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RBC, Commerzbank: resistance for EUR/JPY
Technical analysts at RBC Capital Markets note that “bullish engulfing” pattern seen at EUR/JPY daily chart (February 15, 16) made the pair break through the key resistance at 107.45 yen.
The specialists underline that euro finds itself inside a “declining wedge” seen on the monthly chart. If the single currency closes March above 107.45 yen, it will be able to test resistance levels at 111.67, 114.05 and 120.95 yen. The bank expects bulls to become more active at 107.45 and 102.20 opening new longs on the dips.
Analysts at Commerzbank also think that EUR/JPY may strengthen to 113.29 yen if it overcomes resistance at 111.57.
RBC: spring NFP figures may bring negative surprises
Analysts at RBC claim that while US economic fundamentals (particularly, the labor market ones) have likely improved so far, some of the recent favorable indicators’ glow may be attributed to the better weather – the winter of 2011-2012 in the US was the forth warmest since 1920.
The specialists conducted an interesting research: they analyzed Non-Farm Payrolls data for the last 15 years and came to conclusion that data surprises tend to be positive during warm winters and the actual figures are much higher than on average (this winter NFP beat expectations 3 times increasing by 250K per month on average). Such trend may be explained by rising construction activity and retain spending during mild winters.
Spring payroll surprises, on the other hand, tend to be negative and also higher than average. This happens because market’s participants revise up their expectations after winter’s positive figures, so that the next time it’s much more difficult for the actual data to surpass the elevated estimates.
What are the implications for trading? According to RBC, after such warm winter of 2011-2012, spring data release may surprise the markets to the downside. How will US dollar react to such data releases?
The negative correlation of the greenback and risk sentiment has seemed to wear down (earlier better US data caused American currency decline as risk appetite improved and investors were reducing dollar positions because the greenback was perceived as a safe haven) and for now dollar is acting as a growth-linked currency. So, if RBC’s projections get confirmed, US currency will likely find itself under bearish pressure.
JPMorgan Chase: the risk of hard landing in China
While many economists worry about China’s economic slowdown, analysts at JPMorgan Chase think that the nation has already started to experience “hard landing”: “Car sales are down, cement production is down, steel production is down, and construction stocks are down. It’s not a debate anymore, it’s a fact.”
Earlier in March China’s Premier Wen Jiabao announced that China’s 2012 economic growth target is set at 7.5%, while during the previous 7 years it was always at 8%. China’s factory output in the first two months of the year rose the least since 2009, retail sales increased less than expected and inflation eased to the slowest pace in 20 months, while foreign direct investment in China declined in February.
JPMorgan Chase warns investors about the situation at China’s property market. As Wen claimed that home prices are still “far from a reasonable level,” there are concerns that Chinese government will maintain restrictions on the property market for an extended period that will have negative effect on economic growth.
“What you can look forward to is to see a pickup in property demand that will clear up the inventory; that doesn’t appear likely. We don’t see any evidence of a policy move that will cause the economy to reaccelerate,” say the specialists.
Gary Shilling (A. Gary Shilling & Co.) also thinks that China’s heading towards hard landing and defines this term as a growth rate below 6%.
UK economy: there’s some improvement
On Wednesday, March 2, Chancellor of the Exchequer George Osborne is expected to present an annual budget and to report there is no threat of recession hanging over Great Britain.
Dow Jones analysts believe that Osborne may make some amendments to tax legislation, but basically leave the budget neutral.
Specialists say the budget deficit has improved. Public-sector net borrowing will be about 125 billion pounds ($200 billion) in current fiscal year that ends this month rather than the 127 billion pounds forecast by the OBR in November, according to a survey of 27 analysts compiled by the Treasury last month.
Morgan Stanley: The deficit is likely to improve next fiscal year to about 120 billion pounds.
According to analysts, the U.K. economy definitely returned to growth in the first quarter after a 0.2 percent contraction in the last three months of 2011. Manufacturing and services continued to expand in February (PMI is above 50), while consumer confidence index is forecasted to grow (held at the highest since June).
Office for Budget Responsibility is likely to reflect weak improvement in the labor market with jobless claims seen reaching 1.75 million people this year. Data last week showed Claimant Count Change in February turned to be bigger than expected adding 7.2K versus forecasted 6.5K.
