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December 16: economic events and data releases
Events:
-Troika ends their 4-day visit to Greece.
Important data: US CPI (1:30 p.m. GMT).
Bond auctions: none (keep in mind, however, that France plans to sell 7 billion euro ($9.1 billion) of bills on December 19. Spain and Greece will also offer short-term government securities next week – these upcoming events weight on euro as the market seems pessimistic on the euro zone’s prospects).
Elsewhere in the world:
- The Reserve Bank of India announced measures to curb speculation in the foreign-exchange market (companies won’t be allowed to enter into multiple forward contracts to cover a single overseas transaction, the amount of open positions dealers can maintain overnight will be reduced). As a result, rupee climbed to more than 2 ½-year maximum.
- Russia joins the World Trade Organization. The world’s biggest energy exporter is set to receive the final approval to join the WTO after 18 years of negotiations. Joining the WTO should drive bigger investment inflows, trade and higher competition. It may improve Russia’s credit rating. (14:30 GMT).
Danske Bank: outlook for 2012
Analysts at Danske Bank shared their expectations about global economic development in 2012. The specialists advance several assumptions:
- Concerns about recession are exaggerated – an overly negative economic and financial outlook is priced into financial assets;
- The world’s central banks will keep easing monetary policy;
- Euro zone crisis will continue, though the currency union won’t break up;
- Volatility will remain high;
- US dollar will experience structural weakness;
- Currency interventions will continue.
Danske give several arguments against euro zone’s break-up:
- It’s consequences would be worse than those of Lehman Brothers’ collapse;
- The costs of the break-up would be enormous both peripheral and core economies4
- The single currency is secured by political support as most of the member nations seem ready to give up more sovereignty.
The strategists, however, don’t rule out the possibility that the euro area may split, the exit would be very risky and potentially very costly for any country.
As for US dollar’s structural weakness, the analysts note that the greenback has been steadily depreciating during the last decade (with only a few interruptions like due to the introduction of the homeland investment act in 2005 and the global financial crisis in 2008). Among the reasons of such USD dynamics the specialists cite:
- Euro’s initial strong undervaluation versus the greenback;
- America’s persistent current account deficit;
- Rising commodity prices;
- On average easier monetary conditions.
In the absence of a global recession the dollar will lose to stronger currencies, such as Australian, New Zealand’s and Canadian dollars. The Dollar Index may decline in such case by about 4%, though not more as Danske isn’t bullish on riskier assets, but expects weak US fundamentals to drive a dollar depreciation trend in a “normal” risk environment.
As for EUR/USD, the analysts see the pair below $1.30 during the next few months until the market prices in new ECB monetary policy regime and then rebound end 2012 higher.
December 20: news and data to watch
News:
RBA meeting minutes (full text here):
-comments are less dovish than expected;
-Australian economy will keep expanding even though euro zone’s debt crisis has a negative impact on the global economic growth.
So, RBA rate cuts in the near future are unlikely. Australian dollar has managed to gain a bit on the news rising from $0.9890 to $0.9950.
UK consumer confidence improved in November (40 vs. 36 in October).
Watch today:
Germany: Ifo Business Climate (decline is expected);
Spain: 3- and 6-month bills auction;
The ECB begins longer-term refinancing operation (LTRO) in which banks can borrow unlimited funds in return for eligible collateral, including euro-region government bonds. The banks will be able to decide what to do with the funds on their own.
The single currency may find some support in the short term as the LTRO may provide a new source of demand by banks for euro-zone sovereign debt.
BofA: sell EUR/USD on the rallies
Technical analysts at Bank of America believe that the single currency may fall to 1-year minimum versus the greenback at $1.2510 (last visited in July 2010).
The specialists make such forecast as on December 14EUR/USD went below October minimum at $1.3145 sliding to $1.2945. In their view, support in the $1.2901/2859 area will be the last obstacle ahead of $1.2533.
In their view, the pair is with no doubts trading within the downtrend. The analysts note that as the market's sentiment about euro is extremely bearish, short squeezes are possible and the pair has chances to rise to $1.3250. At that point Bank of America recommends opening short positions.
BBH: euro will decline to $1.24
Analysts at Brown Brothers Harriman expect the single currency to decline versus the greenback in the coming months to end the first 3 months of the next year at $1.24.
The specialists note that euro is still overvalued as its fair value is in the $1.20 zone. The fact that EUR/USD was trading rather high may be explained by the repatriation and the ongoing diversification of reserve inflows which supported the European currency. At the same time, BBH says that these processes may slow down euro’s slump, but won’t stop it.
According to the bank, the pair will find itself under pressure due to the euro area’s economic weakness amid tough austerity measures and the tensions at the peripheral band markets. Such outlook increases euro risk premium and the possibility of further rates cuts by the ECB.
GBP/USD: MPC minutes and technical comments
Bank of England Monetary Policy Committee members voted unanimously at their December meeting to keep policy unchanged as uncertainty over the economic outlook remained high.
All nine members of the MPC voted to continue with the current 275 billion pounds of asset purchases and to leave the benchmark interest at 0.5%. Divisions on the MPC remained over the outlook, with some members saying the November Inflation Report projections meant more quantitative easing was likely to be needed.
UK Borrowing turned out to be lower than expected in November: 18.1 billion pounds versus the forecast of 19.6 billion.
