Comments and forex-analytics from FBS Brokerage Company - page 106

 

Euro has become a funding currency

Analysts at UBS claim that the European Central Bank will cut interest rates twice more by 25 bps each in March and April. As a result, the bank maintains bearish longer-term forecast on EUR/USD.

Economists at Citigroup think that the ECB will reduce the borrowing costs in the second quarter, while strategists at Bank of Nova Scotia say that the central bank will cut rates to 0.5% by the end of the first quarter.

Analysts at Morgan Stanley see a very clear breakdown in the correlation between the euro and risky assets. Euro is increasingly becoming a funding currency – one may significantly benefit from borrowing in euro and investing in Australia’s dollar, Brazil’s real, Mexico’s peso, South Africa’s rand and South Korea’s won.

Specialists at Australia & New Zealand Banking Group claim that other currencies which have effectively low or 0 rates, such as the dollar and yen, are facing a slightly better growth profile.

According to the World Bank, euro zone’s economy will contract by 0.3% in 2012, while the global economy will add 2.5%.

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Spain: successful debt auction

Spain conducted successful debt auction today.

Madrid sold:

• 3-month bills, 1.4 billion, yield 1.285% (versus 1.735% in December), cover ratio 4.3 (vs. 2.9);

• 6-month bills, 1.11 billion, yield 1.847% (vs. 2.435%), cover ratio 6.9 (vs. 4.1).

At the same time, it’s necessary to note that the market is starting to get used to good Spanish auction results and doesn't react. EUR/USD consolidated today in the $1.3000 area.

Spanish bond yields have eased down so far as the nation’s debt-servicing program is supported by the flood of cheap ECB money along with the bank's regular purchases of Spanish bonds on the secondary market.

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BarCap: GBP/USD will reverse down

Analysts at Barclays Capital note that the upward correction of British pound versus the greenback will likely be over within the next 24-48 hours.

In their view, the end of the bullish squeeze will confirm if GBP/USD goes down below $1.5515.

The specialists recommend selling sterling on any further advance stopping above $1.57.

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Fed will release federal funds rate forecast

Tomorrow the Federal Open Market Committee (FOMC) for the first time ever release its interest rate forecast extending to 2016 including individual rate expectations of the committee members'.

The FOMC is trying to make its policy more transparent. In longer term, this new mechanism will provide the Fed with a potentially important tool to influence expectations, and therefore the course of the economy. Economists at Danske Bank think that the Fed might forecast its first hike at the end of 2013.

Analysts at Nomura called the coming meeting “historic”. In their view, the market will get “an historic amount of new information to digest”.

Although the recent economic data was positive and aroused investors’ optimism, US still faces serious challenges, such as high unemployment and the difficult situation at the housing market.

The rate and the Fed’s statement will be published on Wednesday, January 25, at 7:15 p.m. GMT. The Fed’s chairman Ben Bernanke will hold press conference.

The Fed funds rate is expected to stay between zero and 0.25% where it has been since December 2008. The majority of the experts don’t think that American central bank will launch another round of bond purchases, QE3.

 

Japan posted trade deficit in 2011

US dollar strengthened versus Japanese yen as according to the data released today, Japan posted bigger than expected trade deficit in December: the trade shortfall accounted for 0.57 trillion versus the forecast of 0.36 trillion. As this was the third monthly deficit in a row, Japan got annual shortfall for the first time since 1980 equal to of 2.49 trillion yen ($32 billion).

Such figures may be explained by the surge of Japan’s energy import after the March 11 earthquake and by a shift of manufacturing overseas, for example, to lower-cost Thailand.

As a result, Japan may lose the status as the world’s largest creditor which makes it a safe haven for investment. Though yen will weaken in this case letting the nation’s exporters breathe, it would become much more difficult for Japanese authorities to manage the largest debt in the world. As Japan’s population shrinks, the county, which has been for a long time considered a refuge, may be forced to depend on foreign investors to buy its bonds with the yields rising on the fiscal concerns.

Economists at JPMorgan Securities expect the deficit to increase in the coming years. Specialists at Merrill Lynch think that even if the economy picks up, the balance will never return to the days of a 6 or 7 trillion yen surplus. According to the bank, imports of liquid gas from the emerging countries will keep growing and the balance will hover near 0 in the next couple years.

However, analysts at Goldman Sachs think that that the situation of deficit is only temporary and that Japan's trade balance will likely return to monthly surpluses in the second half of 2012. In their view, the impact of last year’s disaster will likely fade out gradually, while the global economic cycle is expected to slowly recover. The specialists also claim that strong yen doesn’t have extraordinary impact on the nation’s exports as the latter are not declining more than global economic momentum even with the yen's continued rise. Japan's decline in overall competitiveness will be gradual due to its high-tech firms.

The pair USD/JPY went up from the levels in the 77 yen area where it began yesterday’s trade testing the levels in the 78 yen zone. Analysts at MIG Bank think that the greenback may rise to 78.40, 79.55, 82.00 and then 83.30 yen.

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HSBC: RBA will cut rate in February

According to the data released today, Australian consumer prices were unchanged in the fourth quarter of 2011 from the previous 3 months, while the market was looking forward to 0.2% increase. Annualized headline CPI was equal to 3.1%, the lowest level in four quarters.

Economists at JP Morgan say that the drop in consumer prices wasn’t surprising given that fact that food price dropped in the last 3 months of the year by 13.4%.

Analysts at HSBC think that the Reserve bank of Australia will cut rates on February 7 for the third consecutive meeting due to the worsening labor market, the tense situation in Europe and the global economic slowdown. The specialists note that low inflation will allow the RBA to ease its monetary policy.

