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BMO: 2012 forecast for USD/CAD
Analysts at BMO Capital Markets note that for the past 2 months the pair USD/CAD has been trading between the levels above the parity and 1.0523 reflecting swings between risk-on and risk-off.
The specialists expect the greenback to strengthen to the levels around 1.0640 as the negative risk sentiment’s likely to prevail during the first quarter of 2012 and there is some chance of Bank of Canada’s easing its policy.
In the second half of the year as the risk appetites revives and the prospects for the BoC’s rate hikes build up, the pair may reverse down returning to the parity level by the end of 2012.
Merkel and Sarcozy warned Greece
Germany chancellor Angela Merkel and French President Nicolas Sarkozy claimed yesterday that Greece will be denied a crucial 130 billion euro bailout unless it can reach an agreement with its bondholders.
Under the terms of the second bailout, investors are being asked to write down 50% of the value of their holdings of Greek government bonds. There has been speculation that the size of this writedown may yet increase.
“We must see progress on the voluntary restructuring of Greek debt,” said the leaders of euro zone’s biggest economies.
Merkel added that “the second Greek aid package including this restructuring must be in place quickly. Otherwise it won't be possible to pay out the next tranche for Greece.”
Germany insisted that no country should be excluded of the euro zone, while France underlined that the new treaty implying tighter fiscal integration will be signed on March 1.
Merkel and Sarkozy met ahead of the EU summit which takes place on January 30. Today Germany’s chancellor meets the IMF managing director Christine Lagarde.
FBS analytical review 2011-2012
Main events of 2011. Outlook for 2012. Comments and forecasts for the single currency, Japanese yen and British pound.
Financial challenges of 2011
2011 was expected to be the year of global economic recovery after the recession of 2008-2009. The year began rather well: the Federal Reserve had launched the second round of quantitative easing, while Europe managed to take a breath amid the tensions caused by the Greek debt issues. Nevertheless, the results of 2011 seem dismal: instead of moderate economic rebound the developed economies are now facing the risk of stagnation and even contraction.
The problems started with the surge of the oil prices due to the turmoil in the Northern Africa and the Middle East. Then Japan suffered from the strongest earthquake and tsunami in its history which led to the Fukushima nuclear disaster. This resulted in the disruption of the supply chains which, in its turn, made commodities more expensive.
The situation in the euro area has deteriorated: Portugal was forced to ask Troika – the IMF, the EU and the ECB – for bailout. It became evident that Greece is tormented not by the crisis of liquidity, but by the crisis of solvency and confidence.
The response from the euro zone’s leaders came too late and was limited. The crisis began to spread across the region. Large European economies as Spain and Italy got under the market’s pressure and had to conduct austerity measures.
Summer was marked with US drama: as American debt exceeded the limit of 14 trillion dollars, Democrats and Republicans were debating on increasing the nation’s debt ceiling and managed to come to the agreement only in time of the deadline. The problem was temporarily resolved, but the whole mess has cost the country the loss of its highest credit rating.
Autumn has brought both good and bad news. On the one hand, despite the deterioration of the expectations during the summer the economic situation in the US began improving. On the other hand, the debt crisis kept spreading over Europe seizing more and more nations: the bond yields rallied even in the AAA-rated countries. At the same time, the policymakers on the either side of Atlantics still don’t hurry with the decisive steps aimed to resolve the problems which keep building up.
Of course, the world has managed to avoid the worst outcome – the single currency is still in place, while the US government shutdown was fortunately left out of the way. At the same time, the situation remains quite difficult. In 2012 the developed economies and the whole global economy will face serious challenges.
Europe may be facing the turning point in its history: the currency union will either have to make a rapid integration progress or begin disintegrating. Now it’s much more difficult for the European states to start recovering than it was a year ago.
The recovery would take substantial, but credible and accomplishable fiscal consolidation plans, stable liquidity supplies to the banking sector and much more efficient collaboration of all stakeholders.
Global economy will surely increase due to the economic growth of the emerging markets such as China and Brazil, though the lower demand in the developed world will affect these nations as well, so possibility of the global economic slowdown is high.
