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BMO: trading recommendations on EUR/USD
Strategists at BMO believe that if nonfarm payrolls, released on Friday 13:30 GMT, are greater than 225,000, it will make sense to go short on EUR/USD. In this case they advise to enter the trade at current levels with a stop at $1.3427 and targeting at $1.2550. The currency pair may strengthen to $1.3200 ahead of the data release, but, in their view, the rise won’t last long.
According to specialists, EUR/USD is more likely to be on the ebb in the nearest future, because the ECB is expected to ease monetary policy by cutting rates by the summer. The two-year yield spread is at 16.7 basis points and is increasing in favor of the greenback.
Technical analysts point that if the currency pair breaks the support level $1.3130, the chances to pass through $1.3035 (the neckline of a classic head and shoulders figure) will be high. The break of the neckline should generate a 500-point drop.
GBP/USD: technical comments
On Tuesday, April 3, British pound slipped versus the greenback breaking below the short-term uptrend support line affected by the Federal Reserve’s meeting minutes. On the weekly chart pound returned below the 200-week MA after testing higher levels.
The pair found support in the $1.5840/30 area (March 20 & 28 minimums, 200 MA on H4 chart and 50% Fibonacci retracement of sterling’s advance from March minimum at $1.5600 to April 2 maximum at $1.6062).
Chart. H4 GBP/USD
On the downside, there’s an important support in the $1.5770/1.5780 zone (61.8% Fibo retracement of the advance mentioned above and the uptrend line the beginning of the year). The outlook for the pair will turn really bearish only if it falls below this point.
On the upside, if GBP/USD keeps trading within the rising wedge (watch the daily chart), it may get chance to revisit the levels in the $1.6165 zone (October 2011 maximums).
As for the fundamental factors, watch the results of the Bank of England’s MPC meeting due today at 11:00 a.m. GMT and US Non-Farm Payrolls data released tomorrow at 12:30 p.m. GMT.
EUR/USD: analysts’ comments
Bank of the West (California): EUR/USD will test its recent trading range $1.30/1.35 on the downside. As the expectations of QE3 in the US have receded, the market’s attention has turned to Spain which is struggling with the deficit targets.
KTB Securities: The debt itself is not an issue as long as there is sufficient enough (economic) growth to support it, but Spain's weak growth outlook does not paint a pretty picture.
ANZ: If the peripheral governments cannot make the necessary reforms, in the long term that’s a negative for euro.
Citigroup: The market has been locked into a range because there was no dominant FX theme. Now it looks as if higher US rates and concern on Spanish debt could be the short-term drivers, opening up room for higher volatility
BBH: Based on current spot and volatility levels, indicative pricing suggests almost a 50% chance of testing the mid-Jan low near $1.26 here in Q2.
Euro faces strong resistance at $1.3380 – this level has been tested several times so far but the pair failed to break above it.
What to expect from NFP?
According to ADP employment report released yesterday, US non-farm sector added 209K jobs in March after a revised advance of 230K in February. The figures were slightly above the consensus forecast (206K – Bloomberg version).
Now all eyes are on official Non-Farm Payrolls figures due on Friday at 12:30 GMT by US Labor Department. The economists expect NFP to post 211K after 227K February, while the unemployment rate is seen unchanged at 8.3%.
The experts often use ADP report to amend their estimates of NFP as the former figures are released earlier than the latter, though the 2 sets of data aren’t always well correlated. According to Credit Suisse, over the past year the average difference between ADP's figures and the government-reported private jobs numbers was equal to 1,000.
Analysts at Brown Brothers Harriman think that the decline in the number of unemployed seen so far may be explained by the fact that some people just stopped looking for jobs and not by some real improvement. The specialists warn that there is a risk on the downside for the March jobs report. BBH adds that the advantages from milder weather in January and February won’t likely be seen in March. In addition, the slump in construction spending (-1.1% drop in February m/m) will also affect job figures.
Blue – actual data
Yellow line – forecast
Dark blue line – revision
NFP chart
USD/CAD: short- and longer-term prospects
The pair USD/CAD is consolidating after yesterday’s advance.
The market awaits Canadian employment data later today (payrolls are expected to increase by 11.3K after declining by 2.8K in February, unemployment rate is also seen higher at 7.5% vs. 7.4%) due at 12:30 GMT. Also watch Ivy PMI at 2:00 p.m. GMT.