The data, released today, revealed a decline of CPI to 3.4% in February from 3.6% in January. Inflation, therefore, edged down in February to the lowest level in over a year keeping hopes that easing inflation will allow consumers to increase spending this year and to boost the economy. The main projection for CPI is to fall below the 2% target level by the end of the year.
RBS: The U.K. economy is looking marginally better: the euro area crisis has receded and the surveys seem to have got a bit better. Britain could easily get 0.3-0.4% in the first quarter despite some uncertainty around the construction data.
Overall in 2011 the UK economy grew just 0.9 percent. The next set of GDP figures for Britain due out in April.
Kiwi may stay unaffected by China in longer term
Concerns about China will send kiwi down? Some analysts don’t think so.
Commodity currencies, such as New Zealand’s and Australian dollars, dropped yesterday after BHP Billiton, the world’s largest miner, warned that iron ore demand from China was “flattening”. The producer expects demand growth to slide back into single-digit figures.
Despite the all the recent worries about the potential slowdown of Chinese economic growth – the second largest economy in the world is the biggest importer of commodities, mainly form Australian and New Zealand – some experts are bullish on NZD in the longer term. For example, analysts at financial adviser Macquarie Private Wealth believe that NZD/USD will keep appreciating during the next 3 years. Their main argument is that New Zealand and Australia will attract investors by safe political climate. They do have a point here as in the current condition political safety actually means much.
“If you look at the last 6 months... the New Zealand dollar has risen 8% against the US dollar. Even if the Reserve Bank Governor were to drop interest rates by a full percentage point, it would probably not change the track of our dollar,” claims Macquarie.
The specialists think that the interest gap between the New Zealand dollar and Australian dollar will close over time: “Our official cash rate is 2.5%, and we don't see any downside to that - the next move from New Zealand being up...the likely next moves in Australia is down”.
Economic data
New Zealand’s current account deficit narrowed from NZD4.75 billions in the third quarter of 2011 to NZD2.76B in the final 3 month of last year.
Watch the nation’s GDP release at 9:45 p.m. GMT. The consensus forecast is 0.6% growth in Q4 slightly down from 0.8% in the previous quarter. The expected slowdown is explained by the decline in manufacturing, compensated by strong farming output and better retail trade and construction.
RBS: how to trade USD/CHF
According to Royal Bank of Scotland, the U.S. dollar may strengthen to Swiss franc because of the U.S. economic improvement and the interest rates increase.
Strategists at RBS are bullish on American currency. They advise to wait for the lower entry levels and recommend buying the greenback when USD/CHF closes below the 200-day MA for two consecutive days (currently at 0.8824). The target level lies at 0.9950. According to an internal model, fair value for the pair is above the 0.9400 level.
Rebounding U.S. economy embraces hope to investors. Inflation is close to a 2% target level and a further quantitative easing is unlikely. The number of Americans claiming new jobless benefits fell to a four-year low (351K in Feb. versus 365K in Jan.). Philly Fed
Manufacturing Index picked up this month (12.5 in Feb. versus 10.2 in Jan.). Number of building permits increased to 0.72M in Feb. from 0.68M in Jan. The overnight index swap market is indicating an interest-rate increase from the Federal Reserve in the fourth quarter of 2013, compared with a July 2014 forecast in February.
The yield spread from purchasing 10-year Treasuries versus similar-maturity Swiss bonds rose to 142 basis points from 127 basis points at the beginning of the month.
Analysts at RBS expect the greenback to trade in the 0.9500 area by the middle of the year before declining to 0.9000 by December.
RBS: comments on major currencies
- EUR/USD: the pair moved higher in recent days, initially spurred on by mixed US economic data at the end of last week and potentially due to some position readjusting. However, further downside for the pair is likely given increasing rate spreads in favor of the US and recent liquidity expansion in the Euro-area relative to the US.
- JPY: yen is acting more like a funding currency for “risk-on” trades. Strong global equities and narrowing credit spreads in recent weeks appear to be boosting JPY crosses. We still see 85 as a bridge too far at this stage, but base may now be 82.
