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Analysts: outlook for GBP/USD
GBP/USD jumped more than 1% on Friday after the EU leaders agreed on measures to ease concerns over the sovereign debt crisis in the euro zone, boosting risk appetite. On Monday the sterling keeps strengthening vs. the US dollar; however, it seems that the initial euphoria which greeted new fades amid uncertainty over how the plans are to be implemented.
The latest economic indicators suggest the Britain’s economy may have contracted in Q2 for a third successive quarter. On Monday, however, Britain’s manufacturing PMI release cheered the investors up: the index increased from 45.9 in May to 48.6 in June, beating the expectations.
Many analysts expect the Bank of England to launch a QE3 round on a meeting on Thursday (July 5). It is necessary to note that the BoE ’s policy is already unprecedentedly loose (interest rates at a record 0.5% low since March 2009 and £325 billion QE program).
According to analysts at Citigroup, the MPC may expand the QE to a total of £500 billion in reaction to the persistent weakness of the UK economy, easing inflation worries and ongoing European Monetary Union crisis. UBS specialists expect a more modest easing: in their view, the asset purchase program is likely to augment to £400 billion.
BBH: Strong resistance for the cross lies at the $1.5770-$1.5800; the next target is near $1.5900. Support is seen in the $1.5600-30 area. It would not be surprising to see the euro lead sterling higher in this corrective phase.
Chart. Daily GBP/USD
CFTC traders positioning data
The latest Commitments of Traders (COT) report, released on Friday by the Commodity Futures Trading Commission (CFTC), showed that during the week to June 26 speculators’ positioning changed the following way:
EUR: the net short positions increased to 160K contracts on June 26 from the previous week’s total of 141K contracts. Euro positions had improved for two consecutive weeks and reached the best level since May 1 on June 19 before falling on June 26.
GBP: the net short positions plummeted to 758 net short contracts following a total of 17K contracts the previous week.
JPY: the net long yen positions fell to a total of 4.5K contracts following a total of 15K contracts on June 19.
CHF: the net short positions increased to 24K contracts following a total of 7K.
It’s necessary to note that the figures cited above are always a week old at the time of their release. Never the less, CFTC data gives a good oversight into how the market is positioned and if/how these positions are being unwound. Although the CME speculators represent a small fraction of trading in the currency markets, their trades are widely seen as typical of hedge fund investors' currency movements.
Data from CFTC
CFTC traders positioning data
The latest Commitments of Traders (COT) report, released on Friday by the Commodity Futures Trading Commission (CFTC), showed that during the week to June 26 speculators’ positioning changed the following way:
CAD: the net long positions edged higher to a total of 9K contracts as of June 26 following a total of 8.2K contracts reported for June 19.
AUD: the net short positions improved to 2K contracts after rising to 3.5K contracts as of June 19.
NZD: the net long positions reached a total of 576 contracts following a total of 2.2K net short contracts on June 19.
USD: the value of the net long positions increased to $26.73 billion on June 26 from a total long position of $22.13 billion on June 19.
It’s necessary to note that the figures cited above are always a week old at the time of their release. Never the less, CFTC data gives a good oversight into how the market is positioned and if/how these positions are being unwound. Although the CME speculators represent a small fraction of trading in the currency markets, their trades are widely seen as typical of hedge fund investors' currency movements.
Data from CFTC
EUR/USD is retreating from Friday’s highs
So, it’s another week with our inimitable EUR/USD. The pair’s drifting lover from Friday’s maximums in the $1.2690 area. In addition, euro’s weakening versus the majority of its other peers. Italian and Spanish 10-year yields slipped on Monday but their funding costs remain high in historical terms.
Demand for the single currency was heart by the news that euro-zone unemployment rose to the record high of 11.1% in May. Spain and Greece showed the worst readings near the 25%. Moreover, fiscally strong Finland and the Netherlands opposed a plan for the euro zone’s bailout fund to buy government bonds in the secondary market.
Analysts at Nomura commented on the situation saying that “now the market is recognizing the reality” after the initial “euphoria”. The specialists expect trading to be quite volatile this week (oh, really?) with euro under pressure ahead of the ECB meeting on
Thursday when the central bank is expected to cut its benchmark rate by 0.25 percentage point to 0.75% and probably announce some stimulus measures. At the same time, if the ECB doesn’t announce measures to support economy, euro may plunge.
We see consolidation above daily minimum in the $1.2610 area on the H1 chart. Support lies at $1.2570 (23.6% retracement of 2012 decline) and $1.2520. Resistance is at $1.2680/90 and $1.2745 (June maximum).
Chart. H1 EUR/USD
BoA: discouraging PMI figures
The last of June manufacturing PMIs were released today. Analysts at Bank of America decided to look at the whole picture.
17 out of 24 countries in the list below saw their PMI readings below the critical level of 50 pointing at contraction of industry. The PMIs of 14 nations deteriorated last month.
A majority of the below-50 PMI indices are located in the euro area. The economists conclude that the negative impact from the European debt crisis has started to spread all over the world.
BOTMUFJ on ECB rates, EUR outlook
Analysts at Bank of Tokyo-Mitsubishi UFJ also think that the ECB will cut borrowing costs by 25bps on Thursday.
The specialists say that they understand the argument for a potential 50bps cut – the central bank may decide to solve the problem once and for all and be done without having to take into account the market’s speculation of another 25bps reduction – but regard the chances of such outcome as small.
The BOTMUFJ specialists don’t think that the ECB will do more than lowering rates. The extraordinary measures used in the past to support financial markets “will be kept for another day”.
