Comments and forex-analytics from FBS Brokerage Company - page 143
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CFTC trader positioning data
The latest Commitments of Traders (COT) report, released on Friday by the Commodity Futures Trading Commission (CFTC), showed that:
• Net euro shorts rose from 101K to 118K;
• Net sterling shorts down from 19K to 13K;
• Net yen shorts down from 66K to 58K;
• Net Swiss franc shorts up from 10K to 14K;
• Net loonie longs up from 28K to 38K;
• Net Aussie longs up from 39K to 48K;
• Net kiwi longs up from 7K to 12K;
• Net US dollar longs down by 4% to $21.65 billion.
Investors continued to make big bets that the single currency, Japanese yen and Swiss franc would weaken against their US counterpart. Commodity currencies such as the Australian and Canadian dollars continued to be favored versus US dollar.
Speculative investors slightly pared their anti-yen bets a little more than a week before the Bank of Japan's upcoming meeting. Anti-yen fervor increased steadily in recent weeks on rising expectations the BOJ would announce new easing measures on April 27.
It’s necessary to note that the figures cited above are always a week old at the time of their release. Never the less, CFTC data gives a good oversight into how the market is positioned and if/how these positions are being unwound. Although the CME speculators represent a small fraction of trading in the currency markets, their trades are widely seen as typical of hedge fund investors' currency movements.
Banks' forecasts for FX majors
Key options expiring today
Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).
Here are the key options expiring today:
EUR/USD: $1.2900, $1.3100, $1.3200;
GBP/USD: $1.5910, $1.6000, $1.6200;
EUR/GBP: 0.8175, 0.8200;
USD/JPY: 80.00 (large) 81.00, 81.50 and 82.15
EUR/JPY: 105.00 (large) and 106.00;
AUD/USD: $1.0300, $1.0400.
Waiting for the BOJ: USD/JPY prospects
Economists are almost sure that the Bank of Japan will deliver additional monetary stimulus at its meeting on April 27.
Morgan Stanley: there’s “near 100% probability” of more easing this month.
JPMorgan Chase: “Expectations that the BOJ will ease policy further at this week’s meeting may keep the yen weaker over the next few days. We expect the central bank to add 5 trillion yen to purchases of long-term government bonds.”
Mizuho Securities and SMBC Nikko Securities: there will be more easing.
CMC Markets: the recent rally in USD/JPY will continue for the rest of the year as a result of the Federal Reserve's current policy to avoid further monetary easing. “There is a very good correlation between 10-year US bond yields and USD/JPY, because when yields go up, the dollar goes up. With the Fed deciding not to continue with QE for the time being, QE will only happen if the US economy starts to fall off a cliff.”
UBS: “While yen bears welcome an expansion of the BoJ's regular outright JGB buying operations or a doubling of the inflation goal to 2%, the most the BoJ may be willing to concede at this juncture would be a 10 trillion yen increase in the APP. The gradual Fed-BoJ policy divergence should serve to keep risks tilted towards a move higher towards 85 USD/JPY on a 3-month horizon. While the Fed will be in no rush to categorically rule out QE3, we maintain the case for further easing is less convincing in the US than Japan.”
BNP Paribas: “A modest increase in the asset purchase target being announced next Friday, in the order of 5 trillion yen, looks to be discounted. As such, more than this may be required to see the USD/JPY rally extend. That said, any decision to increase the maturity of JGBs purchases beyond the current 1-2 years could also help support USDJPY.”
Netherlands' budget debate: to cut or not to cut?
The tensions in Europe keep mounting: now we've got negative news from the Netherlands. The nation's political authorities didn’t manage to come to an agreement on budget cuts, making elections almost unavoidable. Diederik Samsom, head of the Labour Party, said that the elections will take place in September- October 2012.
Centre-right Prime Minister Mark Rutte said on Saturday the negotiations broke down because Geert Wilders, the leader of the Party for Freedom, refused to agree to 14-16 billion euros of budget cuts indispensable to eliminate the excessive budget deficit. Wilders is strongly against the budget cuts in welfare, health and unemployment benefits.
The negotiations between the political parties started after the Dutch economy entered the recession this year. According to forecasts, by the end of 2012 the Dutch budget deficit will increase to 4.6% compared with the 3.0% ceiling set by the ECB.
The uncertainty over budget cuts and reforms, and the time it takes to organise elections, may lead to higher interest rates and higher yields on Dutch government bonds.
If the Netherlands does not cut spending, it is likely to lose its coveted triple-A credit rating, leading to higher borrowing costs. The country may step into a lingering political crisis, hindering the euro zone’s economic rebound.
