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Morgan Stanley: euro and political factors
Analysts at Morgan Stanley look into political factors which will determine dynamics of the single currency versus the greenback.
Today German Chancellor Angela Merkel and French President Nicolas Sarkozy meet with the Greek government and the IMF officials ahead of 2-day G20 summit beginning tomorrow, but the specialists think that euro’s advance on this news won’t last long.
The strategists urge traders to pay attention to the confidence vote in Greek government that is taking place on Friday. In their view, the most bearish outcome for euro would be if the Prime Minister George Papandreou wins as that will lead to the referendum with potentially negative results. If Greek say “no” to the bailout package, Greece will be doomed to announce default.
If Papandreou loses, the government will fall and the new elections will be very likely. In such case the new budget reform measures and potentially delay the next round of bailout funds from the EU will be delayed. This scenario, however, would be more positive for euro as this way there will be no referendum.
Anyway, the medium term outlook for euro, according to Morgan Stanley, is negative.
According to the bank, EUR/USD has broken through the major support levels and is now poised down to $1.3365 and $1.3145 (October 4 minimum). Morgan Stanley expects the pair to end 2011 at $1.30 and then drop to $1.25 in the first quarter of the next year.
CIBC: 12-month forecast for EUR/USD
Analysts at CIBC World Markets expect the single currency to trade between $1.3400 and $1.3800 during the next 12 months.
According to the specialists, in December EUR/USD will consolidate in the $1.3800 area. Then it will fall to $1.3400 in March next year and rebound to $1.3500 in June and to 1.3600 in September to return back to $1.3800 in December 2012.
Bernanke: US economy may need additional stimulus
Federal Reserve Chairman Ben Bernanke claimed yesterday that additional monetary stimulus may be needed to reduce unemployment as US economic outlook seems to be rather pessimistic. Among the options of such stimulus Bernanke named the third round of quantitative easing, extending the period of record-low borrowing costs or estimating the conditions necessary for the rate hike.
The Chairman admits that the central bank has overestimated the pace of US economic recovery and expects American economic growth to be “frustratingly slow”, while FOMC statement states that even after relatively good figures in the third quarter there are “significant downside risks”. According to Bernanke, these risks include the effects of European fiscal and banking problems.
The Fed’s GDP growth projections for 2012 were lowered from 3.3-3.7% (June’s estimate) to 2.5-2.9%. The projected unemployment rate in the fourth quarter of the next year was raised from the previous forecast of 7.8-8.2% to 8.5-8.7%.
The Operation Twist or the lengthening of the Fed’s bond portfolio maturity is left in place. US monetary authorities also confirmed the plan to hold the Federal funds rate between 0% and 0.25% at least until the middle of 2013.
It’s clear now that the Fed’s policy has become more accommodative and the central bank is ready for aggressive actions.
Despite the increased possibility of QE3 that should have weakened US dollar the greenback strengthened against euro. Analysts at UBS think that this may be explained by the fact that some traders expected the Fed to take even more loose approach. In addition, one should remember that the pair EUR/USD is also weakened by the ongoing crisis in the euro area.
Greece’s membership in euro area depends on referendum results
The Greek dilemma is finally put point-blank: German Chancellor Angela Merkel said that Greece’s referendum on a bailout deal will determine whether it will stay in the euro area.
French President Nicolas Sarkozy claimed that the indebted nation will receive any financing only if it holds to the terms of a rescue agreement designed last week.
This is the first time when European leaders raised the prospect of the euro zone splintering. The vote is scheduled on December 4 or 5.
Greek Prime Minister George Papandreou who has initiated the referendum thinks that there’s the necessity of “wider consensus” for the bailout terms expressing confidence that his nation will remain the member of the monetary union. Greek Finance Minister Evangelos Venizelos, on the other hand, argues that such question can’t be submitted to referendum.
The results of the polls show that although the majority of Greeks are against the austerity measures imposed on them by the bailout package they don’t want their country to leave the currency bloc.
It’s also necessary to note that the next 8-billion-euro tranche of the first bailout package will be delayed until the referendum results are announced.
Niesr analyses the odds of the UK recession
National Institute for Economic and Social Research estimate the possibility of recession in the UK by 50%. If the European policymakers don’t find the solution of the region’s debt crisis, the odds of British economic contraction will equal to 70%.