As for euro’s surge at the end of last week, the analysts say that it was due to the low expectations ahead of the EU summit. Timing played its rose as well affecting the monetary flows: it was the end of month, quarter and half of a year.
The markets are already concerned with the size of the European bailout funds and there will be actually more pressure from this side from now on. The EMS has been initially created with the option for future buying bond at the secondary market – that was its difference from the EFSF, so that’s not a new development.
All in all, the specialists are bearish on euro. In their view, EUR/JPY which has bounced above 100 yen may slide to low 90ies in the next 1-2 months. In terms of EUR/USD, it’s not that clear as there will be a lot of data from the United States in the near future – people are talking about the slowdown and that may temper the enthusiasm for US dollar. However, BOTMUFJ is almost sure: whenever the markets are severe, investors will always come back to the greenback. The baseline scenario is that US currency will keep appreciating the second half of this year and then we’ll see some weakness in 2013 (remember US fiscal cliff). If not enough is done politically, the Fed may have to step up.
AUD/USD: prospects for growth
On Monday the Australian dollar edged a bit higher versus the greenback getting above Friday’s maximum setting new 2-month high. Aussie was helped by the residual optimism created by the EU Summit results and the bets that the RBA will leave interest rates on hold at 3.5% tomorrow. According to analysts at Bank of America Merrill Lynch, the central bank will stay on hold until November.
At the same time, the bulls were really unsure: though AUD/USD remains strong enough, it has been trading mainly in red all day long. Investors are in a wait-and-see mode ahead of the RBA announcement and the US data releases later today.
Most analysts expect the Aussie to gain further, especially if the ECB takes new measures on Thursday to support the weakened euro zone’s economy. AUD will be also influenced by the Bank of England’s monetary policy decision the same day.
It makes sense to buy AUD/USD at current levels targeting $1.0300 and stopping at $1.0085. Aussie is currently trading near the strong resistance at $1.0250 (78.6% Fibonacci retracement from a May drop and an intersection of a 100- and 200-day MAs). If the AUD/USD manages to overcome this level, a break to $1.0316 and $1.0409 will become likely. Support for the cross lies at $1.0225 (June 20 maximum), $1.0208 (today’s minimum), $1.0128 (61.8% Fibonacci retracement), $1.0085(June 15 maximum), 0.9965 (June 25 minimum).
Chart. Daily AUD/USD
July 3: economy and currencies
The risk sentiment revived today. US dollar and Japanese yen are weakening versus its peers, while commodity currencies go up. Asian stocks rose for a fifth day in a row. The MSCI Asia Pacific Index (MXAP) had added 0.8% today after gaining 2.7% last week.
As expected, the Reserve Bank of Australia decided to stay on hold leaving its benchmark rate at 3.5%. Australian building approvals increased by 27.3% in May (vs. the forecast of only +5.1%). China also cheered investors up: non-manufacturing PMI rose from 55.2 in May to 56.7 in June (3-month maximum). AUD/USD renewed 2-month maximum.
Events to watch today:
Britain: Construction PMI in June is expected to fall to 53.1 after a 54.4 in May. Analysts expect the net lending to individuals to slide from 1.4B in April to 1.1B pounds in May showing that the banks are less willing to lend money to consumers.
US: Factory orders, a leading indicator of production, may turn out to be weak. This, together with poor June ISM manufacturing PMI released yesterday and the coming labor market data on Friday may fuel the speculation of more easing from the Fed. Don’t forget that the market is pricing in a rate cut by the ECB on Thursday – the market seems hopeful for monetary stimulus here and there that curbs demand for safe havens.
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European crisis echoes in the US
According to yesterday’s release, the US manufacturing unexpectedly contracted in June for the first time since the end of the recession (July 2009). The ISM manufacturing index dropped to 49.7 from 53.5 in May, while economists forecasted a slight decline to 52.1. A reading below 50 indicates the industry contracts.
The release drew a big response from the investors and analysts: there’s a growing concern that the crisis in the euro zone and Asia influences the US economy. According to specialists at Capital Economics, the fall in ISM index is the surest sign that the economy is slowing down. Analysts at Bank of Tokyo-Mitsubishi disappointedly state that the largest economy in the world “is going nowhere”. Specialists at ITG Investment believe that all the policy easing measures taken by the Fed are senseless: these days the issue is an insufficient demand for credit rather than an insufficient supply.
Analysts at IHS Global Insight, however, remain more optimistic: they point that the recessions are usually accompanied by ISM readings in the low-40s. The construction industry is recovering (construction spending rose in May by 0.9%, reaching the highest level in two years). Moreover, the US manufacturing is still stronger in comparison to the other countries. Specialists at Barclays Capital agree: even though the Europe’s problems influence the US economy, the increasing domestic demand is likely to keep the overall economy growing.
Photo: Getty Images
Westpac: buying NZD/USD on NFP
The most interesting and unpredictable regular data release is getting closer and closer. Yes, we’re speaking about US Non-Farm Payrolls.
Consensus forecast: +92K in June after +69K in May.
Analysts at Bank of America Merrill Lynch expect US economy to have added about 100K jobs. In their view, it’s “a slow trend, but not a collapse.”
Strategists at Westpac also sound optimistic. The specialists say that if the employment report comes in around consensus forecasts or slightly higher, one should buy NZD/USD. Otherwise, it will be necessary to do quite the opposite. The bank favors the first outcome expecting the increase in investors’ risk appetite, so the recommendation is to buy NZD/USD at 0.7950 targeting 0.8200 and stopping at 0.7840 (last week's minimums).
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Chart. Daily NZD/USD