Comments and forex-analytics from FBS Brokerage Company - page 175
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Long-term forecasts for CAD
Analysts at Capital Economics believe that the greenback will keep strengthening versus its Canadian counterpart this year to 1.0870 by the end of 2012 and to 1.1630 in 2013. The specialists expect loonie to weaken due to declining commodity prices and no Bank of Canada’s interest rate hike this year. Brent crude oil has so far tested the levels below $90 a barrel and Capital Economics forecasts it to end the year at $85 a barrel, while “business investment prospects already look less sure than a month ago.” In addition, the recent revision to mortgage rules in Canada is likely to curb housing activity which accounts for a considerable share of the nation’s GDP. For loonie downside risks outweigh the upside risks, say the analysts.
Specialists at Scotiabank, however, aren’t that bearish on loonie. On the other hand, they believe that USD/CAD will finish 2012 at parity and then hover there in 2013. According to the bank, the expectations of the BOC rate hikes may return later in the year if global economic sentiment improves. Among other factors positive for CAD Scotia names China’s monetary stimulus efforts, which may prop up commodity prices by the end of the year, and weakening US inflation, which could boost spending, lifting Canadian exports.
Chart. Weekly USD/CAD
Euro area: the relief – at last!
That wasn’t a bad start of the day for EUR/USD: the pair soared by 175 pips in 2 hours – the biggest advance in 8 months – to the maximal level since June 21 of $1.2627 before consolidating around $1.2586 on the hourly chart. Euro also went up against Japanese yen. All in all, risk sentiment improved making the higher-yielding assets and currencies like Aussie and kiwi gain.
French President Francois Hollande is calling for an immediate relief for the troubled euro zone’s economies. He even put French backing of a German-inspired deficit-control treaty on hold. Italy and Spain which are in desperate need of funding delivered an ultimatum saying they won’t approve a 120 billion-euro growth-boosting package unless Germany authorized steps to calm their bond markets. As a result, German Chancellor Angela Merkel gave in on expanded steps to stem the debt crisis and euro-area leaders agreed to ease repayment rules for emergency loans to Spanish banks and relax conditions on possible help for Italy.
European leaders dropped the condition that the emergency loans from Europe’s bailout fund to Spanish banks will have preferred creditor status compared to the money of private bond holders. Such step should help to reduce Spanish yields, say the experts. EU President Herman Van Rompuy said this was a “breakthrough.”
According to the statement, European leaders aim to “break the vicious circle between banks and sovereigns” and will present proposals for joint bank supervision “shortly,” “by the end of 2012.” Once an “effective” system is set up, the ESM could, “following a regular decision, have the possibility to recapitalize banks directly.” As for the pooling of euro-area debt, the measure sought by Spain and Italy and strongly opposed by Germany, it wasn’t mentioned.
Amid all the optimism I’s necessary to note that the EU’s 2 rescue funds may only amount to about 20% of the outstanding debt of Italy and Spain. As a result, it probably won’t be able to generate significantly lower borrowing costs.
Photo from findingoutabout.com
All eyes are on German parliament
Although there are still issues of confrontation among the European policymakers including joint debt, euro bonds, the region’s policymakers have managed to show their resolve in combating the debt crisis.
All eyes are now on the parliamentary vote in Germany tonight on whether to ratify the ESM Treaty and the Fiscal Compact Treaty.
Germany was forced to give up and allow easing conditions on Spanish banks’ rescue and potential Italian bailout. The Chancellor Angela Merkel said after that she was “very satisfied that we took good decisions on growth.” Now she will have to explain the deal to German lawmakers.
The debate will begin at 15:00 GMT. The demand for safer assets will get some support on the news.
Photo: German Bundestag/Müller
EU summit: analysts aren’t entirely happy
All the talk is about EU summit. Here are the analysts’ comments on the issue.
UBS: the innovation of an “effective single supervisory mechanism” and the ESM being able to recapitalize banks directly “will likely come far too late to be of immediate use during the recapitalization of the Spanish banking system.” “Any funding provided to recapitalize Spanish banks over the coming months is still very likely to inflate the Spanish sovereign debt levels.”
