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Nomura, RBS: China will keep easing policy
The economic data released today in China were mostly lower than expected. The nation’s industrial production contracted from 13.2% in October to 12.4% in November (y/y).
Analysts at Nomura expect Chinese GDP growth will slow down from 9.1% in the third quarter of 2011 to 7.5% in the first 3 months of the next year. The specialists say that the country’s economy is rapidly weakening as its exports suffer from the reduced demand overseas and the property market is cooling.
In their view, lower inflation (annual CPI growth dropped from 5.5% in October to 4.2% in November) would allow the nation’s monetary authorities to conduct further monetary easing. The bank expects the People’s Bank of China to cut reserve requirements rate in January.
Analysts at Royal Bank of Canada claim that as Beijing claimed that it will maintain its “prudent” monetary policy stance, the policymakers will adjust the policy in the form of RRR cuts rather than a cut in benchmark policy rates or a shift to currency depreciation.
Analysts on EU summit results and euro area's future
UBS: though the results of the EU summit met by the market with mixed feelings, it’s clear that the single currency will suffer from the fundamentals of recession in the euro area. As a result, EUR/USD will weaken in 2012 towards its fair value at $1.20/25.
BBH: the markets are still worried about the peripheral debt maturing at the beginning of the next year. As Britain refused to join new EU fiscal treaty its role as a safe haven may strengthen.
Goldman Sachs: many issues still are to be clarified. The ECB will eventually towards more proactive purchases on a larger scale after the EU nations confirm their agreement and specify certain regulations.
Citigroup: the funding needs of Italy and Spain for 2012 and a good part of 2013 seem to be covered – a good point. However, when the EFSF was established last year the markets rallied with relief, but now there’s no such reaction.
RBS: the policymakers failed to find solution of the crisis. European imbalances are wider than just the budget problems – the growth divergence across the euro area will increase as the peripheral economies unlike the core ones will be hit by the austerity measures. In addition, the parliaments of the European nations may be reluctant to pass new fiscal legislation.
SocGen, UBS: euro’s declining after Moody’s statement
The single currency dropped versus it’s the greenback to the minimal level in December in the $1.3250 area. US dollar and Japanese yen weakened versus their higher-yielding counterparts as the market’s risk aversion increased.
Euro weakened as Moody’s Investors Service put the credit ratings of all EU nations under review. Explaining such decision the agency said that the European countries didn’t manage to produce “decisive” measures to solve the debt crisis (on Friday, December 9, the EU leaders announced new rule which limits annual structural deficit of the member nation by 0.5% and decided to provide up to 200 billion euro in bilateral loans to the IMF for financing the problem European nations).
Another leading agency, Standard & Poor’s, warned before the Friday's summit that it may downgrade euro zone countries en masse if they fail to stem the debt crisis. The agency hasn’t given any comments on the situation yet.
Analysts at Societe Generale note that Moody’s move is in line with investors’ sentiment as the market isn’t convinced the European authorities have done enough to solve the crisis. The specialists think that EUR/USD may fall below $1.3145, to the lowest levels since January.
Strategists at UBS underline that if euro zone bonds again get under pressure, there won’t be enough positive factors to support euro.
Economists at Bank of Tokyo Mitsubishi UFJ think that the euro zone’s debt crisis will intensify and European currency will keep declining.
S&P comments on the situation in the euro area
Reuters cites the comments of Standard & Poor's chief economist on the situation in the euro area made yesterday: «There is probably yet another shock required before everybody in the euro zone reads from the same page, for instance a major German bank experiencing some real difficulties on the markets, which is a genuine possibility in the near term». According to S&P, EU summit agreement was a significant step forward, but not enough.
Last week the ratings agency put 15 European nations on watch for potential downgrade. It usually takes the agency about 3 months to act after a warning. The agency said, however, that this time it may make the decision more quickly.
S&P intends to urge the European authorities to solve the crisis as the next year the region is facing significant risk of recession and credit crunch.
Analysts at Commerzbank claim that though much of the potential negative outcome has already been priced in, the downgrade by S&P would seriously hit the markets.
Citigroup, BoA: expectations ahead of SNB meeting
The Swiss National Bank meets on Thursday, December 15. The Libor rate is released at 8:30 a.m. GMT and is followed by the central bank’s press conference.