Although UK central bank left door open for more easing in February, pound strengthened versus the greenback. GBP/USD tested the levels in the $1.5773 zone. Support for British currency is situated at $1.5650. Watch the bullish “double bottom” pattern: it will be confirmed if sterling overcomes resistance in the $1.5768/77 area.
ECB conducted first 3-year LTRO, analysts’ comments
The ECB has reported a strong demand for its 3-year longer term refinancing operation allotment. The central bank lend more than 489 billion euro to 523 financial institutions at the fixed rate of 1% and to be paid January 2015. The analysts were expecting the amount of about 300 billion euro.
It was the first of the two 3-year loan auctions announced ECB president Mario Draghi at the central bank’s last meeting on December 8. The next one will be allotted on 29 February 2012.
Reuters sited the following analysts’ comments:
Societe Generale: “This is good. It's a positive number, at the top end of expectations. You have to regard it as a positive result. This is at least a solid 240 billion euro (net) increase for banks. But it is still short of covering all of the banks' financing for next year. So, it could ease fears of a credit crunch somewhat.”
ING: “…the lower number of participating banks (523 versus 1121 previously) suggests that the take-up is currently less widespread — and probably more concentrated in banking systems in peripheral euro zone countries. We will be keeping a close eye on national central bank data over the next few weeks for further clues on which countries' banking systems tapped the three-year facility.”
Analysts at UBS claim that though the LTRO will provide breathing space for banks it won't improve the long-term outlook for the European financial sector.
The pair EUR/USD climbed to the weekly maximum in the $1.3200 area on the ECB’s announcement before sliding back to $1.3090.
Japan: monetary policy and efforts to stem yen
Bank of Japan: monetary policy unchanged
The Bank of Japan kept monetary settings unchanged at today’s meeting, but cut its economic assessment saying that the nation’s GDP growth will stagnate at least until spring next year. Japan's economy recovered from a recession triggered by the March earthquake but is expected to slow sharply in the fourth quarter as the initial rebound driven by companies restoring supply chains and production facilities dies out and the overseas demand decreases.
BOJ Governor Masaaki Shirakawa underlined that the euro zone’s debt crisis and economic weakness have negative impact on the global economy in general and on Japan in particular.
The central bank left the key interest rate below 0.1%. The BOJ didn’t increase asset purchases after 2 months of doing so, trying to save this option for future action.
Analysts at Nomura expect more easing in January-March referring to the risk of a credit rating downgrade for European sovereign debt and the possibility of more stimulus from the Fed and the ECB.
Japan’s government: intervention fund increased
Yesterday Japanese government decided to boost its currency market intervention fund by 30 trillion yen ($385 billion) from 165 to 195 trillion yen – that’s the second biggest* increase and the sign that Japan’s officials are keen to prevent sharp advances of the national currency. Finance Minister Jun Azumi announced that Japan is ready to act at any moment if necessary.
The increase was included in a fourth extra budget approved by the government Tuesday. The extra budget is aimed to revive Japanese economy and will be submitted to the regular parliamentary session starting January along with a main budget for the next fiscal year.
Japanese authorities had to lift up the intervention fund as they spent 9.092 trillion yen between October 28 and November 28 trying to stem yen’s appreciation and support exporters, so it was needed to replenish it.
Japanese government kept its economic assessment intact in its monthly report issued on Wednesday but cut its view on business sentiment, reflecting worsening confidence among big manufacturers in the BOJ's December Tankan survey.
*The biggest one was 40-trillion increase in 2004 fiscal year which was conducted after yen-selling intervention campaign of 2003-2004.
According to the estimates of Barclays Capital, the actual amount available to the central bank for selling yen may increase from about 40 to 70 trillion yen. The analysts say that taking into account the general strengthening of US dollar seen so far and better economic data, the intervention fund will be able to satisfy the need for selling yen during several months.
Europe: event to watch today
- Italy's government will hold confidence vote on austerity in Senate around 2 p.m. GMT: the lawmakers are set to give final approval today to Prime Minister Mario Monti’s 30 billion-euro ($39 billion) emergency budget plan, including a pension overhaul and a levy on primary residences.
The draconian austerity measures will affect the nation’s weak economy. Data released yesterday showed that Italy’s GDP shrank contracted by 0.2% in the third quarter after 0.3% growth in the previous 3 months. The government forecasts contraction in the fourth quarter, 0.6% growth in 2011 and a 0.4% contraction in 2012.
- European Central Bank President Mario Draghi speaks today in Frankfurt after a meeting of the European Systemic Risk Board which begins at 4 p.m. GMT.
Yesterday the ECB made the region’s banking sector a Christmas present – the central bank lend a record sum of 489 billion euro ($638 billion) to 523 euro-area banks in 3-year loans. That was the first of ECB’s LTROs announced on December 8. The second one will be allotted on February 29, 2012. According to Goldman Sachs, the borrowings equal about 63% of the European bank debt maturing in 2012.
The majority of analysts argue that the ECB’s move won’t be efficient as the region’s banks can decide on their own where to invest the obtained funds and they aren’t very likely to invest in the peripheral debt.
St. George: 2012 forecast for AUD/USD
Analysts at St. George believe that although Australian dollar will be affected in 2012 by the euro zone’s problems and potential slowdown in China, it will fall, but not much.
The specialists note that Aussie has shown greater resilience during bouts of risk aversion this year in comparison to previous episodes of risk aversion due to its strong underlying fundamentals.
The bank expects AUD/USD to trade around $1.0000 in March, in the $0.9900 area in June and near $1.0100 at the end of 2012.