Lloyds Bank: “It is one step on a very long road. But we don't have any details, and arguably the detail is where the risk lies, because the market will start to pick holes in it as we've seen previously.”
BOTMUFJ: among questions the market will ask is whether the firepower available to the rescue funds will be enough to stabilize the 2.5 trillion euro Spanish and Italian bond markets, and how easy will it be to agree on the banking supervisory mechanism. “Our initial view is this deal is no game-changer, and any EUR/USD rally will simply offer attractive levels to sell”.
Westpac: “Definitely some good news for risk markets here, though it is not the ‘big bazooka’.”
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ECB may cut rates next week
The European Central Bank meets on Thursday, July 5. The single currency may find support ahead of the meeting on the expectations of the interest rate cut and more long-term liquidity injections. Either of those would be mildly supportive for the euro.
According to Reuters, 48 out of 71 economists surveyed think that the ECB will reduce the borrowing costs next week.
Analysts at Standard Chartered forecast a 25bps rate cut claiming that “the European Central Bank is best suited for post-summit fire-fighting at short notice.”
Consumer prices in the euro area added 2.4% in June in line with consensus forecast. Commerzbank underlines that “there’s no obstacle to an ECB rate cut from the side of inflation”.
Earlier ECB President Mario Draghi has urged European governments to act resolving the crisis. Now as the politicians have made some progress, the central bank may decide to join and help to revive the depressed economy of the euro area.
Here’s the sum-up from BNP Paribas: “At 11%, the unemployment rate has reached its highest level since the launch of euro. Under the current economic environment, labor market conditions will continue to deteriorate. The conditions for further interest rates cuts over the coming months are therefore in place. The refi rate might be reduced by 50bp before the end of Q3. However, interest rates are already extremely low, and this will reduce the impact of further cuts. Nevertheless, many credit institutions are still highly dependent on ECB liquidity. Cutting the interest rate will therefore reduce their liquidity costs. An interest rate cut could reduce somewhat tensions in the market. Nevertheless, ECB actions cannot solve euro zone underlying problems. Structural problems require structural solutions which can be provided only by national authorities and EU leaders.”
Photo: Reuters In English
EUR/USD: technical comments
EUR/USD advanced more than 1% on Friday after the positive announcements at the EU Summit. It seems the EU leaders have finally got a sense of how complicated the situation is and are ready to make concessions. Most analysts, however, don’t believe the euro’s rally will last long.
Analysts at RBS remain bearish on EUR/USD despite the current strength of the single currency. They point at a strongly-marked bearish flag on a daily chart (the pattern started early May), what informs us of a potential downward movement of the cross. In the medium-term RBS strategists recommend selling EUR/USD at current levels, targeting at $1.1880 and with a stop at $1.2775/85.
Commerzbank specialists expect the current rally to end at $1.2746 (June 20 and 18 maximum). In their view, the pair is likely to pull back to $1.2463. Perhaps, the market is not ready to break down yet if it didn’t manage to break below $1.2435.
Specialists at SEB expect the cross to decline as long as it trades below $1.3005. They call attention to the $1.2626 level (the middle of the long bearish candle formed on June 21), which may serve as a resistance in a short term.
Resistance:
1.2626 (today’s maximum, the middle of the long bearish candle formed on June 21 and Jan. 2012 minimum);
1.2670 (38.2% Fibonacci retracement from the May-June decline);
1.2735/46 (50-day MA , June 20 and 18 maximum);
1.2785 (50% Fibonacci retracement);
1.3005 (strong support broken early May).
Support:
1.2521 (23.6% Fibonacci retracement);
1.2432 (today’s and June 8 minimum);
1.2405 (June 28 minimum);
1.2290 (2012 minimum).