The market’s widely expecting the SNB to do something to weaken franc as the officials have expressed concerns about the strength of the national currency.
Currency strategists at Citigroup note that the leveraged funds turned short on franc for the first time in 13 months.
Analysts at Bank of America Merrill Lynch claim that the market is estimating the possibility of the SNB raising floor for EUR/CHF from 1.20 to 1.25 by 25%. Some traders even talk about the floor raised to 1.30.
The specialists say that for further hints about Swiss monetary policy one should analyze the micro survey of Swiss business that appears in the bank's quarterly bulletin (the one for the fourth quarter is released on December 23, the previous are available here). According to Merrill Lynch, the survey deterioration in September triggered the SNB’s intervention as well as verbal interventions in January and December 2010.
UBS: forecasts on the Fed, the SNB and the ECB will act
Analysts at UBS believe that the Federal Reserve won’t announce the third round of quantitative easing at today’s meeting as the nation’s economic data has so far been rather strong. In their view, the Fed may reduce its discount rate and reinstate the Term Discount Window Facility in order to increase liquidity available to US banks.
The specialists think that the Swiss National Bank will raise the floor for EUR/CHF from the current level of 1.20 to 1.25 as Swiss CPI declined for 2 months and the nation’s monetary authorities will try to diminish the risks of prolonged deflation.
As for Europe, the UBS economists think that the European Central Bank will cut its benchmark interest rate by another 25 bps at its next meeting on January 12 and then once again on March 8. As a result, the borrowing costs in the euro area will slide from the current level of 1% to 0.5%. The strategists don’t rule out the possibility that the central bank will lower rated to 0.5% even earlier and that the ECB could be forced to consider such option as the quantitative easing. UBS underlines that the European economy will be under pressure from austerity measures and debt problems, so the ECB will probably be able to justify bond purchases by its mandate of maintaining price stability rather denying potential accusations in deliberate monetizing of the European debt.
SocGen: technical levels for USD/JPY
Technical analysts at Societe Generale expect that the level of 77.15 yen will be able to support the greenback. The specialists note that for the pair USD/JPY could experience growth in the medium term, it should overcome resistance in the 78.30/55 yen area.
Mizuho: short-term recommendations for majors
EUR/USD (bullish, target $1.3525, stop below $1.3135)
Resistance: $1.3250, $1.3310 and $1.3360
Support: $1.3145 and $1.3055
GBP/USD (bullish, target $1.5795, stop below $1.5495)
Resistance: $1.5665, $1.5735 and $1.5770
Support: $1.5525 and $1.5465
USD/JPY (bearish, target 76.95, stop above 78.58)
Resistance: 78.00, 78.15 and 78.29
Support: 77.49, 77.12 and 76.96
J.P. Morgan on trading EUR/USD
Analysts at J.P. Morgan believe that the EU summit on Friday passed as usual – the policymakers achieved some results, but the markets didn’t feel relieved.
The specialists doubt that the European nations will be able to come up with the final by March as the previous ones took 1-2 years to prepare.
J.P. Morgan believes that the crisis will keep on and the European Central Bank will be finally forced to do more. As a result, the economists expect EUR/USD to decline and recommend selling the pair on rallies.
The specialists underline that with all the events affecting the market such as the FOMC and OPEC meetings it’s very difficult to find where to enter the market. In their view, one open shorts on euro if it reaches $1.36 targeting $1.31/30 and placing stops at $1.3820.
BIS: following trend vs. carry trades during crisis
Economists at Bank for International Settlements claim that during the times of the crisis it’s better to use so-called momentum strategies or, in other words, to follow trends than doing carry trades.
The latter is borrowing in currencies with low rates to investing in the higher-yielding ones. The market players usually fund their portfolio by US dollars and buy assets in Australian dollar, New Zealand’s dollar, emerging markets’ currencies.
According to BIS calculations, carry traders lost 12% in January 1998 (Asian crisis) and 6% in October 2008 (global financial crisis) and suffered severe losses in August and September this year. On the other hand, those who applied momentum strategies gained during the same periods.
BIS specialists note that though carry trade is popular because most of the time investors are getting small but stable gains, these positions may lead to large losses – you can lose all you’ve gained in 1-2 years of average returns in 1 month when the situation becomes unfavorable.