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GBP weakens on UK data
The sterling weakens against the euro on the back of a bunch of negative data released in UK on Wednesday. The cable, however, goes up on the prospects of the Fed’s policy easing.
Minutes of the Bank of England’s June 6-7 meeting showed 4 of 9 MPC members voted for the expansion of the bond purchase program. Therefore, the likeliness of the additional policy easing increased sharply. Moreover, jobless-benefit claims rocketed to 8.1K in May after a drop of 12.8K in April (forecast – a 3.1K decline), while unemployment rate remained unchanged at 8.2%.
Chart. Daily GBP/USD
Chart. Daily EUR/GBP
Greece: new government, old problems
According to Pasok leader Evangelos Venizelos, three Greek political parties finally managed to form a parliamentary coalition.
In the new government the right-centered New Democracy Party, the winner of the June 17 election, will hold 129 seats, the socialist Pasok – 33 seats and the Democratic Left – 17 seats. All in all, they will control 179 seats in the 300-member parliament. Antonis Samaras, leader of the New Democracy, will become a prime-minister. The opposition radical-left Syriza Party (71 seat) refused to join the pro-bailout government.
Analysts at Wells Fargo point that the euro zone’s crisis is far from over. Greece made a step towards the partnership with the EU and the IMF, but it still remains unclear if the country manages to fulfill conditions set by its lenders.
Citigroup: Despite the election results the Greek exit possibility still remains high (50-75% in a 18-month period). The growing success of the leftist Syriza Party signals major challenges ahead.
Moreover, many economists note the Greek problems pales in comparison to the debt pit in which Spain slides.
Antonis Samaras, the conservative New Democracy leader
Photograph: Panagiotis Tzamaros/AFP/Getty Images
Thursday, June 21: economy and currencies
On Thursday the FX market switched to a completely risk-off mode, sapping demand for the commodity and emerging currencies. The US dollar strengthens against all major counterparts (except NZD) on the back of the FOMC meeting results. The Fed announced yesterday it will prolong the Operation Twist program until the end of 2012 by selling $267 billion of shorter-term securities and buying the same amount of longer-term debt. The MSCI Asia Pacific Index (MXAP) of shares declined 0.6% on Thursday. The commodity prices fell to a lowest level since 2010.
The Australian dollar was also influenced by the today’s Chinese data. HSBC flash manufacturing PMI dropped to 48.1 in June compared with 48.4 in May, raising the probability of further policy steps aimed at supporting the China's growth.
The New Zealand dollar is the only exception from the today’s market tendency: the kiwi goes up against the US dollar after the GDP report showed the New Zealand’s economy unexpectedly grew by 1.1% in Q1 compared with a 0.4% growth in Q4.
Events to watch today:
• Euro zone: manufacturing and services PMI’s, ECB president Mario Draghi speaks;
• Great Britain: retail sales, 10-year bond auction;
• Canada: retail sales, BOC governor Carney speaks;
• US: unemployment claims, existing home sales, Philly Fed manufacturing index.
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FOMC: what are they aiming at?
On Wednesday the analysts' expectations were realized: the Federal Open Market Committee prolonged the Operation Twist program until the end of 2012 by selling $267 billion of shorter-term securities and buying the same amount of longer-term debt in attempt to lower borrowing costs and to stimulate the sluggish recovery. The Federal funds rate remained unchanged at a zero-bound level.
One has the impression that the widely expected US economic rebound is still awhile away from now. The US officials lowered their 2012 growth forecasts to 1.9-2.4% from 2.4-2.9% forecasted in April. The unemployment expectations for 2012 increased to 8-8.2% from 7.8-8% in April. The Fed’s Chairman Ben Bernanke said at a press conference yesterday that the US monetary authorities will take additional measures if the labor market doesn’t improve in the nearest future.
What do analysts make of the extension of Operation Twist? For the most part, they believe that the FOMC decision is a kind of a prelude to the next round of quantitative easing (QE3). The deterioration of the labor market data and the escalation of concerns about the euro zone’s future is likely to push the Fed to launch QE3. Some specialists, however, doubt that the easing steps are possible before the US presidential election in November.
Photo: ITAR-TASS
Deutsche Bank: USD may remain strong in medium term
Analysts at Deutsche Bank don’t think that the extension of the Fed’s Operation Twist program would have much negative impact on the greenback.