Chart. Daily EUR/USD
BarCap: bearish on EUR
Analysts at Barclays Capital think that market players will remain cautious and the risk premium on euro will remain high. In addition, euro zone’s economic growth outlook seems gloomy, while the effects of structural reforms will become visible only after some time.
The specialists still expect the ECB to keep monetary policy very loose and reduce rates by 50bp next week. In their view, such move isn’t fully priced in by the market.
According to Barclays, EUR/USD will be slowly crawling down to $1.15 during a year from now.
Chart. Weekly EUR/USD
BBH: bulls on USD/JPY
On Friday USD/JPY strengthens but still remains in a sideways channel (since June 26). The cross follows the EUR/JPY’s rally: risk sentiment improved significantly on the EU Summit results. The greenback is up even despite the today’s negative US data releases (personal spending, consumer sentiment, PCE price index).
According to analysts at BBH, the greenback is likely to strengthen further against the Japanese currency: in their view, the combination of fiscal tightening and a weakening economy supports the case for further policy easing. Today Japan released rather negative data: industrial output dropped the most since the March 2011 earthquake and the consumer prices declined. Specialists at BBH believe the next move may come at the next BoJ meeting (July 12).
Support:
79.67 (50-day MA);
79.20 (23.6% Fibonacci retracement);
79.00 (psychological level);
78.80 (June 20 minimum);
78.61 (June 15 minimum).
Resistance:
80.12 (38.2% Fibonacci retracement);
80.61 (June 25 maximum, 100-day MA);
80.91 (50% Fibonacci retracement).
Chart. Daily USD/JPY
July 2: economy and currencies
On Monday EUR/USD weakens after an impressive growth on Friday on the positive EU Summit results (euro leaders eased terms on loans to Spanish banks). Today the single currency is under pressure of expectations that the regional unemployment may reach record 11.1% in May, while manufacturing PMI – to decline to 44.8 in June. The market, therefore, expects the ECB to cut interest rates to 0.75% on the forthcoming meeting (July 5). According to analysts at UBS, the latest EU summit has clearly bought time for the euro, but it still does not remove the bearish case for the currency.
USD/JPY declines today: both Tankan manufacturing and non-manufacturing PMI indices exceeded the previous prints and the expectations (-1 and 8 respectively). However, most analysts still expect the BoJ to expand its asset purchases on a meeting on July 11-12. The Tankan is probably up because the low commodity prices improved the sentiment. AUD/USD weakens; however, the Aussie remains near to an almost two-month high on bets RBA will leave interest rates on hold at 3.5% tomorrow. NZD/USD maintained its biggest gain in three weeks vs. the greenback as Asian stocks extended a global rally. The MSCI Asia Pacific Index (MXAP) gained 0.3% today. The S& P 500 Index rose 2.5% on June 29, after Stoxx Europe 600 Index climbed 2.7% following the EU Summit.
Events to watch today:
Canada: Bank holiday
Switzerland: Retail sales are likely to increase by 0.9% in May after a 0.1% growth in April.
Great Britain: Manufacturing PMI is to grow to 46.7 from 45.9. However, the indicator still remains below 50, what indicates industry contraction.
Euro zone: Analysts expect the Italian manufacturing PMI to decline to 44.6 from 44.8. Unemployment rate in the region is to increase to 11.1% in May from 11.0%.
US: ISM manufacturing PMI is forecasted to decline to 52.1 from 53.5. Later investors will pay attention to FOMC member Williams speech.
BMO: trading EUR/USD ahead of ECB
These days, after the EU leaders demonstrated readiness to act to resolve the crisis, the market participants are trying to guess where will the euro move now and what to wait from the ECB on July 5.
Strategists at BMO Capital Markets recommend going long on EUR/USD at the current levels, targeting at 1.2825 and with a stop at 1.2425. Specialists believe it will make sense to buy all the risky assets including the euro, the Aussie and the kiwi if the currency block holds out. According to analysts, the ECB is likely to reward political leaders by cutting the interest rate. This action could help to ease economic conditions and to reduce risk.
Chart. Daily EUR/USD