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Japan: government revised economic forecasts
Japanese government reduced forecast for the nation’s real GDP growth in 2012 fiscal year which begins in April from 2.7%-2.9% to 2.2% (y/y). The estimate of this year’s growth were lowered from +0.5% to -0.1%.
As the reason of the revision the officials cited negative impact of the yen's appreciation and the ongoing sovereign debt crisis in the euro area. At the same time, the next fiscal year Japan’s economy is expected to “recover moderately” on the assumption that the global situation starts improving.
Consumer prices will add 0.1% in fiscal 2012 (y/y) after showing declines in the previous three years, says the government. In fiscal 2011 CPI will drop by 0.2% (previous forecast was the 0.2% rise).
Citigroup: warning for USD bulls
Currency strategists at Citigroup say that US economic data has so far been surprising the markets in a positive way referring to the recent labor, housing and trade figures. As a result, the Economic Surprise Index designed by the bank has risen from the record minimum in June almost reaching the record maximum at present.
According to Citigroup’s experience, the upside moves of the index correspond to US dollar’s selling periods. It happens as the market becomes more optimistic and risk sentiment improves making the demand for US currency decline.
The analysts don’t think that dollar will weaken this year as many traders have already closed their books for the year and others may be reluctant to take on big new positions right before the end of a quarter. At the beginning of 2012, however, if the economic data remains favorable, investors may decide that they have overestimated the negative effects of the euro zone’s crisis on the global economy. “The surge in data flow itself may be insufficient to reverse recent risk aversion, but it does suggest that dollar’s weakness could reassert itself more quickly and forcefully than many anticipate once conditions settle down,” says the bank.
Analysts expect Aussie to weaken early in 2012
Analysts at Commonwealth Bank have so far lowered forecast for AUD/USD to $0.9800 by March 2012 and to $0.9500 by June 2012.
Reasons:
— general strength of US dollar due to improved US economic data (opposite views to Citigroup);
- funding demand for the US dollar in response to Basel III capital requirement;
- central banks slow down their diversification efforts out of US dollar into euro as the European debt problems persist.
Strategists at TD Securities expect Aussie to slide to $0.9500 by the end of the first half of 2012.
Reasons:
- slowing growth in the global economy with the deep recession in the euro zone and the United States;
-China’s economic slowdown.
Westpac economists think that AUD/USD will rise to $1.0200 in the near term as it’s supported by foreign direct investment inflows. Never the less, Aussie has been trading above its fair value in the $0.91 area for a long time and the odds are that it will depreciate.
Analysts at National Australia Bank also claim that Australian currency will end December at $1.0200, then drop to $0.9600 by March before rising gradually to $0.9800 by June and then to parity by September.
Barclays thinks that AUD/USD will weaken to $0.9800 by the first quarter and then rise to $1.0100 by June. In the short term Aussie will stay under pressure as the euro zone governments failed to commit to faster fiscal consolidation and the ECB refused to extend bond purchases. In the medium term, however, the bank retains a constructive view due to many factors including limited impact on Australia's macro fundamentals from deteriorating euro zone’s growth, expectations of more easing from China, stability in local-currency commodity prices which are helped by weaker currencies.
UniCredit: forecasts for EUR/USD and GBP/USD
EUR/USD: the single currency will keep weakening in the first quarter of 2012. The pair may slide to $1.25. If the tensions at the market ease, euro will be able to rebound, though sustainable rally seems unlikely.
GBP/USD: British pound may decline versus the greenback in the first half of the next year as US currency will keep enjoying strong demand, while the bank of England will continue asset purchases. In the second part of 2012 the outlook for pound is less negative, though UK economic growth will remain sluggish. As a result, the pair GBP/USD will be capped by the levels in the $1.60 area.
Chart. Daily EUR/USD
Chart. Daily GBP/USD
The FOMC will become dovish the next year
The Federal Open Market Committee is expected to become more dovish due to the annual rotation. As a result, the Federal Reserve Chairman Ben Bernanke will get chance to pursue his active loose monetary policy if he thinks that American economy needs help.
The FOMC consists of 12 members – 7 Fed board governors and the president of the New York Federal Reserve Bank have – permanent vote, while the 4 remaining seats are shared by the other 11 FRB presidents which change places on the annual basis.
This year 3 out of the 4 rotating seats was occupied by the hawks – Richard Fisher, the president of the Dallas Federal Reserve Bank, Charles Plosser of Philadelphia, Narayana Kocherlakota of Minneapolis. That means that these policymakers don’t think that monetary policy can be used to stabilize economic conditions and would prefer setting long-term target for inflation. Doves, on the other hand, believe that the central bank has to keep interest rates low to support the national economy. Fisher, Plosser and Kocherlakota voted against the pledge to keep short-term rates close to 0 until the middle of 2013 and against the Operation Twist.
