzbank: comments on EUR/USD

Technical analysts at Commerzbank note that that the pair EUR/USD has been staying below resistance at 1.4535 during 3 days. In their view, this means that euro’s target may now be lower at the 4-month uptrend support line found at 1.4258.

The specialists note that if the single currency drops below these levels, the bullish powers will weaken and the pair may ease to the minimum of the end-March at 1.4021.

Never the less, the bank still thinks that EUR/USD will finally manage to break above 1.4535.

Roubini: Greece will be forced to restructure debt

Nouriel Roubini, professor of economics at New York University famous for predicting 2008 global crisis, says that Greece’s debt to GDP ratio is at “level of insolvency”, so the restructuring of the country’s debt seems inevitable. The same outcome is possible for Portugal’s and Irish banks’ debt.

Roubini thinks that Ireland’s government rescue package designed to finance national saving banks may deepen the country’s debt crisis.

The economist also claims that ECB may raise benchmark rate 50-75 basis points this year. In his view, in 2012 the borrowing costs in the euro area may reach 3%.

According to Roubini, the deviation in the monetary policy between the Federal Reserve and the European Central Bank may be quite destabilizing for financial markets.

Mizuho: comments on EUR/USD

Technical analysts at Mizuho Corporate Bank claim that bullish pressure on euro will strengthen if the pair EUR/USD manages to close the week above the important 1.4500 level. The specialists claim that the greenback’s suffering from the broad weakness, especially versus Swiss franc and Singapore’s and New Zealand’s dollars.

According to the bank, it’s necessary to buy the single currency at 1.4465/1.4400 stopping below 1.4350 and taking profit at 1.4520 and then at 1.4800/1.5000.

Technical levels for GBP/USD

British currency eased down from 1.6375 at the beginning of the Asian session trading versus the greenback. However, sterling’s decline was limited by the 1.6315 level and the pair GBP/USD managed to rise returning to 1.6370 where it all began.

Resistance levels for pound are found at 1.6375/85 (April 14 maximum/session maximum), 1.6425/30 (April 8/11 maximum) and 1.6500. Support levels are situated at 1.6315 (day minimum), 1.6285 (intra-day support) and 1.6220/25 (20-day MA/April 12 minimum).
It seems that GBP/USD isn’t ready for the break higher and the trend seems to be neutral, though volatile.

George Papandreou: Greece won't restructure its debt

Prime Minister George Papandreou claimed today that Greece will be reducing its budget deficit, but not restructuring its debt. “Greece’s problems won’t be solved by restructuring its debt but by restructuring the country,” said Papandreou. The policymaker underlined that the country needs serious reforms concerning not only economic, but also social and politic problems.

According to the official, the deficit-trimming measures, most of them in spending cuts, will account for than 22 billion euro ($32 billion) through 2015. Papandreou announced that Greece is going to cut spending from 53% in 2009 to 44% of GDP in 2015. The government is also expected to unveil plans to raise 15 billion euro by 2013 through state-asset sales.

Last year Greece got bailout from the European Union and International Monetary Fund on the conditions of cutting the deficit to less than 3% of GDP by 2014. The nation itself has set a goal of diminishing the deficit to below 1% by 2015. The government expects to get the deficit down from 15.4% of GDP in 2009 to 7.4% this year. It’s necessary to note, however, that the first-quarter revenue missed the target by 1.4 billion euro.

On-line analytics from FBS always is available on: http://www.fbs.com/analytics/news_markets
 
Analysts forecasts for AUD/USD

Analysts at Royal Bank of Scotland expect Australian dollar to gain about 4% by the end of September versus the greenback climbing to $1.10 helped by the surging commodity prices – the Standard & Poor’s GSCI Index of 24 commodities was rising during 3 quarters in a row. Strategists at Credit Suisse think Aussie will show such advance during a year. Deutsche Bank believes Aussie may appreciate to $1.08.
Australia is reach with resources and its currency will benefit from China’s and Japan’s high demand on its raw materials that account for about 60% of the country’s exports.

The pair AUD/USD is also getting much support from the interest rates differentials. Australian 4.75% benchmark rate is the highest among the developed nations while the Federal Reserve is likely to keep the borrowing costs at the record minimum in order to stimulate US economy.
So, according to Credit Suisse, the fundamental picture for Aussie over the next year seems to be quite encouraging.

In the first quarter Aussie lost 1.8% against its US counterpart. The OECD, however, notes that AUD is overvalued by 38% versus US currency as it added 50% since 2008 reaching $1.0584 on April 8.

Specialists at Credit Agricole warn investors that although the momentum is in favor of Aussie, it’s very vulnerable to the declines in raw-material prices. In their view, the market is now much positioned one way, so people are getting increasingly nervous about the risks of a substantial retracement.