The specialists say that in the short-term revived risk sentiment will make investors go short on US dollar versus its Australian and Canadian counterparts. In the medium term, however, American currency “has nothing to fear from balance sheet neutral actions like Operation Twist.” In addition, if lower long term rates boost commercial lending and borrowing, US economy will benefit. “Operation Twist has been associated with lower long-term rates, and a flatter yield curve that is generally consistent with USD strength.”
Operation Twist is a program under which the Federal Reserve is selling short-term debt and uses the money to purchase longer-term one.
TD Securities: watch IFO figures
Analysts at TD Securities recommend paying great attention to German IFO business climate release tomorrow. In their view, the index may surprise the markets to the upside.
Consensus forecast is 106.2in June, slightly down from May’s figure of 106.9.
EUR/JPY: trading recommendations
The EUR/JPY pair keeps strengthening for a third consecutive day and now trades near to 101.4 (38.2% Fibonacci retracement from an April-May decline). The cross remains in an upward channel since early June and now is at a highest level since May 23.
In general, the sentiment towards the single currency has improved recently: Greece finally formed a coalition on Wednesday, while Spain managed to raise 2.2 billion euro in a debt auction today (the borrowing costs, however, soared). Later today the independent audit report about Spanish banking recapitalization will be released.
On the contrary, demand for the Japanese currency was sapped today on the speculation that the Japanese government will vote for tax hikes in attempt to give the BoJ more room to monetary policy easing. The minutes of the May 22-23 meeting were released early Wednesday: a few BoJ members said the regulator must be ready to act. Japan’s trade deficit increased in May: BoJ’s officials underline that the strong yen hurts the exports badly.
It makes sense to go long on EUR/JPY at the current levels, targeting at 101.85 and with a stop at 98.50. Resistance for the pair lies at 102.00 102.30 (50-day MA) and at 103.35 (50% Fibonacci retracement), while support – at 100.55 (today’s minimum), 99.85 (June 20 minimum) and 99.25 (23.6% Fibonacci retracement).
Chart. Daily EUR/JPY
EUR/USD: technical levels
The single currency has been trading quite volatile today fluctuation on the news. EUR/USD fell to the daily minimum on the news of the scheduled publication of the independent audit on Spanish banks. US jobless claims contracted less than expected sliding to 387K vs. 381K expected.
At the same time, the pair remains within an uptrend channel slowly moving towards 50% Fibonacci retracement of May decline at $1.2875.
BBH says support for the pair lies at $1.2600 (trend line support), while resistance is in the $1.2745/50 area (recent maximums). MIG Bank warns that euro’s slide below $1.2520 would switch the picture to the bearish side.
Chart. Daily EUR/USD
Friday, June 22: economy and currencies
EUR/USD moves down on Friday after yesterday’s sharp fall on the back of the FOMC decision and the Spanish news. However, the demand for the single currency remains limited: according to the IMF today’s report, the euro zone’s crisis reached a critical stage; economists, therefore, believe that the Eurobonds are the only effective solution to revive the currency block. Moody’s rating agency downgraded 15 international banking giants today. Later the day the German business confidence is forecasted to decline, raising demand for the safe currencies. The US dollar for now is weaker in comparison to yesterday growth.
The MSCI Asia Pacific Index dropped by 1.1% today. The Japanese yen weakens for the third consecutive day as the market participants expect the BoJ to ease monetary policy in the nearest future. The Australian, the New Zealand and the Canadian dollar are up today on the speculation that the Fed will take additional measures to support the US economy.
Events to watch today:
• Euro zone: German Ifo business climate, ECOFIN meetings, Belgium NBB business climate
• Canada: CPI
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If you have any questions to our analysts, you're welcome to ask or comments for this article!
RBC: AUD in short and longer terms
Analysts at RBC Capital Markets claim that Australian dollar has a number of safe haven features in the long term. There are reasons for such assumption:
- Australia has the top credit rating;
- Australia is reach with commodities;
- Australia is strongly connected to the Chinese economy, known for its fastest growth in the world.
However, the specialists warn investors about being too eager on AUD/USD in the short term. Australian dollar is extremely vulnerable to shifts in the risk sentiment moving in line with stock markets since 2008. In addition, daily turnover in Aussie is much lower than in US dollar, euro, or yen and Australian bond market seems small in comparison with the US, European and Japanese one.
The conclusion is: now it’s especially important to be very attentive to the time horizons while developing a trading strategy.
Chart. Daily AUD/USD