- CAD: Canadian data was softer, with a drop in foreign interest for Canadian assets and disappointing manufacturing and wholesale sales data. But we still think CAD remains attractive versus the USD and EUR, especially if US data keeps improving.
- NZD: strong rural growing conditions and improving property market are tending to lift confidence. We see scope for NZD to out-perform AUD near term.
- AUD: recent Australian activity indicators below expectations. Political and budget uncertainty increasing as contentious mining and carbon taxes are introduced midyear. Global risk appetite up, but local factors should cap AUD.
- This is mixed week - higher US rates pushed the USD higher over the week versus JPY, AUD, NZD and CAD while short-covering has pushed up EUR, CHF and GBP.
UK: public borrowing surges, Posen and Miles want more QE
British pound dropped by 70 pips on the news that UK public sector net borrowing rose in February to the maximal level since 1994 of 12.9 billion pounds versus the forecast level of 5.0 billion pounds.
In addition, the minutes of the Bank of England’s MPC March 8 meeting showed that 2 members of the Committee (David Miles and Adam Posen) voted to increase Asset Purchase Program by 25 billion pounds in order to avoid damage for the supply capacity of the economy. Posen and Miles said that the central bank’s monetary policy should be loosened further to stimulate demand quickly, “but the stimulus could then be withdrawn were it to become clear that there was a significant risk of inflation rising above target in the medium term.”
The agreement to keep the benchmark interest rate unchanged at 0.5% was unanimous. According to the statement, “overall, the Committee judged that the recent data had evolved in line with its expectations and that there had been little change to the balance of risks to UK activity and inflation.”
At the same time, MPC acknowledged the sharp increase in crude oil prices: “If oil prices were to rise to a level significantly higher than the Committee currently assumed, then that would tend to slow the global and domestic recovery, reduce supply growth, and put upward pressure on domestic costs and prices.”
After the market digested the data GBP/USD found support in the1.5856 area and managed to rise to $1.5870.
If the pair manages to rise above March 19 maximum in the $1.1915 zone, it will get chance to strengthen to $1.5966 (Mar. 2 maximum) and $1.5975 (Mar.1 maximum). Support levels for sterling are situated at $1.5831 (Mar. 20 minimum), $1.5823 (Mar. 19 minimum), $1.5798 (21-day MA) and $1.5771 (10-day MA).
Commerzbank: euro’s advance may prove short-lived
The single currency was trading on the upside versus the greenback today as Greece's lawmakers approved the country's second 130 billion-euro bailout deal.
However, the majority of analysts regard euro’s advance as short-lives claiming that EUR/USD will likely be curbed due to rising U.S. Treasury yields which encourage dollar’s growth.
In addition, analysts at Commerzbank think that the approval “was not a big step but has been perceived as positive by the market”. In their view, “the broader trend is still a stronger dollar and on that point we see the economy picking up in the U.S.”
Brown Brothers Harriman: “If U.S. data remains solid U.S. yields may continue to track higher, while Europe faces some risks from the Italian labor reform talks and continued poor economic news from Spain”.
Many experts say that the Parliament vote was nothing but a formality.
EUR/USD is down from an almost 2-week high of $1.3283 to the levels around $1.3240. Resistance for the pair is situated in the $1.3300 area (61.8% retracement of the decline from the end of February to the middle of March).
Keep an eye on the Fed’s Chairman Ben Bernanke’s testimony to Congress later today and a bunch of European (especially German) PMIs tomorrow.
In the longer term analysts at UBS believe that the ECB would need to keep pumping liquidity into the euro zone’s money markets, so investors will be tempted to seek other foreign assets rather than the euro. According to the bank, EUR/USD will fall to $1.25 in 3 months and to $1.15 by the year-end.
Citi: USD/JPY ahead of Japan’s fiscal year
Usually Japanese companies tend to buy the national currency in March ahead of Japan's fiscal year-end. This year, however, the traditional pattern seems derailed, says Citi.
“One traditional yen specific factor is the year-end yen buying by Japanese corporates and there has been some of that of late. This time around, however, we have also seen some USD/JPY buying from Japanese energy importers. The latter could offset any USD/JPY selling in coming days."