Comments and forex-analytics from FBS Brokerage Company - page 120
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The Fed's policy will remain unchanged
On Tuesday the Fed's Open Market Committee meets to decide monetary policy. The announcement of further bond buying can pose a risk to a resurgent dollar this week, but most analysts doubt that will happen. Recent stronger-than-expected February employment numbers (NFP +227K) has quelled speculation that the central bank might resort to a third round of quantitative easing (QE3) to stimulate the economy. However, an antinomy is observed: the US labor market seems do better, but this has not been matched by a rise in production, demand or consumer spending.
Many analysts say the FOMC is unlikely to offer new measures to stimulate the economy, especially as the Fed continues with its "Operation Twist" effort to keep long-term interest rates low.
The current “Operation Twist”, a $400bn switch into Treasury securities with longer to run until maturity, will use up almost all of the shorter-term Treasuries that the Fed has to sell and take its holdings of some long-term Treasuries close to limits on market liquidity.
Bank of America-Merrill Lynch: While the FOMC is likely to acknowledge the oil market risk, as well as the general improvement in activity data recently, we anticipate the statement will still be supportive of the current easing bias.
BNY Mellon: Good data will reinforce the Fed's view that what they're doing is working and they're not going to stop now. They seem determined to fight the devil they know instead of the devil they don't.
The chance of an even more-dovish FOMC could once more upend the dollar. The fact that these days the dollar seems to be a safe-harbor from Europe's debt crisis may also help the dollar go up at the euro's expense. On the other hand, investors look forward to Bernanke’s announcements about QE3. The Chairman’s silence of may cause the correction.
EUR/USD: main technical levels
Technical analysts at Commerzbank underline that the single currency is facing strong resistance versus the greenback in the $1.3291/1.3325 area.
As long as euro’s trading below these levels, the outlook for it will remain bearish. Support is situated at $1.3095 (last week's 3-week minimum), $1.3080 (55-day MA) and $1.3050 (50% Fibonacci retracement from this year's advance) and $1.3000.
EUR/USD risks dropping to $1.2974/54 (February minimum) and $1.2624 (January minimum). If the pair slides below the latter, it will be poised down to $1.2000.
Strategists at Varengold Bank analysts expect to close today below support at $1.3100 citing negative signals from the MACD.
UBS, RBS, Credit Agricole: EUR/USD forecasts
UBS: “US payrolls data were again strong in February, with both the headline figure beating expectations and previous months' seeing decent upwards revisions. Continued employment creation at this pace makes it increasingly hard for Federal Reserve doves to keep pushing the case for further quantitative easing, especially in light of the fact that tail risks associated with the possibility of a European meltdown have been cut back materially. The ECB's successful LTRO operations and the positive Greek PSI outcome have helped in this regard.”
RBS: “Less QE (quantitative easing) in the U.S. is positive for the dollar ... dollar will do better against the yen, euro and sterling. In Europe the weakest data is in the countries with the weakest fiscal position, which is worrying and it's still a case of selling euro on any rallies.” According to the bank, EUR/USD will fall to $1.26 during the next 2-3 months in case U.S. data in the coming weeks is positive.
Credit Agricole: “There's a risk of EUR/USD sustaining a move below $1.31. There are worries about whether Portugal will follow Greece, whether Greece will need another bailout, whether the underlying issues in the country will be resolved.”
Deutsche Bank: “U.S. growth forecasts are being scaled back even as the labor market picks up and that will weigh on the U.S. dollar” – American economic growth is expected to slow this quarter from the fourth quarter's 3% growth (y/y) as consumer spending flattened and exports remained sluggish. However, taking into account euro zone’s problems (primarily, uncertainty about Spain and Italy), the bank’s “baseline scenario remains the euro to drop towards $1.25 in coming months.”
Banks' forecasts for FX majors
Data were submitted on March 9.
Data from FX Week
RBS: analyzing GBP crosses
Analysts at RBS claim that the recent strong US data is having a negative impact on the pair GBP/USD because of rate spreads and reduced probability of the Fed’s QE3. In addition, recent dynamics shows that EUR/GBP is also finding itself under pressure.
UK manufacturing data released last week (+0.1% m/m in January after +1.1% in December) shows that GBP weakness isn't rebalancing the nation’s economy. It may also mean that that sterling’s decline can be structural rather than cyclical and further weakness is likely.
According to RBS, GBP/JPY is overvalued by less than 4%, GBP/AUD may be around 4.7% overvalued, while GBP/NZD is estimated to be 2.3% overvalued. The specialists say that GBP/USD and EUR/GBP look fairly valued from a short-term perspective.
The bank underlines that the key driving force of all GBP G10 crosses is rate spreads. The dynamics of pound versus euro, US dollar, Japanese yen, Australian and New Zealand’s dollars is also influenced by significant moves in balance sheets. As for the correlation with risk, it has weakened during the past month for most GBP G10 currency pairs except GBP/USD and GBP/JPY where positive correlations have tightened marginally. EUR/GBP has a positive correlation with risk but this has edged lower since March 5. Further worries over the solvency of Euro zone countries may loosen this correlation further.
