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May 23: economic events
The Bank of Japan has chosen not to deliver more monetary stimulus this month. The central bank kept benchmark rate unchanged at 0.1% and announced no additional bond purchases. The lack of easing made yen to strengthen versus all of its major peers. In addition, Japan’s trading deficit narrowed from 0.62T in March to 0.48T in April – another driver for Japanese currency.
Risk sentiment today was also hurt by the reports of former Greece Prime Minister Lucas Papademos saying that preparations for the country's exit from the euro zone are being considered. Although Papademos regards such move as unlikely, the risk, according to him, seems real.
Asian stocks lost 1.5% (MSCI Asia Pacific Index). AUD/USD hit the minimal level since 2011 sliding to 0.9741. EUR/USD is consolidating above 2012 minimum of $1.2624.
Also watch today:
• Great Britain: MPC meeting minutes. According to the forecasts, the MPC officials have voted unanimously to keep the monetary policy unchanged. Retail sales in April are forecasted to decline by 0.5% vs. a 1.8% growth in March – that would be a very bad sign indicating that the condition of the recessed UK economy aren’t improving at all.
• Europe: Leaders of the EU 27 member states assemble in Brussels for a crisis meeting. New French President François Hollande will try to push the currency union from austerity to growth promotion and make Germany agree to the euro bonds – debt issued for the euro zone as a whole. Analysts at Westpac say that the outcome of the meeting will hardly stimulate markets.
• Canada: Core retail sales in March may grow by 0.6% compared with a 0.5% increase in February. The nation’s economy for now seems stable enough.
• U.S.: New home sales are also expected to increase to 336K in April vs. 328K in March.
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Key options expiring today
Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).
Here are the key options expiring today:
EUR/USD: $1.2650, $1.2725, $1.2730, $1.2750, $1.2850 and $1.2870;
USD/JPY: 78.75, 79.00, 79.75, 79.85, 80.00 and 80.30;
EUR/GBP: 0.8040 and 0.8100;
USD/CHF: 0.9300 and 0.9400;
AUD/USD: $0.9900 and $0.9950;
USD/CAD: 1.0120 and 1.0140.
Image from yourmoneydictionary.com
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JPMorgan: forecast for fx majors
According to analysts at JPMorgan Chase, the greenback is likely to strengthen versus its major counterparts as a “safe-haven” against the backdrop of possible Greek exit from the euro zone. Analysts expect the economic slump in China and in the U.S. to weaken commodity currencies as the prices will fall. Japanese yen is the only currency that is expected to appreciate against the dollar.
Specialists sharply lowered their forecasts for EUR/USD to $1.22 in Q2 and to $1.24 by the end of 2012. USD/CAD is forecasted to reach C$1.04 by mid-year AUD/USD may fall to $0.96, while NZD/USD – to $0.73. USD/JPY, however, may weaken to 78.00 yen in Q2.
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Bank of America: EUR/JPY may gain
According to Bank of America, the common currency may reach its highest level against the yen in almost three weeks.
Analysts expect EUR/JPY to strengthen in a short term to 105.80 yen (50% Fibonacci retracement of a decline from March 21 maximum to May 18 maximum). In their view, the euro is looking oversold (14-day RSI is close to 30, signaling the downtrend may reverse) Since the end of March the euro has declined 8% versus the Japanese currency.
Chart. Daily EUR/JPY
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Yen strengthened as BOJ refrained from easing
The Bank of Japan has chosen not to deliver more monetary stimulus this month. The central bank kept benchmark rate unchanged at 0.1% and announced no additional bond purchases (the size of asset-purchase fund remained at 40 trillion yen ($503 billion).
According to the BOJ, Japanese economy is vulnerable due to the strong uncertainty over the global economic prospects and concerns about the euro area. Japanese monetary authorities assure the markets that they are ready to act if markets become destabilized and yen makes a new spike.
The lack of easing made yen to strengthen versus all of its major peers. In addition, Japan’s trading deficit narrowed from 0.62T in March to 0.48T in April – another driver for Japanese currency.
Yesterday Fitch cut the nation’s long-term foreign and local currency issuer default ratings to A+ with negative outlooks citing high rising public debt ratios. However, the downgrade didn’t have much impact on USD/JPY as most Japanese government bonds (JGB) are domestically owned.
Analysts see the next move to more easing in July after the central bank releases its economic forecasts. NLI Research Institute points out that “Japan is likely finding it more difficult than before to intervene in the currency market given international pressure, so if the yen spikes to around 77 to the dollar, the BOJ may act first through monetary policy to weaken yen.”
The pair USD/JPY is trading within gently sloping downtrend since the end of March.
Chart. Daily USD/JPY
RBS: comments on major currencies
EUR: Weaker economic data expected later this week will limit EUR/USD upside potential from current levels.
