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RBC on the policy of major central banks
ECB: the central bank surprisingly cut interest rates by 25 basis points in November. The analysts expect to see the same reduction in December.
Bank of England: the MPC will likely announce another 50 billion pounds of asset purchases at its meeting on Thursday, November 10. The minutes from October Meeting showed that all members of the Committee agreed that further monetary stimulus is necessary.
Bank of Canada: the next time the interest rates will be changed to the upside, but this won’t happen until the second half of 2012.
Reserve bank of Australia: there will be another 25-basis-point rate cut in the first quarter of 2011.
Mizuho: US dollar may strengthen versus yen
Technical analysts at Mizuho Corporate Bank believe that the greenback may rise to the 4-month maximum versus Japanese yen.
The specialists point out that USD/JPY has managed to break above the top of the Ichimoku Cloud. In their view, after Japan’s intervention on October 31 dollar’s baseline has lifted up to 77.44 yen. If the greenback keeps closing above this level until the end of November, bullish pressure on US currency will increase.
According to the bank, the pair may rise above August 4 maximum at 80.23 yen.
Commerzbank: negative outlook for EUR/USD
Technical analysts at Commerzbank note that the single currency declined yesterday versus the greenback testing levels below $1.3565, the level representing 61.8% Fibonacci retracement of its advance in October.
The specialists think that if EUR/USD remains trading below $1.3565, it will be poised down to $1.3380/60 (78.6% retracement and September minimum). After that, the next downside target will be $1.3145 (October 4 minimum).
According to the bank, resistance levels are situated at $1.3685/90 and $1.3870.
SocGen: sell Aussie versus yen
Currency strategists at Societe Generale advise traders to stay out of EUR/USD as there is severe event risk and the pair’s dynamics is extremely volatile.
The specialists propose investors to trade on the consequences of the euro area’s debt crisis or, in other words, on the economic growth slowdown and worsening risk sentiment.
So, according to the bank, a good trading strategy is selling Australian dollar versus Japanese yen. The analysts advise to open shorts on AUD/JPY in the 79.50 area stopping above 81.50 aiming at 74.00 yen.
BBH is concerned about US debt issues
So far the market’s attention has been focused on the euro zone’s debt problems, investors have almost forgotten that the US also has much to deal with.
The United States created special congressional committee – or supercommittee – in order to the debt-reduction measures. The deadline is on November 23. If the policymakers don’t come up with the plan how to decrease debt by $1.2 trillion before the time runs out, America’s spending will be automatically cut in 2013.
Analysts at Brown Brothers Harriman underline that there is a serious split in the opinions of the committee’s members. In their view, this is one of the factors why the single currency has been performing relatively well versus the greenback so far. By their estimates, traders are pricing in only a 7% probability that the supercommittee will reach a deal by the end of the month.
BBH specialists underline that in case of supercommittee’s failure fiscal tightening and sluggish economic growth could make Federal Reserve’s policy more accommodative. That, in its turn, will put the greenback under negative pressure.
US dollar, euro and sterling will be competing in weakness, so US currency want lose much to the latter. Taking into account the euro area’s issues the bank still thinks that EUR/USD will fall to $1.29 by the end of the year. At the same time, other G10 currencies are quite likely to outperform dollar.
Merrill Lynch on US credit rating
Analysts at Bank of America Merrill Lynch believe that other major rating agencies – Moody's or Fitch – will lower US top credit rating by the end of the year after Standard & Poor's downgraded the world’s leading economy in August.
As the reason for such dim outlook the specialists cited concerns about the nation’s huge budget deficit and debt. In their view, the second downgrade will seriously hit weak American economy.
If the so-called supercommittee fails to reach a deal to reduce the US deficit by at least $1.2 trillion by November 23, the rating agencies will make their move at the end of November-beginning of December.
Merrill Lynch decreased US economic growth forecasts for 2012 and 2013 to 1.8% and 1.4% respectively.
At the same time, it’s necessary to note that the agencies don’t intend to hurry with their judgments. Moody's Investors Service plans to take into account such factors as the results of presidential elections and the expiration of the Bush-era tax cuts late in 2012, but not only the committee. Fitch Ratings still has a stable outlook on its AAA rating on the United States, so before any downgrades it will probably revise outlook to negative.
Bank of England left policy unchanged
The Bank of England’s meeting passed today in line with the forecasts: as it was expected, the Monetary Policy Committee left its benchmark rate at 0.5% keeping the ceiling for the asset purchases at 275 billion pounds ($437.3 billion). Minutes of the meeting will be released on November 23.
The BOE said it will take up to four months to make the additional quantitative easing of 75 billion pound sanctioned in October. The central bank aims to keep the scale of the program under review. Despite the fact that inflation reached 5.2% in September British monetary authorities will decline sharply the next year.
Analysts at Nomura International note that the MPC is extremely concerned by the debt crisis in the euro area and potential contagion. In their view, British central bank is very likely to announce more easing until the end of February.
According to the European Commission, UK economy risks contracting at least in one of the next few quarters affected by the government’s spending cuts.
The pair GBP/USD rose from the weekly minimums in the $1.5890 area to the levels in the $1.5970 zone.
Euro area: economic and political news
The single currency rose today versus the greenback helped by the high demand for Italian T-bills: the bids exceeded offer in about 2 times making the market’s concerns ease.
It’s necessary to say that there are enough reasons for concerns. Yesterday Italy’s 10-year yields rose above the critical 7% level – the point when Greece, Ireland and Portugal asked the EU for financial help. Today the yields retreated, but remained elevated.
In addition, there was a talk about the European Central Bank buying Italy’s government bonds. Ever the less, European Central Bank policymaker Juergen Stark warned European governments on Wednesday against asking the ECB for support in dealing with the region's sovereign debt crisis, saying this would put the central bank's independence at risk.
Analysts at JPMorgan Chase warn that Italian problems could make Japanese investors sell the nation’s bond. In such case EUR/JPY is poised to decline.
The European Commission warned of a “deep, prolonged recession” in the region reducing its euro zone economic growth forecast in 2012 from 1.8% to 0.5%.
Lucas Papademos, former vice president of the European Central Bank, was named new Greek prime minister. Elections are scheduled on February 19, 2012.
Goldman Sachs lifted forecast for NZD
Analysts at Goldman Sachs increased forecasts for New Zealand’s dollar from 0.74 to 0.77 in 3 months, from 0.78 to 0.80 in 6 months and from 0.82 to 0.84 in a year.
The specialists point out that kiwi has managed to recover from October minimums in the 0.7470 area, though its dynamic was volatile. In their view, the currency is doing pretty well despite the looming concerns about global economic slowdown and New Zealand’s credit rating downgrade by Standard & Poor's and Fitch at the end of September. According to Goldman, the coming 12 months will be characterized by US dollar’s weakness.
Wells Fargo about USD/JPY prospects
Currency strategists at Wells Fargo note that the moves of the pair USD/JPY are no more strongly correlated with the dynamics of stock market. The specialists underline that the greenback is falling, while stocks in the US are rising.
In their view, the mentioned relationship had been growing less and less pronounced since 2009 and was finally broken in the past year due to continuous Japan’s interventions and contracting interest rates differential between the US and Japan.
As a result, the advance of the equity market won’t help to bring Japanese yen lower. According to the bank, the greenback will be trapped between 78 and 80 yen during the next 6-12 months. Any attempts to weaken yen won’t be effective in the longer term until US economic prospects remain dim and interest rates – extremely low.