BMO: trading on FOMC meeting
Analysts at BMO Capital recommend investors selling the single currency versus the greenback ahead the FOMC meeting later today. In their view, one should open EUR/USD shorts at $1.3170 stopping at $1.3275 and targeting $1.2875.
The specialists think that the Fed’s Chairman Ben Bernanke will discourage the expectations of QE3 due to the recent favorable economic data, especially employment figures. This is BMO’s baseline scenario.
However, the analysts underline that the Federal Reserve is always capable of surprises and if the central bank hints on further quantitative easing, one should try another type of trade like buying Mexican peso against the greenback.
BMO doesn’t agree with those experts who advise trading emerging market currencies instead of the major ones. The bank points out that the developing nations are aggressively lowering interest rates, so the risk-on, risk-off trading patterns to which traders have got used may be altered.
UBS, RBS: EUR/USD forecasts
UBS: “US payrolls data were again strong in February, with both the headline figure beating expectations and previous months' seeing decent upwards revisions. Continued employment creation at this pace makes it increasingly hard for Federal Reserve doves to keep pushing the case for further quantitative easing, especially in light of the fact that tail risks associated with the possibility of a European meltdown have been cut back materially. The ECB's successful LTRO operations and the positive Greek PSI outcome have helped in this regard.”
RBS: “Less QE (quantitative easing) in the U.S. is positive for the dollar ... dollar will do better against the yen, euro and sterling. In Europe the weakest data is in the countries with the weakest fiscal position, which is worrying and it's still a case of selling euro on any rallies.” According to the bank, EUR/USD will fall to $1.26 during the next 2-3 months in case U.S. data in the coming weeks is positive.
Credit Agricole: “There's a risk of EUR/USD sustaining a move below $1.31. There are worries about whether Portugal will follow Greece, whether Greece will need another bailout, whether the underlying issues in the country will be resolved.”
Deutsche Bank: “U.S. growth forecasts are being scaled back even as the labor market picks up and that will weigh on the U.S. dollar” – American economic growth is expected to slow this quarter from the fourth quarter's 3% growth (y/y) as consumer spending flattened and exports remained sluggish. However, taking into account euro zone’s problems (primarily, uncertainty about Spain and Italy), the bank’s “baseline scenario remains the euro to drop towards $1.25 in coming months.”
Citigroup: which G20 currencies outperform others
Analysts at Citigroup claim that while the market players are obsessed with EUR/USD and USD/JPY, a much more profitable trade is to sell G4 majors against other G20 currencies.
The specialists analyzed the average (unweighted) performance of eighteen currencies – Australian, New Zealand’s, Taiwan’s, Singapore’s and Canadian dollars, South African rand, Norwegian krone, Swedish krona, Mexican, Argentinian and Chilean pesos, Indonesian rupiah, Indian rupee, Russian ruble, Turkish lira, Brazilian real, Chinese yuan, Malaysian ringgit – and measured their performance against the average of US dollar, euro, British pound and Japanese yen.
According to the bank, “G20 smalls” have the highest return relative to their realized volatility so far this year. It may be explained by the liquidity added to the market by the ECB and the BOJ which encouraged risk appetite and somewhat stabilized the global economy improving prospects for the smaller countries in the G20 and, consequently, their currencies.
Buying G20 currencies is a way to limit via diversification one’s exposure to risks connected with euro. Such trade is a strong bet on the outperformance of risky assets.
BOJ refrains from easing, but yen’s outlook seem negative
The Bank of Japan kept monetary policy unchanged at today’s meeting in line with the expectations. The benchmark interest rate remains below 0.1%.
Some traders got disappointed as the BOJ didn’t increase asset purchases after boosting them by 10 trillion yen in February. The Bank of Japan’s decision may be explained by the fact that yen backed off the record maximums, stock markets are showing positive dynamics and the tensions in the euro area eased after the Greek deal.
Instead the central bank expanded by 2 trillion yen ($24 billion) to 5.5 trillion yen a loan scheme aimed to encourage banks to fund prospective growth industries and extended its deadline by two years to March 2014. One trillion yen will be used in a new credit line using the BOJ's dollar reserves to encourage investment and loans denominated in foreign currencies. Such actions aren’t as powerful as QE, but still indicate the central bank’s willingness to help national economy.
Japanese yen strengthened from 11-month minimum versus US dollar after the BOJ meeting’s results were announced, but then dollar-bulls regained power: the pair USD/JPY has initially dipped to 82 yen, but then set daily high at 82.79 yen.
RBS: “The Bank of Japan is basically maintaining its stance of monetary easing after setting an inflation goal of 1%. To clarify its determination to beat deflation, the BOJ could ease policy further as early as late April.”
Citibank: Although some investors got disappointed, “today's decision is not something that can reverse the yen's fall.”
Among the reasons to remain bearish on yen one may name Japan's trade balance switching to deficit, monetary outflows from Japan as Japanese companies are seeking to enter foreign markets and relatively low odds of QE3 in the U.S.
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