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Easing by the Fed seems likely
On June 19-20 market participants will focus on the FOMC meeting, the interest rate decision and the new economic projections. How will the monetary authorities behave on the back of the disappointing US data releases and the increased financial stress in euro zone?
The interest rate is forecasted to remain at a 0.25% low. However, according to many specialists, a zero-bound funds rate is not enough to combat a sluggish recovery and high unemployment; the US policymakers may need some “insurance” in the form of additional easing.
According to Janet Yellen, the Fed’s vice chairman, the FOMC could begin another round of bond purchases or extend its portfolio maturity further if the economic expansion proceeds at an “insufficient pace.”
Credit Agricole: We believe that the FOMC will find it prudent to increase current policy accommodation in June with a modest $200 billion increase in its maturity extension program (Operation Twist).
UBS: The US monetary authorities are expected to adopt a wait-and-see approach, holding out for further developments in Europe. In a longer term an extension of Operation Twist cannot be ruled out.
Photo: AP
CAD down on oil price drop
The Canadian dollar weakens against the greenback on the back of Spain’s debt woes and a drop in crude oil prices (Canada is the largest crude supplier to the US). The loonie declines even though the positive data was released today: foreign securities purchases exceeded the estimates of $3.4B and reached $10.2B.
Most analysts expect the economic data released this week to show growth in the world’s 10th-largest economy is slowing (wholesale and retail sales, CPI). Moreover, market participants are increasing bets that the Bank of Canada will reduce interest rates from the current 1.0% due to euro zone’s headwinds on a next meeting.
Resistance for USD/CAD lies at 1.0278 and 1.0301, while support - at 1.0237, 1.0173, 1.0150 and 1.0109.
Chart. Daily USD/CAD
Analysts: outlook for EUR/USD
On Monday the EUR/USD cross strengthened to $1.2747 on the back of the pro-bailout parties’ victory, but then quickly dropped to $1.2575 on concerns about critically high Spanish borrowing costs. What to expect from the common currency in a longer term?
Wells Fargo: There is still scope for a near-term euro bounce, although we see the euro slipping back to $1.20 in the next twelve months.
Danske Bank: EUR/USD will trade at $1.24 in 3M, $1.26 in 6M and $1.30 in 12M. The upward trend on a 12-month horizon reflects expectations of a significant monetary easing from the Fed on the back of the US economic slowdown.
Chart. Weekly EUR/USD
Tueasday, June 19: economy and currencies
EUR/USD reached the $1.26 level early Tuesday but still remains below the weekly close Friday. Despite the positive Greek election outcome, the single currency is still weighed by the worsening situation in Spain. Spain’s bond yields reached 7.3% on Monday on the back of uncertainty whether the country will need a sovereign bailout. The next Spain’s auctions are scheduled on Tuesday and Thursday. The G20 meeting continues for a second consecutive day in Mexico: according to the IMF Chief Christine Lagarde, the member-countries agreed a total of $456bn for the new crisis fund. The policymakers increase pressure on German Chancellor Angela Merkel to expand the rescue measures. Merkel, however, insists that budget discipline cannot be replaced by the Eurobonds.
The US dollar declines vs. the euro and the yen ahead of the FOMC meeting (June 19-20) amid speculation that the Fed will ease monetary policy in order to stimulate the US economic growth. Most analysts expect the Fed to extend the program “operation Twist”. The Fed officials will also make new economic projections and discuss the local and global problems.
The MSCI Asia Pacific Index (MXAP) of shares declined 0.3% today. JPY strengthens against its major peers as the increased financial stress in the euro zone has supported demand for JPY as a safe currency. However, the risk sentiment is not so bad: AUD and CAD keep strengthening vs. USD. The Reserve Bank of Australia released today the June 5 meeting minutes. According to RBA, the recent rate cut was caused by the world economic slowdown, while the local conditions remain positive. NZD/USD opened the day with growth, but now demonstrates weakness.
Today watch out for important data from Great Britain (CPI is to remain at 3.0%), euro zone (German ZEW economic sentiment is expected to worsen), Canada (wholesale sales growth may remain at 0.4%) and US (building permits, housing starts).
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JPY grows on Spain's woes
USD/JPY has declined below 79.0 yen today after a Monday’s growth. Investors choose the safe Japanese currency amid concerns on the Spain’s economy. Is the yen likely to strengthen further?
According to the BoJ Governor Masaaki Shirakawa, the BoJ is ready to inject liquidity into the markets if necessary. Shirakawa underlined that the euro zone’s crisis remains extremely dangerous for the Japan’s economy: it spurs demand for the yen, hurts exports and could influence the banking sector.
Standard Chartered: The BoJ may intervene in the FX market in order to weaken the national currency if the Fed eases monetary policy on Wednesday.
USD/JPY remains in a downward channel since late March. The pair trades above the 200-day MA, but below the 50- and 100-day MAs and the daily Ichimoku cloud. USD/JPY sees a strong resistance at 79.16 (61.8% of Fibonacci retracement from a Feb.-March rally). The bearish sentiment will be likely to increase if the pair manages to break the 78.65 support level.
Chart. Daily USD/JPY
GBP up after CPI release
The British pound strengthens against the greenback after the UK inflation figures were released. CPI growth slowed to 2.8% in May from 3.0% in April, what is the BoE's top end of the target range.
