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Watch Fed’s meeting minutes on Wednesday
To get insight about the Federal Reserve’s stance toward further quantitative easing one has to watch the Fed's January meeting minutes released on Wednesday.
The minutes will show how the opinions of the central bank’s officials are divided: some FOMC members may have seen the need for additional monetary easing.
This time the central bank for the first time will provide "qualitative" details on officials' views on the Fed's near-record $2.9 trillion balance sheet.
Last month the Fed revealed its intentions of keeping the rates near zero until the end of 2014 but gave no details on how it should handle its asset holdings.
The argument against QE3 is improved labor market situation (in January unemployment rate declined to 8.3%). However, some experts think that US economy won’t gain enough growth pace to satisfy the Fed.
Different comments on Greece and euro
UniCredit: if Greece leaves the euro area, it would be a disaster for Greek society, while for the rest of Europe it won’t matter much in the longer term. However, the majority underestimates the risks of Greek default to the global financial markets in general and other European nations in particular.
Bank of Nova Scotia: as Greek parliament approved austerity measures the pressure on euro may ease in the short term.
Societe Generale: speculative positioning data shows that short euro positions are being reduced, but not enough to spark a substantial risk rally. EUR/USD will struggle to break last week's maximum at $1.3330.
Morgan Stanley: EUR/USD correlation with the market’s risk sentiment will break down this year. The single currency will remain under pressure with the ECB’s accommodative increase of euro’s supply, recessionary growth and political uncertainty. Sell euro at $1.3250, stopping at $1.3300 and targeting $1.2390.
Credit Agricole: so much good news is already reflected in the value of the single currency, so even if there is some form of debt deal and second bailout package for Greece EUR/USD’s advance will be limited.
JPMorgan: buy euro against franc
Analysts at JPMorgan recommend buying the single currency versus Swiss franc. In their view, the pair EUR/CHF will rise to 1.23 in the medium term.
The specialists point out that in Switzerland deflationary forces are mounting, while the economy is close to recession. The bank reminds investors of weak January manufacturing PMI (the indicator declined from 49.1 to 47.3) and high unemployment rate.
According to JPMorgan, the SNB will defend the 1.20 floor or possibly to raise it.
Moody’s downgraded European nations
The single currency declined versus the greenback for the third day. Euro fell after Moody’s Investors Service downgraded several European nations. US dollar, on the other hand, strengthened versus all of its major counterparts as the market’s risk sentiment deteriorated.
Moody’s cut Spain’s rating from A1 to A3, Italy’s – from A2 to A3 and Portugal’s one – from Ba2 to Ba3 with negative outlooks. The ratings of Slovakia, Slovenia and Malta were also lowered with negative outlooks. In addition, the agency said it may strip France, Austria and the UK of their top Aaa ratings. The rating of EFSF (European Financial Stability Facility) was retained with stable forecast.
According to the Moody’s economists, the downgrade was motivated by the uncertainty over the euro area’s prospects for institutional reform of its fiscal and economic framework and the resources that will be made available to deal with the crisis.
The euro zone’s finance ministers meet tomorrow to discuss a second 130 billion-euro ($171 billion) aid package for Greece which managed to reach parliamentary approval of austerity measures.
Analysts at Mizuho claim that “the ratings agencies behind the curve as the risks have actually been falling in Europe. There may be worries that countries cutting fiscal spending may drag on their economic growth, but the concerns aren't new and the downgrade should have minimal impact on market sentiment.”
Investors’ attention will be also focused on Italian bond auction today (bonds due in 2014, 2015 and 2017) and debt auctions of Spain, Belgium and Greece (bills) and the Netherlands (bonds maturing in 2017) tomorrow.
The pair EUR/USD fell from last week’s maximums above $1.3300 to the levels in the $1.3135 area.
Bank of Japan increased asset purchases
Japanese yen declined against US dollar as the Bank of Japan increased its asset-purchase program by 10 trillion yen ($128 billion) to 65 trillion yen and set near-term inflation target at 1%. The move was generally unexpected. The BOJ left its benchmark rate at 0.1% (in line with forecasts).
According to the BOJ statement, the central bank’s goals are to “clarify its monetary policy stance and to further enhance monetary easing” to “overcome deflation and achieve sustainable growth with price stability.” Some experts, however, criticize the BOJ for yielding to political pressure. The increase in the asset-purchase facility will be used to fund purchases of more government bonds.
Japanese central bank decided to support national economy which contracted in the final quarter of 2011 by 2.3% (y/y), data released yesterday showed. The BOJ also signaled its resolve to take further action to beat deflation. Nationwide core CPI fell by 0.1% (y/y) in December, the third straight month of decline. Prices haven't risen by at least 1% for any year since 1997.
It’s also necessary to point out that as US Federal Reserve last month set an inflation target and extended its commitment to near zero rates. As a result, pressure on the BOJ strengthened encouraging it to make a move.
Analysts at Sumitomo Mitsui think that the impact on yen’s long-term uptrend will be limited. Specialists at Mitsubishi UFJ Morgan Stanley Securities claim that the BOJ still has further easing options left, such as increasing the amount of assets it buys and buying JGBs with longer maturities.
