Comments and forex-analytics from FBS Brokerage Company - page 103
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Analysts on the ECB monetary policy
Analysts at BofA Merrill Lynch, Citigroup, JPMorgan Chase and Barclays Capital believe that by the middle of the year the European Central Bank will reduce borrowing costs to the record minimum of 0.5%.
“The ECB is being more preemptive and aggressive now,” points out JPMorgan.
Citigroup expects euro zone’s economy to contract by 1.2% this year and 0.2% in 2013 after 1.5% growth in 2011. As a result, inflation rate will fall from 2.8% in December to 1.1% in the second quarter of 2013, while the ECB’s target lies just below 2%. JPMorgan Chase thinks that fiscal squeeze of almost 2 percentage points of GDP this year will push unemployment above the record 11% level.
Specialists at UniCredit, however, seem more optimistic. In their view, European economy will add 0.6% in 2012 as cheaper euro encourages trade. Consequently, the ECB will be able to keep its rate at 1%.
Economists at Societe Generale claim that the central bank will be unwilling to pare its benchmark too close to 0 to maintain a corridor between it and the smaller deposit rate as the much lower benchmark would make it unattractive for money-market funds and banks to lend. The bank says that the ECB will stop cutting rates at 0.75%.
Analysts at Jefferies note that if European economy keeps deteriorating even after the rate cuts, the ECB may decide to follow the Federal Reserve and the bank of England conducting direct quantitative easing. In their view, such an initiative may come as soon as March and initially involve promising to buy as much as 500 billion euro of bonds across the region over 3 months.
At the same time, it’s necessary to remember that Bundesbank strongly opposes purchases of Spanish and Italian bonds. Taking into account the strong influence of German central bank at the ECB, one may assume that quantitative easing will be an option for the European monetary authorities only if their price-stability mandate is at risk.
Some experts think that the ECB is already conducting indirect QE lending to banks, which in their turn use these funds to buy government debt. Others don’t agree with such opinion saying that the central bank is currently trying to save banks and keep open the channel through which lower interest rates are transmitted rather than actively aid growth and governments.
BoA: pound's slipping into downtrend
Analysts at Bank of America Merrill Lynch believe that British pound will trade within downtrend versus the greenback all year.
The specialists claim that if GBP/USD breaks below support at $1.5272 (October minimum), the pair will complete 15-month “head & shoulders” breaking through the neck line. As a result, the long-term trend will become bearish and sterling will be condemned to failure to $1.3908 and $1.3825.
Analysts at Commerzbank are also bearish on pound, though not as strongly yet. In their view, the pair will fall to $1.5272 and then to $1.5135, where it should hold first time around before resuming decline.
BoA: Canadian dollar will fall in Q1
Analysts at Bank of America Merrill Lynch believe that by the end of the first quarter the greenback may reach peak at 1.09 versus its Canadian counterpart and then return to the lower levels.
The specialists underline that loonie keeps depending on the market’s risk sentiment. Canada’s currency is highly sensitive to the market volatility stemming from Europe and the situation in the euro area, in their view, will get worse before it gets better.
Moreover, the bank points out that Canada's housing market is overvalued. Although Merrill Lynch doesn’t expect a crash, this situation may кeinforce any large external shock if prices fall rapidly.
In addition, China remains the object of investors’ concerns.
All these factors contribute to increasing the possibility of an interest rate cut by the Bank of Canada, negative for CAD.
MIG Bank: negative outlook for Aussie
Technical analysts at MIG Bank are bearish on the prospects of Australian dollar versus its American counterpart.
In their view, the pair AUD/USD will go down to the parity level and then drop to $0.9862 (December 15 minimum) and $0.9664/20 (November 23 minimum).
According to the bank, the pair won’t be able to overcome 200-day MA which has been has been holding steady around $1.0413 during 3 months.
Citigroup: USD/JPY is facing resistance
Analysts at Citigroup think that US dollar will be imprisoned in range between 75 and 80 yen in 2012.
The specialists claim that USD/JPY will face resistance of the weekly Ichimoku Cloud which is situated in the 78/80 yen area.
In their view, the greenback will trade with a slight downside bias unless and until the Federal Reserve shifts to tighter monetary policy.
Strategists at ANZ are bearish on USD/JPY in the long-term as Japan switches away from direct currency intervention tools. In addition, they say that the private sector is likely to have a continued bias to repatriate offshore assets because of the global deleveraging cycle. As yen is strengthening in most of its crosses, it would be very difficult for Japanese policymakers to encourage large outflows of private sector capital.
