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May 24: economic events
There are many headlines today. Firstly, the EU summit revealed that the leaders aren’t willing to compromise: the agreement on Eurobonds wasn’t reached.
According to French President Francois Hollande, Eurobonds are necessary to protect the indebted countries from high borrowing costs. German Chancellor Angela Merkel, however, said much stronger economic cooperation in the region is needed before Eurobonds can be issued. EU leaders underlined that they want Greece to remain in the euro area while respecting its commitments.
EUR/USD touched $1.2545 yesterday, the lowest level since July 13, 2010, due to mounting worries about a disorderly Greek exit from the euro zone.
Elsewhere Chinese HSBC flash Manufacturing PMI fell from 49.3 in April to 48.7 in May indicating that business conditions for Chinese manufacturers deteriorated (the index was already below the benchmark level of 50 points).
New Zealand’s trade surplus increased from March reading, but came significantly below the forecasts (355M vs. 450M expected). The nation’s authorities released the budget: deficit’s seen at NZD$ -7.9 billion this year and next before returning to surplus in 2014. NZD/USD is rising after 2-day decline as traders realized that kiwi’s recent depreciation was too rapid.
Today watch for European PMI data (forecast mixed, but the bias is negative), UK revised GDP (recession will likely get confirmed) and US core durable goods and unemployment claims figures.
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NZD: economic, fundamental comments
New Zealand delivered a tough annual budget on Thursday, targeted at a return to a budget surplus by 2015.
According to the budget forecasts, deficit will fall sharply in the next two years and a NZ$197 surplus will be reached by 2014-15. Finance Minister Bill English said the new budget will reduce upwards pressure on interest and exchange rates and stop the debt rising. Government is planning to reduce social overhead costs and increase taxes.
ANZ: With spending capped New Zealand's interest rates are likely to stay low for a prolonged period.
New Zealand's trade balance surplus widened in April to NZ$355 million compared with a previous reading NZ$186 million, but came below the forecasts.
The kiwi is strengthening against the greenback on today’s news and on speculation its decline to the lowest levels this year was excessive. Analysts at Westpac expect the downtrend of NZD/USD to extend to at least 0.7370 (Nov 25 minimum) and to 0.7000 in a month. This week a correction to the 0.7650-0.7850 area is expected given its currently oversold reading (14-day RSI is below 30).
Chart. Daily NZD/USD
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USD/CHF approached 2012 highs
It’s been a long time since we wrote something about Swiss franc.
The greenback keeps rising versus Swiss franc – USD/CHF has approached the maximal levels since the beginning of the year close to 0.9600. If the pair managed to make to break above this area and close there, US dollar will be able to test 0.9700/0.9800.
Both Tenkan-sen (red) and Kijun-sen (blue) are going up on the Ichimoku chart, though note that the Cloud is still very narrow, so the bulls don’t have much power yet and resistance in the 0.9600 region may prove to be strong. Support lies at 0.9500 (May 18 maximum) and 0.9462 (May 16 maximum). 50-day MA is getting ready to cross the 100-day one bottom-up – it will be a positive signal and the lines will provide good support for the pair.
The picture seems bullish, so buying on the dips seems reasonable enough. In the longer term we expect US currency to keep gradually appreciating versus its Swiss counterpart.
In the situations of uncertainty investors usually tend to go to safe havens – US dollar and Japanese yen. Swiss franc used to belong to this category, but the SNB’s policy response (EUR/CHF peg at 1.20), but the demand for Swiss currency isn’t now as high as it used to be.
Chart. Daily USD/CHF
Germany avoids recession, but PMIs upset
On Thursday final GDP release confirmed that Germany, avoided technical recession: the largest euro zone’s economy grew in Q1 after a worrisome contraction in Q4 2011. Germany resumed growth due to increase in exports and private consumption.
ING analysts comment the rejection of Francois Hollande’s idea of Eurobonds by Angela Merkel: “While the euro zone is still searching for growth, Germany already has it”. Commerzbank claims that after the (EU) summit without any results there's still a lot of uncertainty about Greece. "The last thing we need in this situation is the German economy getting into trouble,” the specialists say.
However, German business confidence came below expectations in May on Greek concerns, and so did the economic activity data (PMIs).
Table. Euro zone's economic data (May 24)
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EUR/USD hit 2-year minimum
Bears push the single currency lower and lower – EUR/USD hit today 2-year minimum at $1.2515 and where will be the bottom? Or, more precisely, will there be a bottom?
Euro got another blow as the PMI data of the euro zone’s leading economies came worse than expected (more information here).
Commerzbank: although the outlook is negative, euro’s slump was rapid enough, so to confirm another down leg in the term the pair needs to close below $1.2530 (78.6% Fibonacci retracement of the pair’s advance from 2010 to 2011). Otherwise, EUR/USD will rise to $1.2720 and $1.2820/30.
Danske Bank: downside for EUR/USD and a test of $1.2500 seems imminent.
RBS: sell EUR/USD at targeting $1.2329 (2008 post financial crisis minimum) and stopping above $1.2640/90 (the range caught 2 lows in 2006, 2009 minimum and then almost caught the Jun 2010 maximum).
BNP Paribas: “With a Greek exit once again being discussed, the pressure on the euro should continue especially with the lack of clarity on any of the pressing issues.”
Westpac: “Further push in Greek polls towards the pro-bailout parties and a relaxation of Germany’s stance on the aforementioned policies are the key risks to EUR shorts.”