The old distinction, with hawks concerned about inflation and doves worried about weak growth, has subsided over the past 20 years. Fed officials agree that keeping inflation low and stable is a necessary precondition of good economic performance.
This year, a “tough group” of hawks occupied. These officials had little sympathy for the Fed’s innovative efforts to try to lower long-term interest rates, said Brian Bethune, a Fed expert at Amherst College in Massachusetts.
In 2012, the Fed is losing 3 hawks and only getting one: Jeffrey Lacker, the president of the Richmond Fed. The other 3 new members: John Williams, the president of the San Francisco Fed, Dennis Lockhart, the president of the Atlanta Fed, Sandra Pianalto of Cleveland are viewed as more consensus-minded and likely to vote with Bernanke.
BBH: demand for yen will remain high next year
Analysts at Brown Brothers Harriman believe that in the first quarter of 2012 the demand for Japanese yen will remain high.
In their view, yen will remain among the top performers in the G10 in the first quarter of the next year due to such factors as:
- demand for safe havens;
- Japan’s inability to recycle its current account surplus.
According to BBH, the Bank of Japan could conduct new currency interventions. At the same time, the specialists don’t expect the BOJ to establish a definitive floor in the USD/JPY.
ECB balance extended to the record maximum
The pair EUR/JPY fell to 10-year minimum at 100.30 yen, the pair EUR/USD dropped to the minimal level since January at $1.2887.
Investors are concerned that European Central Bank will inject more cash into the financial system to avoid a credit crunch from the region’s debt crisis. The ECB announced yesterday that after last week’s lending to the euro zone’s banks its balance sheet climbed to the record level of 2.73 trillion euro.
Analysts at Westpac think that euro will stay under pressure due to the signs of more formal quantitative easing.
UBS: euro’s unlikely to rebound
Analysts at UBS give several reasons why they think that the single currency won’t be able to rebound at the beginning of 2012 as it has done this year gaining several thousands of pips.
1. The ECB is likely to cut rates to a new historic low of 0.50% and might well then embark on outright QE.
2. Greek PSI will last till March 20. However, revenue shortfalls due to the deeper-than-forecast recession may result in additional financing needs, which in the absence of new official money might mean a larger haircut and hence the need of more PSI.
3. If Greece is forced to impose an involuntary restructuring on investors, the crisis will spread to other problem economies – Portugal, Spain and Italy. The measures conducted by the European authorities are arguably not yet powerful enough to stop the contagion.
4. The above Greek scenario would result in Greece’s default. This will trigger credit default swaps (CDS) which imply payouts of more than 80 billion euro. This alone would make the market highly stressed.
5. High possibility of resistance to ESM ratification in some countries as well as more serious social unrest in both debtor and creditor nations.
UBS, Commerzbank: bullish on EUR/CHF
Analysts at UBS advise investors to buy the single currency versus Swiss franc expecting the pair EUR/CHF to rise to 1.25. According to the bank, “the franc is now largely flat on a structural basis” and “the SNB should take note of this before they manage their next step”. As a result, the specialists think that the odds that the Swiss national Bank increases floor for EUR/CHF are now higher.
Analysts at Commerzbank also think that the speculation about EUR/CHF floor-raising will help to strengthen euro ahead of the important inflation data release in February.
Yen: comments and forecasts
Japanese yen has strengthened this year versus all major currencies gaining 4.2% against the US dollar and 6.7% against euro, although Japanese authorities have sold at least 14.3 trillion yens ($183 billion) trying to stem the appreciation of the national currency.
It’s necessary to remember that the fiscal year in Japan ends on March 31. Usually yen tends to rise in the first months of the year. The advance of Japanese currency accelerates through March. Then in early April the trend changes in the opposite direction as Japanese companies finish seasonal repatriation of profits and the funds start flowing out of Japan.
This time, given the prevailing risk aversion environment, Japanese companies may decide to leave their money at home in April. However, if risk sentiment improves, the outflow from yen will strengthen. Until that happens, yen will remain strong and continue to consolidate. So, the future of Japanese currency depends on investors’ risk sentiment and on whether the greenback will be attractive as a safe haven.
The pair USD/JPY still stays within the longer-term downtrend which has been developing since the middle of 2007. During the last few months US dollar has been consolidating between 75 and 80 yen. One will be able to speak about the long-term trend reversal only if the pair consolidates above the psychologically important point of 80 yen and then overcomes 100-week MA in the 84 yen zone.