Euro: comments and forecasts
The majority of the analysts are bearish on EUR/USD. The European currency keeps trading within the downtrend despite some positive news, such as the ECB’s massive 3-year credit auction.
The single currency has little chance to repeat the advance it managed to make at the beginning of 2011, when it gained several thousand pips. The ECB is expected to cut rates to a new historic minimum of 0.50% or even lower and might as well embark on outright QE.
The pair EUR/USD may fall to $1.2550 in the first quarter of the year and then slide to $1.2000.
One might benefit from selling euro versus Australian dollar as the latter will be supported due to Australia’s trade connections with China, which aims to encourage the national markets with more loose monetary policy.
The yield spread between 2-year US and German bonds is holding close to -12 – it’s a positive factor for US dollar. Last time the negative reading was posted in March 2010 and held till July 2010 – this period corresponds to the slump of the pair EUR/USD from the levels in the $1.3300 zone to the multi-year minimum of $1.1875.
Pound: comments and forecasts
According to Bloomberg Correlation-Weighted Indexes, British currency added 0.7% versus the developed nations’ currencies (US dollar increased by 1.1%, while euro lost 1.4%, the Index shows) in 2011. Sterling gained 2.3% against euro and ended the year almost unchanged versus the greenback.
Pound will be helped by the fact that the effects from the VAT increase are disappearing and, consequently, the inflation pressure might decrease. In addition, Olympic Games 2012 will encourage tourism and consumer spending.
Among sterling-negative factors one should name the consequences of the severe austerity measures, the slump of the world’s business activity and the negative effects of the European debt crisis on British economy.
The pace of wage growth in Britain falls behind the pace of the price growth. As a result, disposable income of British people is declining and causes contraction of retail sales provoking general economic weakness of the United Kingdom.
Last year the pair EUR/GBP was steadily declining under the influence of debt problems in Europe. The European currency fell from the year maximums in the 0.9080 area to the levels in the 0.8300 area hit so far. For now pound’s appreciation doesn’t bother UK monetary authorities. Most likely, the Bank of England will think of taking some measures to curb sterling only if the pair drops to the 3-year minimum at 0.8000.
The pair GBP/USD has been trading in a more volatile way: during the past 6 months the British currency has reached the maximum at $ 1.66 and hit the minimum at $ 1.53. Pound is expected to stay above support at $ 1.52. If this level is broken, the pair may test $ 1.50. The rebound may take the pair to $ 1.6150.
Depending on what course the things will take in the first quarter of 2012, both Britain and the United States may get into another round of quantitative easing. The experts think that British central bank will increase its asset purchase program in February when the current stage of the purchases is finished. Until that moment the currency moves will be determined by the market forces.
Yen: comments and forecasts
Japanese yen has strengthened in 2011 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.
UBS: another recommendation to sell euro
Everybody is bearish on euro, so does UBS. Analysts advise investors to open shorts on EUR/USD at $1.2755, stopping at $1.3050 and targeting $1.2250.
In their view, by the end of the first quarter the European Central Bank will lower its benchmark interest rate to 0.5%. As a result, euro will lose support of the yield differentials. In addition the bank thinks that euro will stay under pressure due to the compulsory Greek debt restructuring. Moreover, it’s necessary to note that US economy is outperforming the European one, so that the Federal Reserve won’t launch the third round of quantitative easing – the factor positive for the greenback.
Citigroup: ECB won’t cut rates until February
Analysts at Citigroup believe that the European Central Bank will definitely cut interest rates, but this won’t happen until February as the euro zone’s monetary authorities need to wait for the confirmations of declining inflation and weaker economic growth.
According to Citigroup, on Thursday the ECB will take a pause in the borrowing costs reduction and reaffirm their support for the region’s economy.
As a result, the single currency will stay under pressure. The bank expects EUR/USD to drop to $1.25 in the next 3 months and then to $1.20 by the end of 2012.
Nordea: be bearish on euro
Analysts at Nordea Bank advise investors to go short on EUR /USD at $1.2779 placing stops at $1.3820.
In their view, euro will be affected by the difficulties the European governments will surely face trying to raise funds and implement new budget rules.
