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Euro area: political situation
Italy
New Italian Prime Minister-designate Mario struggles to get political parties to agree to take part in his technocratic Cabinet as it would be hard for the government without political representation to pass unpopular laws through the government.
Monti has to convince investors that the nation is able to reduce its 1.9 trillion debt ($2.6 trillion) and stimulate economic growth which was below euro area average during the last decade.
Greece
New Greek Prime Minister Lucas Papademos underlined that the country’s future is in the euro area. According to Papademos, the membership in the currency union guarantees Greece “monetary stability and creates the right conditions for sustainable growth”, reports Bloomberg.
The new government formed on November 11 has to implement budget measures necessary to obtain the second bailout package of 130 billion euro ($177 billion) adopted on October 26 and conduct a voluntary debt swap by the end of February.
For now the main goal is to secure the payment of an 8 billion-euro tranche of the first bailout program. In order to avoid default Greece needs this money before the middle of December.
The EU waits for all Greek parties to give written commitment to structural reforms and austerity measures. So far opposition leader Samaras has been declining to do that.
Germany
German Finance Minister Wolfgang Schaeuble said that Merkel’s government wants Greece to remain a member of the European Monetary Union. At the same time, Christian Democratic Union party led by the Chancellor voted to allow euro states to quit the currency area.
Euro area: sovereign bond yields are surging
The single currency got today under negative pressure. The pair EUR/USD dropped from the levels in the $1.3800 area where it started the week to the $1.3500 zone. The pair EUR/JPY hit 1-month minimum at 100.93 yen.
European bond yields surged increasing concerns about the region’s debt crisis. Italy’s 10-year yield approached the critical level of 7%. The yield spreads between 10-year debt of Spain, France, Austria and Belgium and similar German bunds all widened to the maximal level since the euro was adopted in 1999.
The economic data were also discouraging: German ZEW Economic Sentiment index declined this month to the lowest since October 2008 of minus 55.2.
Strategists at Nordea warn that if euro falls below last week's minimum at $1.3480, the number of bears will sharply increase. Analysts at Bank of Tokyo Mitsubishi UFJ believe that the fate of the currency union is still vague as the European nations may move closer to fiscal integration or break apart. In their view, EUR/USD will drop to $1.25 during the next 6 months.
On RBA rates and Aussie’s prospects
News about new technocratic governments in Italy and Greece brought only short-term relief to the market. Yesterday’s surge of euro zone bond yields threw investors into the risk-averse mode that affected such risk-sensitive pair as AUD/USD.
Analysts at RBC Capital Markets believe that Australian dollar’s dynamics versus the greenback will remain extremely volatile as Aussie is closely correlated with the equity markets which are seized by uncertainty. In their view, the risks for AUD/USD are to the downside.
Dow Jones reports that the interest rate swaps market is currently pricing in a 100% chance of a rate cut by the RBA in December, though the surveyed economists expect the RBA to keep the rates unchanged.
This month RBA lowered its benchmark rate by 25 basis points to 4.5% citing the projected slowing inflation and the risks posed by the euro zone debt crisis. The central bank gave no hints on further rate cuts in its meeting minutes released yesterday. According to the document, the policymakers have also discussed the possibility of staying on hold. The RBA underlined that the mining industry could become the driver of the nation’s economic growth that would require more tight monetary policy in the medium term.
Analysts at Westpac, however, claim that the mentioning of the risks connected with Europe means that the RBA left the door open for further easing, and look forward to 75 basis points of rate cuts starting in February.
Wells Fargo: negative forecast for EUR/USD
Analysts at Wells Fargo are bearish on the prospects of the single currency versus the greenback during the next 12 months. The specialists believe that euro will be affected by the increasing borrowing costs for the peripheral euro area nations and the risk of recession in the region.
According to the bank, EUR/USD will fall to $1.3000 in 3 months, to $1.2800 in 6 months and to $1.2600 in 9 months and hit $1.2400 in November 2012.
Japan: monetary policy, economy, yen’s rate
The Bank of Japan left its benchmark rate unchanged at the minimal levels of 0-0.1% and the asset-buying fund at 20 trillion yen ($260 billion) after increasing it by 5 trillion yen in October.
As Japan’s economy strongly depends on the external demand for Japanese goods, deepening European debt crisis, the flood in Thailand and the risk of global economic slowdown will have a serious negative impact on the nation’s growth prospects.
Analysts at Nomura claim that the central bank may augment monetary stimulus if the national currency which is regarded as a refuge keeps strengthening and once again approaches record maximums against its US counterpart.