At the same time, it’s necessary to note that the average of the trimmed mean and weighted median inflation rose in December to 2.6% versus the forecast of 2.4%. As the figure remains within the RBA’s target of 2-3%, it won’t be an obstacle to the rate cut. At the same time, some experts argue that such reading may make the central bank pause after lowering the borrowing costs the next month and take time to watch inflation trend.

The pair AUD/USD is consolidating within a rising wedge. If Aussie breaks higher, it will get chance to retest October maximums in the $1.0750 area. At the same time, the likelihood of rate cuts will weigh on sentiment. On the downside the pair will be supported by the 20-day MA at $1.0340. It may be sensible to trade at the edges of this range avoiding the middle.

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UK economy contracted in Q4

Data released today shows that British economy shrank in the fourth quarter by 0.2%, while the market was expecting only 0.1% contraction. The UK is now dangerously close to recession. The IMF reduced 2012 forecast for UK GDP growth from 1.6% to 0.6%. Britain’s economy is hit by the European debt crisis and austerity measures.

Bank of England’s Governor Mervyn King claimed that the economy faced an “arduous, long and uneven” path to recovery but that once it does it will be on a “more sustainable footing than at any point in the past 15 years”.

UK Prime Minister David Cameron claimed that “economy grew last year”. “More people in work today than at time of last election... Fall in GDP reflects higher food and fuel prices, euro zone crisis and debt overhang”.

Billionaire investor George Soros said at the World Economic Forum which began today in Davos, Switzerland, that “to expect a rebound is unrealistic”. The specialist notes, however, that “Britain is benefitting from not being part of the euro. The outlook for the euro is truly dismal. The EU is undemocratic to the point where the electorate is disaffected and ungovernable”.

Analysts at ING think that “UK economic activity is likely to get worse before it gets better, with a technical recession likely to be confirmed by first-quarter 2012 GDP numbers”. “Household spending is constrained by the fact that wages have failed to keep pace with the cost of living for four consecutive years while job insecurity is rising once again”.

Economists at RBS note that “the primary source of negative news in Q4 was from the industrial sector where weakness in the UK’s key export markets is certain to have been a key factor, along with the unseasonably mild weather which depressed energy output.”

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SocGen, ING, JP Morgan about USD/JPY

The greenback retreated versus Japanese yen from yesterday’s maximum in the 78.30 yen area to the levels around 77.50 yen after the dovish FOMC statement.

Analysts at Societe Generale believe that support at 77.30 will help to contain the decline of USD/JPY. In their view, the pair will once again turn up from this point returning to 78.30 and then rising to October maximum at 79.55 yen.

Strategists at ING, on the other hand, underline that if USD/JPY moves below 77.30/40 on sustained basis, the bullish momentum will be lost and the pair will slide to the previous range between 76.00 and 78.25 yen.

Specialists at JP Morgan are bearish in the longer term. The bank claims that by the end of the year US dollar will likely fall to 70 yen level if American stocks keep rallying. JP Morgan says that the 5-year US real yields suggest USD/JPY should be around 75 yen

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Bernanke sticks to loose monetary policy

The Federal Reserve predicted low interest rates until the end of 2014. The Federal Open Market Committee set formal inflation target at 2%.

US central bank claimed that its growth estimate in the coming quarters worsened from “moderate” to “modest”. The Fed’s Chairman Ben Bernanke indicated that another round of quantitative easing remains as option saying that the Fed is “prepared to take further steps in that [easing] direction if we see that the recovery is faltering or if inflation is not moving toward target.” As inflation forecast for 2014 is at 1.6-2% – below the target – the FOMC can easily justify more easing.

At the same time, it’s necessary to note that there are some deep divisions within the central bank: 3 out of 17 FOMC officials would like to raise rates this year, and 3 more in 2013, while 2 think the first rise should not come until 2016. Bernanke, however, tried to persuade investors that the date in the FOMC statement is more important and that the committee’s approach will prevail over individual forecasts.

Deutsche Bank: “While the Fed’s characterization of the economy in the statement has not changed very much, the comment that conditions are likely to warrant exceptionally low levels for the funds rate ‘at least through late 2014’ is on the surface a major difference from the mid-2013 date given in the last statement.”

Citigroup: “In the long and medium term this is all second order. But in the short term, it's more complicated. Investors will want to know what the meaning of "extended" is when Fed officials talk about keeping rates low for an extended period. If they conclude that means 2015 or 2016, it could hurt sentiment.” “Our positioning indicators show short euro position mainly against US dollar rather than on the crosses. That means the greenback is vulnerable. Also investors have discussed euro to death, but have been giving the greenback an easy ride. If they start to worry, American currency could be in for a rough ride in the immediate aftermath of FOMC, even if the long-term implications are limited.”

Mizuho: “The Fed’s pledge for a prolonged easing of monetary policy boosted risk-on sentiment. Dollar selling is likely to continue across the board.”

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Westpac: market’s risk sentiment improved

Analysts at Westpac Institutional Bank claim that as the Federal Reserve announced that it plans to keep interest rates at the record low minimum until the end of 2014, one may trade on the risk-on sentiment.

In addition, the bank expects the ECB to cut rates at the beginning of February and then conduct 3-year liquidity option later that month. This would also contribute to the market’s risk appetite.

Moreover, Westpac says that there is potential for more quantitative easing in the UK where GDP contracted in the fourth quarter more than expected.

The specialists advise investors to focus on the commodity currencies. In particular, the bank recommends selling British pound versus New Zealand’s dollar in the 1.9200 area, looking forward to the pair’s decline to 1.8700 and stopping at 1.9400.

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