According to the bank, “the question is not if you are bearish on the single currency, but rather, are you bearish enough?”
The specialists claim that one should buy back the single currency when it hits $1.20.
EUR/USD: main events and data releases
On Monday the European currency tested the weakest level since September 2010 at $1.2665. Today the moves of EUR/USD seem limited on both sides.
On the upside, euro is under pressure ahead of Spanish and Italian securities auctions this week as investors are worrying that the nations won’t be able to raise enough funds to meet their funding needs.
Spain will offer 5 billion euro ($6.4 billion) of bonds due 2015 and 2016 tomorrow, while Italy plans to sell 12 billion euro of bills. Yesterday Fitch Ratings warned that Italy faces a “significant chance” of a downgrade. The agency is going to make decision on Italy’s and Spain’s ratings by the end of January.
In addition, Reuters reported that hedge funds may resist a 100 billion-euro plan to restructure Greece’s debt which will be outlined next week by Lucas Papademos.
On the downside, there’s some support as US dollar is constrained before China’s inflation report. According to the forecasts, the pace of consumer prices growth might have slowed down in December. As a result, Chinese monetary authorities may get more liberty in spurring growth easing their monetary policy.
In addition, demand for US currency as a safe haven may decline as America’s economic performance seems to be improving.
The longer-term forecast for euro is bearish with plenty of experts seeing the pair drift down to $1.20 during the next few months.
Today:
- German 5-year notes auction aimed to raise 4 billion euro. Euro will likely be vulnerable even to the slightest signs of weak demand for the debt of the euro zone’s leading economy.
- US Beige Book (7:00 p.m. GMT) – Summary of Commentary on Current Economic Conditions.
Tomorrow:
- Chinese CPI (1:30 a.m. GMT) – Prev. 4.2% y/y; Forecast 4.0% y/y;
- Euro zone’s Industrial Production (10:00 a.m. GMT) – Prev. -0.1% m/m; Forecast -0.2% m/m;
- US unemployment claims (1:30 p.m. GMT) – Prev. 372K; Forecast 370K;
- Also watch the ECB meeting, but that’s a separate story.
RBC on trading EUR/CHF and EUR/USD
Swiss National Bank Chairman Philip Hildebrand resigned on Monday due to the scandal over his wife’s currency trading.
Franc strengthened after Hildebrand’s announcement as the investors began questioning the SNB’s resolve to keep EUR/CHF floor at 1.20.
Analysts at RBC Capital Markets think that the market has overreacted. The specialists advise buying euro at 1.2000 stopping at 1.1975 and expecting the pair to rise to 1.2400.
It’s necessary to note that the bank isn’t exactly bullish on the single currency versus other peers. According to RBS, euro is likely to make a corrective bounce next week as the EUR/USD shorts are currently too large, but eventually euro will drop to the levels in the $1.25. As a result, the recommendation is to sell euro on the rallies.
ANZ: USD/JPY will face strong resistance
Analysts at ANZ underline that the greenback is trading versus Japanese yen within a very narrow range between 76.50 and 78.50.
The specialists note that even though an eventual break of the downtrend seems almost inevitable, the bulls will have to overcome strong resistance at 79.35/50 and 80.55/81.00. In their view, major moves of the pair will likely be only “elusive” as it turned out to be before.
According to the bank, the downtrend will reverse only if USD/JPY rises above 81.00 and holds above this level on a sustainable basis. If dollar slips below 76.50, it will risk falling to 74.50 or even 71.50.
Morgan Stanley: comments on EUR/USD
Analysts at Morgan Stanley believe that the European Central Bank will lower its benchmark rate to 0.5% and keep it at this level through 2012 in order to support the weak European economy. As a result, money market rates will decline; euro will become more attractive as a funding currency and depreciate.
The market will be pessimistic on the euro zone’s outlook, so the greenback will enjoy safe haven support this year. While the markets may worry about potential QE3, its impact is expected to be limited. According to Morgan Stanley, when the rest of the world is not outperforming, “bad news” in the United States will be more supportive for the American currency in the flight to safety.
The bank says that EUR/USD will end the year at $1.2000.