Chart. Daily EUR/USD
Pound recovers after negative GDP
Sterling strengthens against the greenback despite the negative GDP release. The British currency is supported by the preliminary business investment: indicator increased in March by 3.6% vs. a 3.3% decline in February.
Great Britain’s economy contracted more than initially estimated due to a slump in construction. Q1 GDP shrank by 0.3% (vs. a preliminary estimated a 0.2% contraction). In current economic conditions many analysts expect the Bank of England to run a new round of bond purchases.
Societe Generale: If there’s a heightening of tensions in the euro crisis in the next few months, the bank would respond. We expect another GDP fall in Q2 and a return to growth in Q3.
Support:
1.5606 (March minimum);
1.5504 (38.2% Fibonacci retracement of the Jan - Feb rally).
Resistance:
1.5820 (April strong support);
1.5929 (February maximum);
1.6000 (psychological);
1.6091.
Chart. H4 GBP/USD
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: $1.2525, $1.2550, $1.2600 and $1.2625;
GBP/USD: $1.5700 and $1.5750;
USD/JPY: 79.40/50 and 80.00;
AUD/USD: 0.9750 and 0.9800;
EUR/GBP: 0.8050 (smaller at 0.8000).
Image from yourmoneydictionary.com
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Citigroup: if Greece leaves euro area…
Analysts at Citigroup believe that the odds of Geek exit from the euro area (“Grexit” as they say now) are increasing and account currently for 50-75%. In their view, the most important question is whether other countries will follow.
According to Citigroup, if Greece is the only nation leaving the euro area its exit will be a positive factor for euro as with the elimination of the weak link the rest of the region will become stronger.
However, one should remember that we are dealing with the market’s sentiment: if Greece leaves, the fears about other peripheral economies will mount and risk premiums will surge making it impossible for these nations to meet the fiscal and growth targets. As a result, the fate of euro would depend on the ability of the European authorities to convince the market of their determination to stick to euro. Taking into account the current inability of the policymakers to reach consensus and deliver some credible anti-crisis measures, euro will likely remain under heavy pressure until investors become convinced of the policymakers’ resolve.
The specialists think that if Greece leaves the currency union, Portugal and Ireland will ask for second aid packages; Spain will get some form of aid; the ECB will cut its benchmark rate to 0.5% and probably resume longer-term refinancing operations. In addition, Portugal, Ireland, Spain and Italy will be downgraded.
Image from Greek News, Greece, Cyprus, Economy, Politics, Greek Soccer | Greece.GreekReporter.com
May 25: economic background
EUR/USD fell by 2.5% this week amid the renewed concerns about Greece. New round of risk aversion weighs on the high-yielding currencies and supports the US dollar as a “safe haven”: AUD/USD dropped by 0.7%, NZD/USD declined by 0.3% and USD/CAD grew by 0.4%. GBP/USD went down by 0.9% on concerns that Britain’s monetary policy may become more “dovish”. USD/JPY strengthened by 0.6% despite the overall trend remains downward. USD/CHF added 1.6% this week.
Italian Prime Minister Mario Monti claimed yesterday that the majority of EU leaders approved the idea of common euro-area bonds at this week’s summit and that and Italy can help persuade Germany which is currently against this proposal. From the first sight Monti’s comments look inspiring, but Luxembourg Prime Minister Jean-Claude Juncker said quite the opposite thing after the meeting: joint Eurobonds didn’t find much support. To describe the situation we need one word – uncertainty.
German Gfk consumer climate released today came unchanged this month at 5.7 in line with forecasts. Consumer views on economic conditions remain stable. The same can’t be said about business climate and activity – remember poor data released yesterday.
Japanese National Core CPI rose by 0.2% in March – still below 1% target set by the Bank of Japan. That means that deflation risks remain and more QE is likely. That’s confirmed by Tokyo CPI which contracted in April by 0.8% (vs. -0.6% expected and -0.5% in March). Yen weaken against US dollar after the release.
Asian stocks fell – MSCI Asia Pacific Index lost 0.5%. There was an earthquake in New Zealand, but with no damage reported market’s reaction wasn’t strong.
There are no major news releases today. For more information consult FBS economic calendar.
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EUR/USD: what’s next?
The single currency hit 2-year minimum this week on the concerns that Greece may leave the euro area – how long the bears have been waiting for this to happen! What’s next?
After the parliamentary elections the indebted country is closer to the exit from the euro zone than ever before. The uncertainty is likely to dominate the market before the new elections on June 17. In the beginning of the week market participants looked to the EU summit; however, on Wednesday EU leaders didn’t reach any agreement on the question of Eurobonds. Nevertheless, they underlined that they want Greece to stay in the euro zone. On Thursday euro zone released a bunch of negative PMI data.
Analysts at BBH underline that the market sentiment is still very fragile. In the longer term EUR/USD needs improvement of the euro zone’s economic figures. In the short term, however, there’s room for correction on short covering. Bank of Tokyo-Mitsubishi UFJ also look forward to some consolidation in the $1.25 area.
Analysts at Scotia Capital note that euro’s RSI is at 21, so the currency is oversold and may temporarily recover, especially as markets have already priced in much of the negative scenario for Greece. The specialists underline that they don’t believe that EUR/USD may show any sustained advance. The bank sees the pair ending 2012 at $1.25 expecting no collapse of the European currency.
Despite this talk about some retracement higher, analysts do think that EUR/USD will breach $1.2500 (option barrier) and start descending to $1.1875 (June 2010 minimum). Societe Generale proposes to go short at $1.2600 stopping at $1.2750 and targeting $1.2100.
Chart. Weekly EUR/USD