According to Japan Automobile Manufacturers Association, in the first half of 2011yen’s appreciation slashed Japanese carmakers’ profit by 330 billion yen. Japanese GDP rose by 6% in the third quarter on the year-to-year basis as the nation’s economy recovered from the March earthquake. However, during the first 20 days of October exports slashed by 1.6%. Credit Suisse believe Japan’s economy is losing upside momentum since August and that the readings of its indicators will soon start to deteriorate.
As for Japan’s intervention policy, analysts at UBS don’t expect any changes. In their view, the nation’s monetary authorities will keep intervening only in case yen’s sharp bounces. As the European debt crisis escalates, Japanese investors trim their overseas assets – primarily euro zone sovereign debt holdings – and repatriate their money making demand for yen increase. That means that yen’s appreciation is caused not only by the speculative inflows, but also by the Japanese real money accounts. In such circumstances Japan will be forced to act, so USD/JPY’s decline will be likely limited.
Feldstein: Greece will have to leave the euro zone
Martin Feldstein, professor at Harvard University, who has foreseen in 1998 that the euro zone will end up with the necessity of bailing out its members, claims now that the currency union will survive, even though Greece will leave the bloc within a year.
According to Feldstein, if Greece doesn’t default and devalue its currency, it will face constant economic slump. The specialists underline that even if the nation’s debt was wiped out Greece would have an unbearable a current-account imbalance which could be eliminated only by abandoning euro and devaluation.
According to the European Commission, Greece’s debt will reach 163% of GDP this year.
Feldstein claims that Italy is in better situation than Greece due to the stronger economy and budget and smaller current-account deficit.
It’s also necessary to note that the economist advises the European Central Bank to resist pressure and avoid increasing purchases of Italian bonds as this would distort financial markets and reduce the urgency for the government to restore fiscal order.
Societe Generale: comments on EUR/JPY
Analysts at Societe Generale warn that the single currency may keep declining versus Japanese yen and fall to October 4 minimum at 100.75 yen. The specialists underline that EUR/JPY has eroded support in the 104.90/104.75 zone.
According to the bank, bearish pressure will ease only if the pair returns above 104.75. In such case euro will get chance to rise to October 31 maximum at 111.60 yen.
HSBC, Rabobank on the factors influencing EUR/USD
Analysts at HSBC claim that the fair value of the European currency is in the $1.20/$1.30 area. However, even despite the escalating crisis euro keeps trading above these levels. The specialists see 2 reasons for that.
Firstly, euro is supported by monetary inflows even though some of them are the result of European banks bringing capital home in an effort to defend themselves against possible losses on their holdings of euro-zone bonds. The current account of the euro area as a whole is almost balanced and there are positive portfolio and merger and acquisition inflows.
Secondly, as the consequences of the currency union’s break up are expected to be terrible, investors are betting that the policy makers will find a way to save the bloc. In addition, there is also a chance that the member nations will move to closer fiscal coordination.
Analysts at Rabobank add that much may be explained by the weakness of US dollar which showed the worst performance among the other major this year but has regained some safe haven status because of the European turmoil. At the same time, there are pairs with much stronger downtrend for the common currency: EUR/JPY fell from April maximum at 123.32 yen to the levels in the 103 yen area.
Commerzbank: comments on GBP/USD
Technical analysts at Commerzbank believe that after British pound has broken support of the 55-day MA and 38.2% Fibonacci retracement at $1.5825 it’s poised versus the greenback down to $1.5632 (October 18 minimum) and then to $1.5271 (October 6 minimum).
In the longer term the specialists expect sterling to slide to the support line of the uptrend from 2009 to 2011 at $1.5050.
According to the bank, resistance for GBP/USD is found at $1.6060 (downtrend line) and $1.6136 (200-day MA). The outlook for the pair will remain negative as long as it’s trading below $1.6185, the 61.8% Fibonacci retracement of pound’s decline from August maximums.
RBC: euro managed to recover a bit versus dollar
The single currency has managed to recover a bit versus the greenback after it slumped earlier this week to the minimal level since October 10 in the $1.3420 area.
Analysts at RBC claim that euro got lift from short-covering and the advance of US stock futures. The specialists say that the further dynamics of EUR/USD today will depend on the results of Spanish and French bond auctions.
In addition, the pair’s rebound may be explained by the speculation that the Fed will do additional quantitative easing. It’s recommended to pay attention to the speech of New York FRB President William Dudley at 5:50 p.m. GMT.
The market is also looking to see the increase in US Jobless claims (1:30 p.m. GMT).
At the same time one should remember that the situation in the euro area remains very tense. Strategists at Brown Brothers Harriman warn traders that if euro breaks below $1.3400, it will slide to October minimum at $1.3145.