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Zerohedge: EUR/USD and CB balance sheets
Analysts at Zerohedge, US financial blog, point out an interesting thing about EUR/USD.
The European Central Bank announced yesterday that in the past week its balance sheet increased by 31 billion euro to a new all time record maximum of 3.058 trillion euro due to the increase in the main refinancing operations (MRO). The Federal Reserve’s balance sheet, on the other hand, continues to be flat, or is even modestly declining.
The authors of the blog claim that EUR/USD moves have been based upon balance sheet correlation. However, in recent months this trend got broken as the markets were on the constant guard of more QE from the Fed. Now the fair value of the pair, according to this method, is at $1.1600. Look to the chart below which is the perfect illustration of this relationship.
Zerohedge points out that there are 2 possible scenarios here.
1. If the Fed keeps refraining from further stimulus and the ECB will do all the unsterilized intervention, EUR/USD will continue its way down.
2. If the Fed announces large-scale asset purchases, EUR/USD will surge by at least 400 pips.
“Place your bets,” the bloggers say.
Japanese tax hike: pro et contra
Japan's lower house has voted to approve doubling the country's consumption tax to 10% over three years. The legislation now goes to the opposition-dominated upper chamber, where it is expected to pass during the current session of parliament ending September. However, the decision was not unanimous: 363 lawmakers voted in favor, while 96 - against.
Prime Minister Yoshihiko Noda championed the controversial bill regardless of the objections from his own party. In his view, the tax hike is needed to reduce the snowballing budget deficit (forecasted to reach 214% of GDP in 2012). Japan’s government says that the increase will generate $170 billion a year for the budget. Opponents believe the hike is premature and will weaken the economy further because it will limit the consumption.
Analysts at UBS fear that the first tax hike in 2014 could bring the economic recovery after the last year’s earthquake and tsunami to the deadlock. According to the Cabinet Office’s Economic and Social Research Institute, a 1% point increase in the tax will cut GDP growth by 0.32% a year after. In this case a strong economic stimulus will be required to support the rebounding economy.
In a short-term, the international investors take the “wait-and-see” approach, because they have already burned many times by trying to trade USD/JPY on Japan’s political events. Specialists at Sumitomo Mitsui Banking Corporation also don’t expect the Japan’s fiscal policy and the internal political differences to be the core factors to specify the yen's direction.
Yoshihiko Noda, Prime Minister of Japan, a member of the Democratic Party of Japan
Photo: Franck Robichon/EPA
RBC: trading on EUR skepticism
Analysts at RBC Capital Markets propose entering euro shorts at $1.2550 stopping at $ 1.2675 and targeting $1.2250.
“We're setting ourselves up for a little bit of disappointment out of the summit and think that's the best way to play the euro right now,” say the specialists.
Chart. Daily EUR/USD
Westpac: another strategy for EUR bears
Here’s another euro selling recommendation. Analysts at Westpac advise investors to go short on EUR/USD on the break of $1.2440 targeting $1.2000 and stopping at $1.2580.
The specialists are preparing themselves for the “frustrating news” on the EU summit.
Chart. Daily EUR/USD
Commerzbank: bearish view on NZD
Technical analysts at Commerzbank are bearish on New Zealand’s dollar versus the greenback. In their view, NZD/USD will breach support of $0.7844 (38.2% Fibonacci retracement of this year’s decline) and decline to $0.7774 (January 6 minimum), $0.7736 (50% Fibonacci retracement of the pair’s advance in June) and $0.7677/70 (May 22 maximum and 61.8% Fibonacci retracement).
The long-term negative targets are $0.7469/0.7371 (October, November and December minimums) and $0.7186 (200-week MA) and $0.7116 (2011 minimum)
According to the bank, the outlook for the pair will remain bearish as long as it’s trading below $0.8017 (last week’s maximum). Key resistance for the pair lies at $0.8059/85 (March and April lows, 61.8% Fibonacci retracement and 4-month resistance line).
Chart. Daily NZD/USD
GBP/USD: technical comments
GBP/USD weakens on Wednesday after touching 1.5640 during the Asian session. Most analysts expect the sterling to continue a downward movement: in their view, the BoE talks on policy easing and increased May public sector net borrowing will weigh on the sterling.
On Tuesday the BoE governor Mervin King warned that Britain isn't even half way through the crisis and said the nation probably won't recover for at least five years. King added that the rate cuts are less effective stimulus for the economy than the QE. Specialists at TD Securities expect a new monetary easing in July.
Commerzbank analysts remain bearish on GBP/USD: in their view, in a short-term a slide to 1.5407 (Jun-8 low) is likely. Further decline would lead to 1.5269/35 (recent low and 2012 low). Analysts at RBS also recommend going short on GBP/USD, targeting to 1.5050 and with a stop at 1.6075.
Resistance:
1.5660 (23.6% Fibonacci retracement from June rally);
1.5734 (June 21 maximum);
1.5747 (200-day MA);
1.5778 (June 20 maximum).