BNP Paribas: UK inflation is likely to continue declining in 2012. Last week Mervyn King hinted on additional QE and the inflation figures give necessary room for the easing.
In a short term, however, the cable is likely to continue the upward movement. According to Commerzbank strategists, a slide below 1.5600 is needed to reverse the current trend. Specialists at Societe Generale also note that these days the sterling is the most undervalued G10 currency, while the US dollar is under pressure ahead of the FOMC monetary policy decision.
Resistance:
1.5752 (200-day MA);
1.5782 (50% Fibonacci retracement from an April –May decline);
1.5876 (55-week MA).
Support:
1.5600 (March low);
1.5407 (June 8 minimum);
1.5235 (2012 minimum).
Chart. Daily GBP/USD
Will EUR growth continue?
The single currency strengthens against the US dollar amid speculation that the Fed may ease monetary policy on Wednesday. The strength of the euro is limited by the deep problems in the currency block. However, many analysts believe that in a short term EUR/USD may keep moving up.
On Tuesday the euro climbed above $1.26 even despite the negative German ZEW Economic Sentiment (index declined by 16.9 in June after a 10.8 growth in May). The Spain’s 10-year bond yields edged down to 7.09% (0.10 % down from yesterday’s high), but still remain excessive.
US released mixed construction data today. Number of new building permits exceeded the forecasts and reached 0.78M, while number of new housing starts declined to 0.71M.
BBH: Technical factors warn that the correction from the sharp losses in May is not complete, and further dollar corrections may be supported by easing from the Fed. The next retracement objective is near $1.2670 (61.8% Fibonacci retracement from May slide).
Danske Bank: EUR/USD movement will depend on the relative monetary policy response between the Fed and the ECB. If the Fed delivers strong monetary easing this could trigger a trend reversal in EUR/USD – but just an extension of Operation Twist is not enough.
Chart. Daily EUR/USD
Societe Generale: comments on AUD/USD
Analysts at Societe Generale believe that the overall trend for AUD/USD still remains bearish, despite the fact that the Aussie strengthens for the fourth consecutive day. They explain the strength of the Australian currency with hopes of stabilization in Europe and a smaller-than-expected RBA rate cut. It is necessary to note that AUD was the worst-performing G10 currency since March until early June.
Specialists expect the RBA to cut rates by further 50 b.p. by the end of 2012 due to the dim global growth prospects. They admit that the national economy remains resilient, but underline that it is highly dependent on China – Australia’s biggest trading partner. China’s GDP growth is forecasted to slow down to 7.9% in 2012.
Some market participants perceive the Aussie as a safe currency – foreign investors raised their holdings of Australian bonds to a record high of 79% in Q1 2012. Societe Generale specialists disagree: in their view, AUD remains very dependent on the risk sentiment.
In current global economic conditions analysts expect the cross to trade at $0.78 by the end of 2012 (these days the pair is overvalued). They recommend going short on AUD/USD, bearing in mind that the dollar’s weakness won’t last long.
Chart. Daily AUD/USD
Barclays Capital: bearish on EUR/CAD
Analysts at Barclays Capital recommend selling the euro against the Canadian dollar ahead of the FOMC meeting on Wednesday where the Fed is likely to extend the Operation Twist program.
Despite the fact that the dovish FOMC statement will weaken the greenback and the “neighboring” currencies, analysts expect the loonie to grow vs. the common currency due to its high-beta properties. A switch to the Canadian dollar will help to avoid direct losses, connected with the Fed’s easing measures.
Specialists believe that the global risk sentiment is likely to remain high in the medium term on the back of the positive outcome of the Greek elections and the seeming readiness of the central banks to support the national economies. The ECB is expected to cut rates by 50 b.p., while the Bank of England – to extend the asset purchases program by 50 billion pounds in July. The demand for high-yield currencies, therefore, is likely to edge up, even if the situation in the euro zone worsens.
Chart. Daily EUR/CAD
Wednesday, June 20: economy and currencies
On Wednesday EUR/USD trades in the $1.2680 area. The factors, influencing the cross, are controversial: on the one hand, the greenback remains under pressure ahead of the FOMC meeting held today (Bloomberg survey of 64 economists shows 37 expect the Fed to announce an extension of Operation Twist today). Greece is finally close to forming a coalition: according to Pasok leader Evangelos Venizelos, a new government could be ready by midday today. The G20 statement calls Europe for integration and doesn’t mention any easing measures. On the other hand, the euro’s growth has many constraints: the euro zone’s problems are here to stay, investors remain concerned about Spain’s and Italy’s borrowing costs.
USD/JPY continues a downward movement today. Japan’s trade deficit in May increased to 907B compared with the 544B yen deficit expected (second-worst since 2009), even though the exports improved. The minutes of the May 22-23 meeting were released early Wednesday: a few BoJ members said the regulator must be ready to act if risks materialize from Europe. According to BoJ’s Governor Masaaki Shirakawa, the economy starts to pick up moderately.
The MSCI Asia Pacific (MXAP) Index gained 1.1% on Wednesday. The Aussie strengthens for the fifth consecutive day despite the negative data releases (CB Leading Index, Housing Starts). New Zealand and Canadian dollar, however, demonstrate a downward movement. NZD current account deficit declined in Q1, but was still bigger than forecasted.
Events to watch today:
• Great Britain: claimant count change, MPC meeting minutes, unemployment rate
• US: FOMC meeting, crude oil inventories
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