On Monday Dutch government holds an emergency meeting.
RBS: comments on GBP/USD
Analysts at RBS claim that there’s less upside for GBP/USD as Britain and the United States have very similar economies and the relative out-performance of the US economy may push GBP/USD lower over the short-term.
At the same time, the specialists don’t see the potential for significant declines as the Federal Reserve is still a long way from raising interest rates. In addition, there will be more concerns about US fiscal policy later this year and into 2013.
“The policy mix suggests that most of any GBP/USD declines that are seen over the coming months are likely to be given back into 2013,” the bank says.
There’s significant resistance at $1.6167 (2011 maximum), while support is found at $1.5800/5900.
April 24: important economic releases
At the beginning of today’s trade all eyes were for Australia: the nation’s annual inflation was at 1.6% in Q1. This is the slowest pace of CPI growth since 2009. Aussie declined versus the greenback as the market strengthened in thought that the Reserve Bank of Australia will cut its benchmark rate on Tuesday, May 1. On April 3 central bank Governor Glenn Stevens signaled he may end a 3-month pause in interest-rate cuts as soon as next month if weaker-than-forecast growth slows inflation.
Data to watch today:
• Great Britain: Public Sector Net Borrowing in March is forecasted to show£15.6 billion budget deficit vs. £12.9 billion deficit in February.
• Canada: Canada’s Core Retail Sales in February are expected to increase by 0.8%. In January the report reflected a 0.5% decline. The BoC Governor Mark Carney in his speech may give a hint on a more hawkish monetary policy: the central bank could raise interest rates from a record 1% low sooner than expected.
• U.S.: The current expectations are that the April Consumer Confidence index may reach 70.1. New Home Sales in March may increase by 321K vs. 313K in February. However, if the number of new home sales will fall, it may further indicate a slowdown in the U.S real estate market. U.S. 2-year notes auction is scheduled.
• Euro zone: Spanish 3- and 6-month T-bill auction; Italian bond (CTZ, BTPei) auction.
Yen’s strengthening as a safe haven
US dollar has been declining versus Japanese yen since the beginning of this week on the concerns about the battle for leadership in France and the Netherlands and its potential negative impact on the efforts to resolve the region’s debt crisis.
Analysts at Rochford Capital don’t think that yen’s safe-haven status will be steadily undermined because of the Bank of Japan’s very loose monetary policy (the BOJ is expected to announce more QE on Friday after expanding bond purchases by 10 trillion yen ($123.6 billion) and set ting a 1 percent inflation goal).
This week we’ll here from the United States first: the Fed will announce tomorrow the results of 2-day FOMC meeting (monetary policy statement, projections for growth, unemployment and inflation). Strategists at Bank of America Merrill Lynch see risks that economic and rate forecasts will be considered hawkish that is positive for the greenback.
USD/JPY tested today 4-day minimum of 80.85.
IFR Markets: “Despite the push down, Tokyo players still look to be better buyers on dips, especially sub-81.00. Granted, more stops loom below, especially sub-80.80 but a move to this level could be onerous barring more legs down in the JPY crosses.”
Support levels are at 80.60 and 80.30 yen.
John Taylor: outlook for USD, EUR and JPY
John Taylor, the head of currency hedge fund FX Concepts, expect US dollar to strengthen versus the single currency in the second quarter. The specialist says that “Europe’s going to be in a recession and they’re going to have to print more money and be looser, and the U.S. is going to have a stronger economy than them by quite a bit.”
As for USD/JPY, Taylor thinks that the pair may weaken in the next 2-3 months as prospects for further easing from the Federal Reserve damp investor demand for the greenback: “If we do have a crisis in Europe and a little recession scare in the U.S., that might drive money back to the yen and it’ll be stronger for a couple of months before it weakens”. According to Taylor, if the Fed increased stimulus in the second half of the year, the greenback would also drop against euro.
Deutsche Bank: FX trade becomes more volatile
According to analysts at Deutsche bank, the trade on the FX market will soon become more volatile: the time of the range-bound markets is coming to an end.
Lately, currency crosses have been trading sideways despite the considerable political and economic changes. However, as history confirms, such range-bound trading periods usually don’t last long. According to Deutsche bank strategists, central banks prepare to intervene into the game (for example, Bank of Canada seems to become more hawkish, while Reserve Bank of Australia – dovish). Emerging markets will also follow a pattern: summer months tend to bring above-average return on investments.
Currency strategists recommend going short on the euro, the greenback and the yen vs. the sterling, the loonie and the emerging currencies, such as Mexican peso, South Korean won and South African rand.