USD/JPY Still Softer

We saw the USD hit hard this afternoon during and following Ben Bernanke’s testimony. In some instances, like the EUR/USD, we are starting to see some profit taking and mild retracements of earlier upward moves. However, the in the case of the USD/JPY we are seeing no recovery yet as the USD continues to sell against the JPY. After breaking through old support levels at 81.61, we see no significant levels below which could indicate possible support until 81.254; the 100% retracement line on the move from Tuesday’s low to yesterday’s high.

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Commerzbank: German exporters expect euro to fall

According to Commerzbank’s monthly survey of German exporters, the majority of respondents still think that the single currency will soon drop.

The sentiment of German companies about euro has worsened this month in comparison with March: 66% of participants now expect EUR/USD to fall during a year, while last month this figure accounted for 46%.

As a result, the bank says that if the current uptrend for the pair doesn’t reverse in the coming months, some firms may record significant losses.

Respondents also expect the single currency to fall versus Swiss franc, pound, Polish zloty and Russian ruble.

Chart. Daily EUR/USD

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UK economy went out of the dip

According to the data released today, UK GDP added 0.5% in the first 3 months of 2010 after losing the same amount in fourth quarter of 2010. Analysts at Capital Economics claim that British economy has only reversed the dip without going forwards.

As a result, the opposition’s criticism of the government's austerity measures is likely to strengthen, while the possibility of the BoE rate hike may decline though inflation twice exceeds the central bank's 2% target.

Never the less, pound managed to gain on the news as investors were preparing for worse outcome, says Danske Bank. The market was also pleased with the encouraging readings of the key indicators that showed the 0.9% quarter advance in services and 1.1% manufacturing growth. The weakest link was the construction that contracted by 4.7%.

Resistance levels for the pair GBP/USD are found at 1.6600 (April 21 maximum), 1.6715 (December 2009 maximum) and 1.6750 (November 25/2009 maximum). Support levels are situated at 1.6550 (April 25 maximums), 1.6515/20 (previous day maximum) and 1.6430 (April 26 minimum).

Chart. Daily GBP/USD

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Analysts increase forecasts for Aussie

Australian dollar reached today the record maximum at 1.0852 as the CPI data showed that inflation rate increased by 1.6% in the final 3 months of 2010 from the previous quarter, making the biggest advance since 2006. As a result, the expectations of the Reserve Bank of Australia’s rate hike have strengthened.
In addition, Aussie benefited from the speculation that US FOMC will keep the interest rates at the minimal 0%-0.25% levels.
Analysts at Bank of America Merrill Lynch think that Aussie may add more in the short term. In their view, the market doesn’t have much rate rises priced in at least for the next few months.
Specialists at Ueda Harlow think that the pair AUD/USD may strengthen to $1.10. Economists at Commonwealth Bank of Australia raised their forecast for the Australian dollar. The analysts now expect Aussie to climb to $1.12 by the end of September, before declining to $1.04 at year-end. Earlier the bank projected that the pair will decline to 0.9400 by the end of September.
According to the Credit Suisse Group AG index based on swaps, the RBA will lift up the borrowing by 26 basis points in the next 12 months.

Chart. H4 AUD/USD

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Barclays Capital: Canadian dollar forecast

Canadian dollar added 11.8% versus the greenback since the end of June reaching $0.9453 on April 21, the maximal level since November 2007.
Analysts at Barclays Capital think that loonie may climb even higher. In their view, Canada’s currency will show the best results among the commodity currencies such as Australian and New Zealand’s dollars as those nations more depend on China the growth of which may slow. In addition, Canadian economic growth is gaining pace and the specialists expect the bank of Canada to conduct 2 rate hikes this year.
Barclays warns, however, that later sluggish productivity growth and troubling current account deficit will come into focus. There’s also the evidence that loonie's strength is affecting exports of some goods to the United States. As a result, in the longer term USD/CAD may reverse its downtrend.
It’s also necessary to note that, according to The Economist's Big Mac Index based on the purchasing power parity Canadian dollar may be overvalued by at least 12%.

Chart. Daily USD/CAD

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Bullish AUD/NZD met with resistance at 1.3425

Upon the release of Australian CPI data this Wednesday, the AUD/NZD was taken to session lows at around the 1.3320 level (50% retracement of the rally between 1.3388/1.3446) before spiking higher, recording a 4 day high in the 1.3425 zone. The pair is now consolidating below this level and is currently trading in the 1.3410/20 area, 30 pips above the daily open.

The Australian currency can now be seen strengthening throughout the market. The AUD/CAD broke above the 1.0270 level and is quoted now at 1.0290, but not before climbing to an all-time high of 1.0322. AUD/JPY presents a bullish tone and is edging higher from its daily open at 87.86, quoted now just below the 88.30 area. And the AUD/USD is slowly grinding higher, now trading at 1.0830, more than 40 pips above its opening price.

