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Citigroup: scenarios for US dollar after the Supercommittee
Analysts at Citigroup believe that investors’ attention that so far has been focused on the situation in the euro zone will turn next week to the United States where the so-called Supercommittee which consists of Democrats and Republicans is trying to reach a deal on deficit reduction. The specialists note that according to the survey they have conducted among investors, fewer than 20% of the respondents expect the committee to reach agreement on how to proceed with the cuts. It will be recalled that if the parties fail to agree, the nation will face automatic cuts.
Citigroup economists are more optimistic. In their view, approaching election will urge the lawmakers to compromise. If these projections come true, Australian dollar will be able to make significant advance. Talking into account the fact that trading volumes will likely be small ahead of the Thanksgiving holiday on November 24, the bank thinks that AUD/USD could add 2-3% on the positive outcome.
At the same time, the strategists warn that the odds are that the Supercommittee fails to come up with an agreement are rather high. In such case the greenback will get a 1-2% lift as a safe haven. The biggest gains of US currency will be seen versus euro and Canadian dollar. Specialists at RBC Capital Markets, however, don’t agree with the latter, they think that in the latter case US dollar will weaken as it did in July and August.
Commerzbank: comments on EUR/USD
Technical analysts at Commerzbank note that euro’s decline versus the greenback paused ahead of support provided by the level of 78.6% Fibonacci retracement in the $1.3380/60 area.
The specialists think that EUR/USD will correct upwards rising to $1.3835/80. Then the bank expects the pair to resume decline moving down to $1.3270 (support line) and $1.3145 (October 4 minimum).
Resistance is seen in the $1.4250/85 zone. The long-term target remains at $1.20.
J.P.Morgan: comments on GBP/USD
The Bank of England’s November meeting minutes are released on Wednesday, November 23 at 9:30 a.m. GMT.
Analysts at J.P. Morgan believe that British Monetary Policy Committee will sound extremely dovish. The specialists also think that US Congressional deficit supercommittee won’t come up with the debt reduction steps. As a result, the market’s risk aversion, in their view, will remain very strong. Negative risk sentiment, in its turn, will make sterling decline versus the greenback.
According to the bank, it’s necessary to sell GBP/USD in the $1.5785 zone stopping above $1.6000 and expecting the pair to drop to $1.5385.
J.P. Morgan: buy Aussie versus US dollar
Analysts at J.P. Morgan claim that as the situation in the euro area is worsening and the risks of contagion are mounting the possibility that the European Central Bank will have to step in increases.
The specialists underline that if the ECB acts, the easing will most likely be conducted in the form of the rate cuts. In such case the yield for the euro gets less attractive. If the central bank decides to undertake bond buying, this will make investors concerned about inflation and weight on the single currency. At the same time, if ECB succeeded, this would be positive for euro.
So, the economists expect the risk sentiment to keep deteriorating to the critical point where the ECB will be forced to save the currency union and then revive.
The bank thinks that one shouldn’t lose trading opportunity here. According to J.P. Morgan, it’s necessary to open longs on AUD/USD in the $0.9500 area stopping below $0.9100. The economists expect the pair to rebound to $1.0500.
Nomura: EUR/USD will fall by the year-end
Analysts at Nomura expect the single currency to drop versus the greenback by the end of the year.
In their view, as the euro zone’s debt crisis escalates, European investors will likely stop repatriating their assets. That will be another blow for euro.
According to the data from the ECB, the region’s investors brought home 65.9 billion euro ($89 billion) in August and 11.6 billion euro in September – these figures significantly exceed 12-month average inflow of 629 million euro.
Such demand made EUR/USD trade in November in the $1.3871/1.3422 area which is at least 12% above its lifetime average of $1.2042. Nomura believes that the pair will end 2011 at $1.30.
BMO: trading ahead of Supercommittee
Here is another trading strategy on the approaching deadline for US Congressional deficit Supercommittee.
Analysts at BMO Capital are pessimistic about the committee’s ability to come up with the budget solution.
The specialists note that there are 3 possible outcomes: Democrats and Republicans will reach a deal on reducing shortfall by more than $2 trillion, by just the required amount of $1.2 trillion or they’ll fail to find a compromise and the nation will face automatic cuts. In their view, the latter variant is the most likely one.
BMO advises traders to sell NZD/USD at current levels stopping above $0.7650 and targeting $0.7175.
Moody's: France’s rating outlook may deteriorate
Moody's Investors Service repeated its October warning announcing that the outlook for France’s AAA may be changed to negative. The risks to the nation’s rating come from the sustained rise in its debt yields combined with weakening economic growth.
According to Agence France Tresor, France's average medium- and long-term financing costs for the first 11 months of the year accounted only for 2.78% – the second lowest level since the creation of the single currency. However, last week the nation’s 10-year bond yields surged to 3.7% and the spread over German bunds exceeded 200 basis points rising too the maximal level since France adopted euro.
Moody's warned that if the increase in yields by 100 basis points means the increase of funding costs by 3 billion euro a year. Taking into account the fact that French government projects 1% GDP growth in 2012, higher interest burden will make achieving targeted fiscal deficit reduction more difficult.
Many analysts believe that the only way to save the region from escalating borrowing costs and the potential recession is the bond buying at the secondary market by the ECB or the EFSF.
UBS: forecasts for British pound
In the short term the specialists see British pound under pressure versus the greenback as the Bank of England went through additional QE last month.
In the medium term, however, UBS expects demand for sterling increase as the UK will act to reduce its budget shortfall and the declining inflation will make the real rates in Britain higher.
The bank lifted up its 3- and 6-month forecasts for GBP/USD from $1.48 to $1.52 and from $1.62 to $1.65 respectively. The estimates of EUR/GBP future rate were lowered from 0.88 to 0.85 in 3 months and from 0.83 to 0.81 in half a year.
Commerzbank: comments on AUD/USD
Technical analysts at Commerzbank note that Australian dollar breached yesterday support versus its US counterpart in the $0.9929/10 area (August minimum, Fibonacci level).
The specialists expect AUD/USD to fall to $0.9688 (78.6% Fibonacci retracement) and plan to take profit at this point. If the bears keep pulling the market, the next downside target will lie at $0.9388 (October 4 minimum).
According to the bank, resistance levels are situated at $1.0127 (resistance line), $1.0340 (November 14 maximum) and $1.0445.
Rating agencies affirmed US credit rating
The greenback managed to recover a bit higher versus Japanese yen at the beginning of today’s Asian session as the major rating agencies affirmed US credit grades:
- Standard & Poor’s: America will retain AA+ rating even if the Supercommittee fails to reach agreement on reducing the nation’s budget deficit by Thursday (US lost its top grade by S&P on August 5);
- Moody’s Investors Service kept US rating at the top Aaa level with negative outlook;
- Fitch Ratings repeated that there will likely be a downside revision to US rating outlook in case of the Supercommittee’s failure.
Risk sentiment has slightly improved. The pair USD/JPY managed to get above 77 yen. However, there hasn’t been enough positive news to detain yen’s appreciation and the pair soon resumed decline drifting lower.
Support levels for American currency are found at 76.75 (November 21 minimum) and 76.55 (November 18 minimum). Resistance levels for US dollar lie at 77.35 (today’s maximum), 77.50 (November 15 maximum) and 77.90 (November 9 maximum).
It’s also necessary to note that investors are closing positions ahead of Japan’s holiday tomorrow and US one on November 24.