J.P.Morgan: US dollar will remain weak

Analysts at J.P. Morgan claim that the world has got used to the weaker dollar. In their view, the current market’s sentiment is much different from what was just 6 months ago when Brazil’s Finance Minister Guido Mantega complained that weak dollar was creating a global currency war. The emerging markets seem to be more concerned about rising inflation when about exports, so they're letting their currencies strengthen.

As a result, for those investors who are holding longs for the currency of a country with relatively high inflation, such as Brazil, Mexico or Singapore, the specialists advise keep buying this currency keeping short positions in US dollar.

Commerzbank: negative outlook for EUR/USD

The single currency advanced versus the greenback from the minimums in the 1.4020 area hit at the end of March limited by the 1995 maximum at 1.4535.

Technical analysts at Commerzbank claim that the outlook for the pair EUR/USD has now turned negative. In their view, as long as euro is trading below 1.4535 the bears dominate the market and the pair risks falling to the key support at 1.4279 that is the 4-month uptrend channel support line.

The break above 1.4535 will be confirmed if the European currency closes the week above this level. According to the bank, the bulls will eventually win and EUR/USD will manage to overcome the mentioned resistance. In such case the outlook will change to neutral/bullish.

Deutsche Bank: EUR/USD won’t rise above $1.50

Last week the single currency was performing well enough trading in the $1.45 area against its American counterpart.

Analysts at Deutsche Bank think that euro's strength is caused by the greenback’s weakness. The specialists say that investors are using US dollar as a funding currency in carry trades borrowing in dollars and investing in the higher yielding currencies. Euro, on the other hand, isn’t used for that purpose since the European Central bank hinted on the rate hike.

According to the bank, the pair EUR/USD has potential to climb to $1.50. Then the situation may rapidly change, note the specialists, as the rate expectations are probably not going to shift much more in favor of the euro. As the sentiment about US currency has become too negative any signals from Federal Reserve may reverse the pair.

Economists at Brown Brothers Harriman also think that EUR/USD advance will be limited by $1.50 as the market will inevitably get aware about the debt problems of Spain and Portugal.

Currency strategists at Nomura Securities are the most bearish on euro as they advance to sell the currency against Swedish krona and Norwegian krone. As the reasons for being short on euro the specialists cite the excessive pricing in of the ECB hike and the possibility of oil prices decline.

Goldman Sachs keeps longs on EUR/USD

The advance of the single currency versus the greenback has stalled so far. Analysts at Goldman Sachs claim that as the risk sentiment has deteriorated, the bears may take profits on US currency.

The bank, however, is rather optimistic about the longer-term prospects of the pair EUR/USD. The strategists remind that euro was supported by the expectations of the ECB rate hikes. The bank still expects that the European Central bank will lift the rates by 50 basis points this year, but think that in 2012 the key benchmark rate will reach only 2.5% as the inflation rate may ease and there will be a lot of spare production capacities.

According to Goldman, euro was driven mainly by the broad dollar weakness and the factors negative for US currency are still in place. In addition, the bank expects that in the near future EUR/USD will get support from the further reduction of the fiscal risk premium. The strategists underline that when the debt problems escalated in the early January investors priced in sufficient risk premium for euro. While the Greek issues have once again got in the center of market’s attention, the narrowing yield spreads on Spanish and Italian bonds that are much more important from the systemic risk point of view allow looking for some contraction of this premium.

As a result, Goldman Sachs remains bullish on euro and keep the existing long positions at $1.4085 from the March 18 targeting $1.50.

ECB officials hint at further tightening

European Central Bank officials signal that the central bank will keep tightening monetary policy this year in order to fight rising inflation as the euro area’s economy’s improving, even though the ECB President Jean-Claude Trichet said that the rate hike to 1.25% conducted on April 7 wasn’t necessarily the start of a series.

Ewald Nowotny (Austria): investor expectations that the benchmark interest rate will be increased by another 50 basis points in 2011 are well-founded. The central bank will revise its inflation forecast after estimating in March that it would average about 2.3% this year. It’s quite obvious that both ECB interest-rate regime and our liquidity regime have been in crisis mode for quite a long period of time. The euro area as a whole is no longer in the crisis situation and this development will be reflected in the ECB’s policy.

Luc Coene (Belgium): monetary conditions are too accommodative.

Axel Weber (Germany): there is a significant increase in inflationary pressure and current policy is supportive of the economy and expansive.

Yves Mersch (Luxembourg): the growth dynamic is carrying on and is firming and that policy remains “very accommodative.

Vitor Constancio (ECB Vice President): Portugal is likely to be the last country to require help.
Trichet underlined that economic growth is now self-sustained and risks are balanced.

The IMF raised last week its growth prediction for the euro region to 1.6% in 2011 and 1.8% in 2012.

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