Economists at Credit Agricole think that the BOJ's decision will help to keep JGB yields low and make yen weaken in the short term. However, the specialists aren’t sure that the impact will be sustained. There needs to be probably more to be done, the buying of JGBs would need to be more intense, says Credit Agricole.
The pair USD/JPY rose above 78 yen mark. Resistance for the greenback lies at 78.29 yen (maximums of the late November and January 25). Above this level the upside momentum will increase.
Analysts at UBS revised up euro forecast
Analysts at UBS raised 1-month forecast for euro from $1.2000 to $1.3000 and increased the 3-month projection from $1.1500 to $1.2500.
The specialists also lifted up their 3-month forecast of USD/JPY’s rate from 75.00 to 77.00.
According to UBS, short-term risks diminished: the situation in the euro zone’s banking sector will improve due to ECB’s Long-term liquidity operations (LTLO) operations, while the threat of a disorderly Greek default for now subsided.
China pledged to help the euro area
The single currency went up versus the greenback and reached 2-month maximums against Japanese yen as the People’s Bank of China announced that the nation will take part in resolving the euro zone’s debt crisis.
The PBOC Governor Zhou Xiaochuan said that China can provide help through the central bank, China Investment Corp., the nation’s sovereign wealth fund, and banks including the China Development Bank, Export-Import Bank and other institutions.
Analysts at Royal Bank of Canada claim that we’ll see some growth on the short covering, but the advance won’t be long.
On the upside, euro’s moves are limited ahead of the European finance minister’s teleconference on the second bailout for Greece (the meeting initially scheduled for today was put off to Monday, February 20). European authorities are waiting for written commitments of Greek parties on the implementation of the austerity program. According to Greece’s government, the necessary assurances will be provided today.
The pair EUR/USD rose from yesterday’s minimum at $1.3079 to the levels around $1.3180. There may be some further consolidation between 100- and 55-day MAs.
Commerzbank: EUR/CAD technical comments
Analysts at Commerzbank are bearish on the single currency versus Canadian dollar. The specialists note that EUR/CAD didn’t manage to overcome resistance provided by the 55-day MA at $1.3258 and is resuming decline.
According to the bank, support levels are situated at $1.3000 (psychological level), $1.2876 (2012 minimum), $1.2777 (2011 minimum), $1.2765 (the 1985-2012 uptrend line) and $1.2613. Resistance levels are situated at $1.3253 (January maximum), $1.3258 (55-day MA) and $1.3398 (September minimum).
Analysts on USD/JPY prospects
Analysts at BNP Paribas believe that one shouldn’t hurry to turn bullish on USD/JPY. The specialists underline that though the Bank of Japan decided to keep expanding its balance sheet and set a 1% inflation target, it will not be guiding policy any differently. The economists remind that asset purchases didn’t manage to reverse yen’s uptrend either in the past 3 years or during the prior QE in 2002-2004. According to the bank, USD/JPY will trade in 73 yen area in first quarter, 71 in the second one and then decline to 70 in the final 3 months of the year.
Never the less, analysts at Barclays Capital note that the BOJ is trying to "catch up to its counterparts, and this adds to the downward pressure on yen already prevailing from Japan’s ongoing external balance deterioration and the risk of a sovereign downgrade toward fiscal year-end (March 31)”. With Japanese interest rates also “lower for longer” Japanese investors will look abroad for better returns stepping up monetary outflows from Japan. In addition, US dollar will be helped by American economic recovery. In their view, USD/JPY will rise to 79.00, 81.00 and 83.00 yen in 3, 6 and 12 months.
By the way, specialists at Societe Generale point out that the move of Japanese central bank doesn’t look that large compared with ECB’s actions: the BOJ will increase bond purchases by a further 10 trillion yen this year, which could increase the size of their balance sheet by 2% of GDP, while the ECB's December LTRO added nearly 5% GDP to the central bank's balance sheet (remember that there will be another 3-year LTRO February 29). The specialists say that though the fast that USD/JPY rose above 200-day MA is rather promising, the pair still has to overcome the critical 80 yen level.
Economists at CitiFX believe that yen’s depreciation will be short-lived. In their view, it will be difficult for USD/JPY to start sustainable rally until US Treasury yields as a whole start to press higher.
HSBC about the forex market prospects
While many experts expect the single currency to keep falling versus the greenback, analysts at HSBC think that EUR/USD will rise to $1.3700 by the end of the second quarter.
The specialists don’t think the market has arrived at any kind of final verdict on Greece. There is disappointment that there wasn’t anything firmer in terms of ring-fencing Greece, but progress has been made and there is political commitment on the outcome. In that environment, people should still buy the euro, claims the bank. In the short term, euro will push higher and some of the doubts will fade away.
HSBC also believe that the Swiss National Bank (SNB) will defend the floor for EUR/CHF which was set at 1.20 in September 2011 without raising it in the near future. As for USD/CHF, it will remain stable at around 0.90 over the next 3 months.
The specialists are bullish on emerging market currencies, even though many are dependent on global growth indicators, and are driven by unpredictable risk appetite.