The economists lowered their economic growth forecasts for 2012 from August estimate of 2% to 0.9%. In their view, UK GDP growth will keep stagnating in the first half of the next year as it was this year going through the slowest recovery since the end of the First World War.
Niesr has also revised down its forecast for the global economic growth from 4.5% to 4% in 2011 and 2012 noting that there are downside risks to this projection from the crisis in Greece.
UBS: what if Greece has to quit euro?
Analysts at UBS tried to estimate the potential consequences Greece will face in case it has to leave the euro area.
On the one hand, the nation would regain control of exchange and interest rates. On the other hand, new currency would fall by about 60%. Greece’s borrowing costs would rise by at least 7 percentage points, so that position of banks and companies would seriously deteriorate. The country’s trade will drop by 50% even taking into account the competitive advantage exporters will gain from the devaluation.
All in all, according to UBS, quitting euro would cost each Greek 11,500 euro in the first year and 4,000 euro in following years.
ECB lowered the benchmark rate
The European Central Bank decided to cut its benchmark interest rate at President Mario Draghi's first policy meeting in charge by 25 basis points to 1.25% after it had twice increased it – in April and July.
Such move was unexpected by the majority of the economists as inflation in the euro area showed the reading of 3.0% in October for the second month in a row, while the central bank’s target lies just below 2%.
According to Dragi, the main reason for the cut is the deterioration of the euro zone’s economic data. The ECB President underlined that growth slowdown will cool inflation perspectives. In his view, at the end of the year the monetary union will face mild recession.
Currency strategists at Bank of Tokyo Mitsubishi UFJ think that ECB’s decision to ease its monetary policy will increase the pressure on the single currency and the demand for euro will keep declining. In their view, European borrowing costs will be lowered to 1% during the next few months.
The pair EUR/USD traded today in quite volatile manner: by the middle of the day it reached high at $1.3834 and then returned to the day’s minimum in the $1.3660 area before another bounce to the day’s maximums.
UBS: technical levels for the major pairs
EUR/USD: the major support is found at $1.3567. If the single currency breaks below this level it will fall to $1.3406. Resistance is situated at $1.3871 and then at $1.4003.
GBP/USD: resistance lies at $1.6097. If the pair overcomes this level it will be poised up to $1.6167. Support is at $1.5825.
USD/JPY: resistance is seen at 78.42 and 78.98 yen and support – at 77.43 and 76.94 yen.
USD/CHF: support is situated at 0.8718 and 0.8568 (October 27 minimum). Resistance is found at 0.8960.
Chart. Daily EUR/USD
Chart. Daily USD/JPY
Greece: the referendum story
Everything about the euro area and Greece in particular seems to change with great speed. At the beginning of the week the markets were shaken by Greek Prime Minister George Papandreou’s unexpected announcement of the referendum on the bailout package.
The EU policymakers’ reaction was abrupt as they froze credit payments to Greece and raised the question of the nation’s membership in the monetary union. Then Greek opposition expressed readiness to compromise, Papandreou backed away with the referendum idea and investors’ concerns ease. The head of Greek government has no intention to step down. Now Greek authorities discuss the prospects if setting up a transitional government with the participation of the opposition to make sure Greece will get aid payment.
The analysts in Deutsche Bank caught the point claiming that trading EUR/USD has become so volatile that it has become too risky to open significant positions for longer than 5 minutes.
The pair EUR/USD rose from 3-week minimum in the $1.3600 area to the levels above $1.3800. Strategists at Westpac say that the single currency has no strength for the sustainable rally but there is some relief as the threat of referendum that would very likely bring “no”-result has been removed.
NAB: market awaits NFP data
The market’s looking forward to get another confirmation of the coming QE3: many traders expect that US jobs growth slowed in October, while the unemployment rate remained high at 9.1%. Economists surveyed by Bloomberg project Non-Farm Payrolls to increase last month by 95K after adding 103K in September.
Analysts at National Australia Bank claim that even if the NFP reading beats economists’ forecasts but the unemployment rate stays unchanged, traders will see this as a reason for additional monetary stimulus and this will weight on the greenback.
Analysts at Bank of Tokyo-Mitsubishi UFJ point out that for unemployment to decline by half a percentage point over a year US employers have to hire about 150K workers a month. According to the labor statistics, by the beginning of October American economy had recovered about 2.09 million of the 8.75 million jobs lost as a result of the 18-month recession that ended in June 2009.
The NFP figures and the jobless rate are released today at 12:30 GMT.