Analysts at Toronto-Dominion Bank: if loonie fails to find a powerful growth driver, it will risk declining. However, although USD/CAD looks undervalued it will be difficult for the pair to breach the corridor within which it has been trading since February as it approaches resistance provided by 200-day MA. The specialists are looking forward to gradual appreciation of the greenback. On the downside they see the pair’s decline contained by 0.98 in the near term.
Longer-term
In the first quarter of 2012 Canadian dollar added 2.4% versus its US counterpart gaining from US economic recovery (due to trade connections), high oil prices (exports) and some stabilization in euro area (good for risk sentiment). Analysts at RBS see USD/CAD falling to 0.9600 by the end of June.
At the same time, although loonie has decent fundamentals, there have been some disappointing data so far (retail sales). The Bank of Canada is clearly on hold. Strategists at Scotia Bank expect USD/CAD to rise to 1.0100 by the year-end.
BMO: “Even if we do get a break through 1.0075, it won’t go screaming too much higher given the pent-up interest to sell US dollars at better levels.”
Pound fell on data releases and the BoE
British pound fell versus the greenback on weak data and the results of Bank of England’s meeting.
The pair GBP/USD tested the levels below the 200-day MA, but found support at 50-day one from which it bounced upwards.
Resistance: $1.5885 (February 9, March 6 maximums) and $1.5922 (March 21 maximum).
Support: $1.5818 (today’s minimum, 50-day MA), $1.5775 (uptrend support line from the beginning of the year).
UK economy: growing or not? The BoE has taken a "wait-and-see" approach
In contrast with Manufacturing, Construction and Services PMIs which point to accelerating growth in these sectors, today’s data released in Britain was discouraging: UK manufacturing production contracted by 1.0% in February m/m (vs. expected increase of 0.1%). Official forecasts aren’t positive either: GDP growth in Q1 is unlikely to hit the 0.5% q/q as implied in the Monetary Policy Committee’s February forecast.
There is also some disappointing news from the euro area which strengthened the pressure on sterling as Europe is Britain’s main trading partner: German February industrial output data (-1.3% m/m vs. the Reuters consensus of -0.5%).
The BoE decided to leave the rates unchanged at 0.5% keeping the size of the Asset Purchase Facility at 325 billion pounds (the last increase was in February by 50 billion pounds). The central bank said that the MPC expects the asset purchases to take another month to complete and that “the scale of the program will be kept under review.” There’s no detailed policy statement. One will be able to get more hints on the BoE’s policy stance only when the meeting minutes are scheduled for release on April 18.
EUR/USD renewed 3-week low
The single currency is declining versus the greenback for the fourth day in a row. Today EUR/USD hit 3-week minimum at $1.3056 due to concerns about the euro area, primarily Spain.
Another source of pressure on euro – German February industrial output data: -1.3% m/m vs. the Reuters consensus forecast of -0.5%.
In addition the results of French debt auction conducted today came mixed: the nation managed to sell the planned volume 8.439 billion euro of debt maturing in 2017, 2022, 2026 and 2041 out of a targeted 7-8.5 billion euro, though the yields were slightly worse.
RBC Capital Markets: Euro zone pressures are picking up with the 10-year Italy-Bund spread sitting at 375 bps, the 50% retracement of the January-March tightening. Spain is also underperforming with our rates team noting spread widening is more pronounced in 2-year notes than in 10-year ones.
The technical outlook for EUR/USD seems bearish. However, taking into account the fact that we’ve seen a rapid decline it’s possible to expect some correction before the pair’s slide to $1.3000 and lower resumes.
Spain: frightening austerity agenda
On Friday, March 30, Spanish Prime Minister Mariano Rajoy delivered the annual budget. Spain is cutting 27 billion euros ($36 billion) from its budget this year as a part of the tough austerity plan. Prime Minister remains committed to reduce the budget deficit to 5.3% of GDP in 2012 from 8.5% in 2011, despite the protests, bursting in Spain.
To meet the goals set in the budget plan, Spain’s regional authorities will have to cut their deficits by 50% this year. As a result, budget spending in both health care and education is expected to be cut. Social unease may increase on the back of these reforms.