Support levels (AUD/NZD): 1.3395, 1.3375, 1.3365 Resistance levels (AUD/NZD): 1.3425, 1.3445, 1.3463

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Juergen Stark: it’s vital to avoid debt restructuring in euro zone

European Central Bank Chief Economist Juergen Stark claimed in the interview to German TV station ZDF that debt restructuring euro area member state may lead to more severe consequences than those of the Lehman Brothers bankruptcy that market 2008 crisis. In his view, such move would result in new banking crisis failing to solve the budget and structural problems in individual nations.

According to Stark, the county that restructures its debt risks being thrown out of capital markets and foreign financing for an unforeseeable time.

The economist is sure that the only way out for the indebted European economies is to conduct fiscal reforms and fully repay their debts.

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Greece’s deficit rose above the forecast

According to the EU data released today, the actual Greece’s 2010 budget deficit exceeded the forecast level. Greek shortfall rose to 10.5% of GDP, while the European Commission was looking forward only to 9.6% figure. The nation’s debt surged to 142.8% of GDP that’s above 140.2% estimate.

Despite the fact that a year ago the EU and the IMF provided Greece with 110 billion euro ($160 billion) bailout, the country keeps struggling to raise its revenue as its economy’s contracting.

Greek bond yields remain at the maximal levels – 2-year yields reached at 21.87%, while 10-year hit 15.18%.

Most economists think that the country will eventually have to restructure its debt either by extending the maturity or even by lowering the total amount of obligations.

Analysts at BNP Paribas think that Greece will need either a new loan from the EU/IMF or primary market bond purchases by the EFSF. The specialists are sure that the country won’t be able to fund itself in the markets in first quarter of 2012.

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Commerzbank: ECB rates forecast

Strategists at Commerzbank think that the ECB will lift up the rates 2 times more – in September and in December. In addition, by the middle of the year the European policymakers may also change the allotment modes that may also be regarded as a tightening move.

The specialists think that the peripheral nations won’t be affected much by the rate increase, at least in the long term. According to the bank, looking at Portuguese or Spanish sovereign 5- or 10-year bond yields it’s possible to see that the real ECB interest rate expectations component of these yields is rather small as they are determined primarily by the sovereign credit risk.

However, the economists expect that in the longer term divergence trend in the euro area will intensify.

Chart. Daily EUR/USD

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Hans Tietmeyer about the euro area and the ECB policy

Former Bundesbank President Hans Tietmeyer says that European Commission should have determined the criteria of joining the euro area more strictly. In his view, the currency union now faces the consequences of its development during the last 10 years.

Tietmeyer claims that Greece has a chance to get out of the crisis without restructuring. In his view, that depends on how competent the actions of the country’s policymakers will be. The indebted countries have to address their problems and take all necessary measures to restore their competitiveness in the euro area and worldwide, Tietmeyer says.

The economist thinks that the ECB was right to raise the interest rates.

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Financial Times: too early to restructure Greece's debt

Analysts at Financial Times doubt that the euro zone will be able to get out of the crisis without suffering much, as they have thought before. The economists changed their opinion as the tensions within the monetary union have significantly strengthened during the past week.

Let’s name the 2 main events here. Firstly, the elections in Finland showed that the 2 parties, which propose a partial Portuguese debt default as a condition for the bailout, have gained much weight among the nation’s population. This propelled the market’s concerns making the bond spreads widen to the record highs. Secondly, German Chancellor Angela Merkel may lose her majority over the domestic legislation of the European Stability Mechanism (ESM), the permanent mechanism to provide help for problem European states. The vote on the matter has already been put off until autumn. To make the domestic audience change attitude towards ESM, German officials talked about the inevitable Greek restructuring. This lead to the boom of rumors and ended with an investigation counter Citigroup conducted by Greek authorities.

The FT economists, however, warn that Greece’s premature default may have very dangerous consequences for the euro area. According to the newspaper, voluntary restructuring won’t save the country’s debt problems. Greece faces no short-term liquidity squeeze as it’s supported by the EU and the IMF, so there’s no urgent need for the restructuring. Moreover, the specialists believe that Greek banking sector won’t survive large and involuntary haircut. The ECB would face a haircut on its direct investments of Greek government bonds, and, more importantly, much of the collateral posted by Greek banks would vanish. Greek default will cost German taxpayers alone at least €40bn ($58bn), including recapitalization of the ECB estimates FT – that’s much more expensive than the bailout.

If Greece defaults, the EU and Portugal probably won’t be able to agree on a rescue package in time, the EU’s dispute with Ireland over corporate taxes may escalate, German, Finnish or Dutch parliaments may fail with the ratification of the ESM, and Greek parliament may refuse the new austerity measures and many other disasters may happen. FT analysts also think that there is the downgrade threat for French sovereign bonds. If it happens, the logic of the European financial EFSF will be destroyed as it is built on guarantees of the AAA countries.

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