ECB: rates unchanged, analysts’ comments
As it was expected, yesterday the European Central Bank left its benchmark rate unchanged at 1%.
Here are the main points of the euro zone’s monetary authorities:
- There are “tentative signs of stabilization” in the European economy, yields at Spanish and Italian bond auctions decline.
- Still euro zone’s economic outlook in 2012 seems alarming, the region’s financial market is in the state of “high uncertainty and substantial downside risks”.
- During the next few months euro area inflation will remain at 2% before declining.
- European leaders have to encourage job creation without slippage in austerity measures and reforms.
- The new European fiscal compact, which is currently under negotiation, must be characterized by “unambiguous and effective wording”.
- The central bank’s decision to provide 489.2 billion euro in low-cost 3-year loans to the European banks has prevented a credit contraction.
- The ECB was pleased that euro zone leaders had confirmed that the involvement of private creditors in the second Greek bailout was “unique and exceptional.” The ECB has persistently argued against private sector involvement warning thatt it would increase contagion risks.
Analysts’ comments
Nomura underlines that the central bank wants to assess the latest data in order to judge the magnitude and depth of the recession in the region.
Societe Generale claims that further rate cuts will only be forthcoming in case of the signs of an outright credit crunch.
The single currency picked up versus the greenback returning above $1.28.
Never the less, UBS thinks that the overall negative outlook for euro didn’t improve after the ECB meeting. The specialists lowered forecasts for the pair EUR/USD from $1.25 to $1.15 by the end of this year and from $1.20 to $1.10 by the end of 2013.
Morgan Stanley: sell EUR/CAD and EUR/AUD
Analysts at Morgan Stanley recommend selling the single currency versus Australian and Canadian dollars.
In their view, traders will be using euro as funding currency investing money in higher-yielding currencies such as Aussie and loonie. Such move of the market may be explained by high risk aversion in the euro area, low yield especially in key European economies and the risk of ECB’s easing policy, says the bank.
According to Morgan Stanley, one should open shorts on EUR/CAD at 1.3150 stopping at 1.3260 and targeting 1.2740 and on EUR/AUD at1.2660 targeting 1.1925 and stopping in the 1.2860/2905 area.
Commerzbank on trading EUR/USD
Technical analysts at Commerzbank claim that resistance for the pair EUR/USD lies at $1.2860 and $1.2933. While the single currency holds below the latter, the outlook for it will be negative.
The specialists recommend going short on euro at $1.2760 stopping at $1.2935 targeting $1.2588.
ING, Lloyds: EUR bearish trend will stay intact
The single currency has been trading within downtrend since November, when the possibility of Greece exiting the euro zone was mentioned officially for the first time.
Analysts at ING claim that no matter whether the European policymakers including the ECB reach agreement to stabilize the government debt crisis or not, the single currency will fall. In their view, the Europe’s credit crunch is a reality, and the euro zone requires softer monetary conditions, including a weaker euro.
At the same time, the specialists underline that euro’s shorts are too large now, so if the currency is to fall further from here, a “different community of sellers” – corporations, institutional investors and FX reserve managers – must emerge.
According to ING, US dollar, demand for which will be supported by the euro zone’s debt problems, will keep strengthening versus commodity and emerging market currencies. The recovery of American currency will go on for 3-6 months, says the bank.
Strategists at Lloyds Bank claim that though excessive euro shorts may allow the European currency to experience short-term runs, euro's reaction to the improved global data will be limited as the markets realize that European economy is severely weakened by the austerity measures and it would take a long time for the region’s growth to become strong enough so that the ECB would be able to tighten its monetary policy.
Italy: mixed results of the debt auction
Italy managed to raise 4.75 billion euro meeting the target level. The nation sold 3-year notes at an average yield of 4.83% down from 5.62% at a prior auction in December.
The single currency declined versus US dollar and Japanese yen as the demand wasn’t as high as the market’s expected: investors bid for 1.2 times the amount allotted, down from 1.36 last month.
Italy will soon face a more serious challenge – 10-year bond auction which is set to take place in 2 weeks. In the first quarter the country will have to pay off more than 100 billion euro.
Analysts at Morgan Stanley claim that any rebound of EUR/USD is going to remain limited and the medium-term outlook for the pair is limited.