Support:
1.5583 (38.2% Fibonacci retracement);
1.5538 (June 25 minimum);
1.5523 (50% Fibonacci retracement);
1.5463 (61.8% Fibonacci retracement).
Chart. Daily GBP/USD
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EUR/GBP: not very bright prospects
This week the single currency has breached the flag formation within which it has been trading versus British pound. In addition, EUR/GBP fell below 0.8000, the level above which it was consolidating all June. This looks like quite bearish signal.
On the daily Ichimoku chat one may see that the bearish Cloud didn’t let the bulls inside acting as resistance. MACD is also negative. The weekly bearish Ichimoku Cloud is getting wider and wider – the downtrend from late June 2011 is still in place.
On the fundamental part euro is weakened by the concerns about the EU summit. If the market isn’t reassured enough after the European leaders’ meeting finished, euro’s slide will continue. Note that there has to be some breakthrough in negotiations between Germany and other euro zone members for investors to be satisfied.
As a result, we would refrain from buying the pair these days. Currently EUR/GBP is trading just under 0.8000.
Resistance:
0.8000;
0.8011 (June 12 minimum);
0.8040 (June 25 maximum)
0.8055 (lower border of daily Ichimoku Cloud).
Support:
0.7980/70 (late May minimums);
0.7950 (May 16 minimum).
Chart. Daily EUR/GBP
JP Morgan: outlook for USD
According to analysts at JP Morgan, the US dollar is likely to weaken if the Fed launches QE, China announces monetary and fiscal easing and the EU leaders will work out a detailed plan for a banking union. On the other hand the greenback is to move on the upside if a US economic slowdown continues (we don’t have to forget about the huge US budget deficit), Greek new government doesn’t satisfy the lender’s demands, borrowing costs in Italy soar and China’s economy growth doesn’t accelarate in Q3 2012.
In the second half of 2012 the greenback is expected to move predominantly sideways after strength in Q1 on hopes for the economic rebound. In 2011 the US currency went up only by 1.5% trade-weighted amid concerns regarding the global economy and the euro zone’s debt problems. The last time the greenback moved up so unsteadily the early 1990s (recession in the US and the ERM fail).
Photo: Reuters
June 28: economy and currencies
The most expected event on Thursday is the EU leaders meeting in Brussels where the key euro zone’s problems are to be discussed. EUR/USD declines for a fourth consecutive day ahead of the Italian bond auction and the EU summit. Most investors say that the widely discussed banking union is premature: nations are not ready to share debt. GBP/USD plunges on low EU summit expectations. Early Thursday the risky currencies demonstrated growth, but now are mostly in the red. Kiwi falls on the data that the NBNZ Business Confidence index halved in June, the Aussie and the loonie drop. USD/JPY goes down on Japan’s better than expected retail sales data. The MSCI Asia Pacific Index of shares climbed 1.1% after the Standard & Poor’s 500 Index advanced 0.9% on Wednesday.
Events to watch:
Europe: EU Economic Summit will be the first time European leaders meet since the Greek parliamentary elections on June 17. The nation’s new Prime Minister Antonis Samaras who pledged to seek relief from austerity measures imposed on the country while keeping the bailout funds flowing as he has recently undergone surgery to repair a detached retina. Billionaire investor George Soros warns that if the fiscal disagreements aren’t resolved in the next 3 days, the summit could turn out to be a fiasco. In addition, Italy will try to sell 10-year government bonds. The results of the auction will have an extremely strong effect on the market’s sentiment. The yields will be used as a gauge of the market’s confidence of the European policymakers’ resolve to solve the crisis.
Britain: The final British GDP figures will likely confirm that the nation’s economy has fallen into recession declining by 0.3% q/q in the first 3 months of 2012 after losing 0.3% in Q4 2011. Although the markets have already priced in the grim news, the release will once again remind investors about UK economic weakness and make them think that the Bank of England will ultimately have to expand its Asset Purchase Program.
US: The United States also release the final Q1 GDP readings: in May US economic growth in the first quarter was revised down from 2.2% q/q to 1.9%. No further revision is expected this time, so negative surprise would weight on the greenback. Unemployment claims – the indicator closely watched every week – is seen declining slightly from 387K to 385K.
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RBS turned bearish on AUD/USD
Analysts at RBS recommend selling Australian dollar versus its US counterpart stopping at $1.0250 (200-day MA) and targeting $0.9579 (2012 minimum). The specialists have finally given up optimism on Aussie.
Support:
$1.0029 (50-day MA);
$0.9924 (June 14 minimum, 38.2% Fibo retracement of the decline October to November);
$0.9881 (23.6% Fibo retracement of the decline from February to June);
$0.9794/9803 (May 18 minimum, June 5 maximum).
Resistance
$1.0141 (June 6 maximum);
$1.0208/15 (50% Fibo retracement of the decline from October to November and the slide from February to June).
Chart. Daily AUD/USD