GBP: The sharper than expected fall in inflation in April may have lowered a potential barrier to more QE. GBP gains will be capped from here. The fair value for GBP/USD is at $1.54, so the pair may extend decline. A dovish set of BoE minutes is likely to support the ongoing squeeze higher in EUR/GBP.
JPY: Japanese policy makers are expressing increased concern over JPY strength. Intervention risk will increase, if USD/JPY approaches 78 yen level.
CHF: Swiss consumer confidence rebounded to the maximal level in a year, adding to the view that the economy is stabilizing. Renewed Euro zone fears are likely to increase demand for CHF amid safe haven flows, but the SNB stands ready to act.
CAD: Core and headline y/y CPI for April increased and March manufacturing and wholesale sales improved. But there was foreign net selling of Canadian securities in March and external headwinds and positioning adjustments weighed on the CAD.
AUD: Aussie has price in a lot of negative developments (lower commodity prices, weaker equities, narrower yield advantage, and domestic political uncertainty). At the same time, uncertainty in Europe suggests risks are still skewed to the downside.
NZD: New Zealand’s government to deliver a credible budget on Thursday. Political stability much stronger than Australia. Recovery frustratingly slow, but looks somewhat oversold compared to the AUD.
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Pound is hurt by the news flow
British pound is slapped by very poor retail sales data: the index contracted in April by 2.3% (the biggest decline since 2008) after adding 2% in March.
Also note that the MPC released its May meeting minutes. The essentials are:
BoE is prepared for another round of QE, but doesn’t want to hurry as inflation will remain above the target 2% level in the medium term.
David Miles dissented from the majority opinion and voted for more QE (25-billion-pound increase).
Decision to keep rates unchanged at 0.50%, as expected, was unanimous.
The MPC would continue to monitor the outlook each month and further monetary stimulus could be added if the outlook warranted it.
GBP/USD hit $1.5673, the minimal level since the mid-March after breaching 200-day MA yesterday. Technical analysts at Commerzbank claim that the next target for sterling on the downside lies at $1.5599 (March minimum).
Chart. Daily GBP/USD
AUD/CAD: technical comments
AUD/CAD keeps trading in a downward channel since January. Last week a bullish correction followed the break below parity, but the bulls were unable to reverse the long-term downtrend.
However, analysts at RBS see the potential for the pair’s upward reversal. The specialists underline that the pattern resembling such reversal model as “doji” was formed last week (see the weekly chart). In their view, the value of this observation increases as the market is trading in oversold conditions (14-week RSI is close to 30).
According to RBS, one may go long on AUD/CAD at $1.0060. The bank recommends increasing positions if Aussie overcomes 1.0112 (May 17 maximum). Bullish targets lie at 1.0430 onto 1.0557, while stops may be places around 0.9890.
In our view, the picture on the daily and weekly Ichimoku charts is still too negative. We advise you to bear this trade in mind. If the pair rebounds in the 0.9925/00 area (and support looks solid enough), don’t hurry and watch for the parity level. If the rate overcomes 1.0000, get ready to follow the lead of RBS.
Support levels:
- 0.9943 (38.2% Fibonacci retracement of a 2010-2011 growth);
- 0.9925 (support of a channel);
- 0.9913 (2009 maximum, 100% Fibonacci retracement of a 2009 growth).
Resistance levels:
- 0.9977 (May 15 minimum);
- 1.0175 (resistance of a channel);
- 1.0000 (parity);
- 1.0207 (double top in 2010);
- 1.0430 (100-day MA, 123.6% Fibonacci retracement).
Chart. Daily AUD/CAD
EUR renewed 2012 minimum
Today EUR/USD slid to $1.2614 renewing the year's minimum. Then euro managed to recover to $1.2650 helped by option buyers. Experts say that there is a barrier at $1.2600 with likely stops just beneath ahead of more sell stops through $1.2580.
Commerzbank notes that if we see a sustainable bearish breakthrough below $1.2624 (previous 2012 minimum), EUR/USD will head to support at $1.2530 and $1.2066. Resistance lies at $1.2750 (May 17 maximum). In the longer term the outlook for EUR/USD will remain bearish as long as it’s trading below $1.2875/1.3000.
On the fundamental part, Morgan Stanley claims that “very little is likely to come out of this summit... The pressure remains on the downside in EUR/USD and any rebounds will be sold into in this environment.”
Chart. Daily EUR/USD
OECD: GDP growth forecast
According to the Organization for Economic Cooperation and Development (OECD), euro zone’s debt crisis may spill over outside the euro area with very serious consequences for the global economy
The OECD left its 2012 growth forecasts for 34 member-countries unchanged at 1.6% (euro zone’s concerns were offset by the improving prospects of the U.S. economy).
The OECD’s report recommends the ECB to be ready to resume quantitative easing if the situation in the euro region worsens. According to economists, declining inflationary pressure gives space for monetary stimulus.
Table. OECD GDP growth forecast for euro region
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