According to Spanish Economy Minister Luis De Guindos, the introduced austerity measures are focused on spending cuts rather than tax hikes. Moreover, Prime Minister Rajoy has denied the intentions to raise taxes. However, some economists are convinced that the government will also need to raise income taxes, increase electricity prices, abolish corporate tax breaks, and keep civil servant salaries fixed for a while in order to cut budget deficit.
The appraisal of the Spain’s government’s policy seems to be controversial. Investors believe the further austerity measures would deepen the recession in Spain and in the whole euro zone, given that the Spanish economy is already expected to contract by more than 1.7% this year. Some experts note Rajoy tries to eliminate budget deficit at the expense of economic growth in order to delight the EU officials.
European officials, however, appreciate the value of Spain’s attempts to return market confidence. “Even though Spain is in a difficult situation, the steps it has taken are consistent with its goal to improve the sustainability of its public finances”, said Olli Rehn, EU Commissioner for Economy and Finance.
On Wednesday, April 4, Spanish government conducted the first debt auction since announcing that public debt will surge to 79,8% GDP this year. Spain sold only 2.59 billion euros of debt out of 3.5 billion euros (maximum target). Spain's borrowing cost is actually higher than it was on the day of the first LTRO operation 3 1/2 months ago. The yields on 5-year notes rose to 12-week maximum of 4.5%.
Analysts at CIBC claim that if Spanish yields keep rising, euro will decline. In their view, euro zone’s periphery remains in extremely stressful condition.
How do you like the picture at EUR/CHF chart?
The pair has clearly pierced the SNB’s floor which lies at 1.20 posting the 7-month minimum at 1.1997 on the new wave of concerns about Spain’s finances. Switzerland’s central bank replied that it “won't accept any exchange rate below 1.20” reiterating its commitment to buy foreign exchange in unlimited quantities to defend this level.
Analysts at HSBC think that the SNB intervened today. In their view, the evidence is that stops in the 1.2030 area didn’t trigger sustained slump of euro below the minimal level. Strategists at Citi estimate that the central bank sold 1-2 billion euro at 1.20.
Swissquote points out that it was the CPI data released today which made traders test the SNB’s resolve to maintain franc’s cap. The specialists think that the SNB won’t manage to keep on with just verbal interventions from now on.
Swiss inflation accelerated to 0.6% in March from 0.3% in February beating the forecasts. The SNB’s foreign currency reserves increased from 227.2 billion francs in February to 237.5 billion francs in March. Recent data shows that franc’s peg to euro helps to stabilize Swiss economy, though CGF is still about 30% stronger than it was below the crisis.
RBC: Swiss central bank has signaled and repeated its unwavering commitment to the EUR/CHF floor. But though the market believes it for the next 1-3 months, EUR/CHF risk reversals show investors believe the floor will break beyond that. If downside price risks emerge, the SNB's only real tool is to raise the EUR/CHF floor. The floor can last as long as it is compatible with the SNB's mandate of price stability.
A few more comments on NFP and today’s trading
Release time: 12:30 p.m. GMT
Societe Generale: the pace of hiring has probable decelerated to 190K in March but likely upward revisions to prior months along with another drop in the unemployment rate to compensate the impact of slightly slower payroll growth. Employment growth between 1% and 1 ½% is weaker than in an 'old normal' recovery and may not be able to generate GDP growth above 2%, but it is pretty good insurance against a slip back into recession. However, QE3 may return to the agenda before June as the pace jobs growth declines. “Payrolls on a bank holiday is a good enough reason to take risk off for anybody.”
Goldman Sachs: forecast for March gain in nonfarm payrolls is raised from 175K to 200K on the better-than-expected ADP employment report.
Bank of New York Mellon: “The whisper number could be something larger than 250K. The problem is that everyone is talking about it, but nonfarm payroll data is so unpredictable and if the figure comes in below 200K, stocks are likely to sell off”.
Reuters’ consensus: +203K.
Trading implications
A good reading will encourage short-term Treasury yields and, consequently, the greenback, while the single currency will get under pressure.
For now EUR/USD has managed to find support at the bottom of the daily Ichimoku Cloud after hitting 3-week minimum at $1.3034 yesterday. At the same time, this support looks really fragile as the market’s still seems seriously concerned about Spain.
Analysts at Bank of Tokyo-Mitsubishi claim that euro’s slide below $1.30 looks inevitable.